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Best endeavours clauses - do they work?

19/08/2014

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United Kingdom

Under what circumstances are clauses which require a party to use 'best/reasonable endeavours' to conclude an agreement with a third party enforceable?

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Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB)

Under what circumstances are clauses which require a party to use 'best/reasonable endeavours' to conclude an agreement with a third party enforceable?

A mechanic could not fulfil his contract to restore a client's classic car. The client and mechanic concluded a settlement agreement in which the client agreed to use reasonable endeavours to enter a restoration contract with a third party (another mechanic) the result of which would mean no loss would be payable. The client failed to agree a contract with the third party in the timescale allotted. The Court was asked to rule on whether the reasonable endeavours clause in the settlement agreement was effective.

Relevant law

Clauses which require a party to negotiate a future contract (an 'agreement to agree') with another party are unenforceable because the object of the obligation lacks certainty. Clauses requiring a party to use reasonable (or best) endeavours to negotiate an agreement with another party are also generally unenforceable for the same reason, but there are limited circumstances in which such a clause may be acceptable.

Reasonable endeavours clauses are only enforceable if two requirements are met:

i) there is sufficient certainty about the object requiring best endeavours. The clause will generally require a clearly defined object (e.g. permission to import certain goods, or the acquisition of a grant, or of another form of finance); and

ii) there must be sufficient objective criteria by which to measure the endeavours.

Therefore, reasonable endeavours clauses to negotiate a future agreement are potentially enforceable, but only if the future agreement is set out clearly and sufficiently in advance and the terms are likely to be acceptable to the relevant counterparty.

In this case, the object of the reasonable endeavours was uncertain. It was a mere 'agreement to agree' under which key terms such as the price of the restoration were not defined. Had the contract with the new mechanic been set out sufficiently in advance, the clause may have been enforceable.

The Court also held that once the obligor can do nothing more in terms of reasonable steps to achieve its objective, it is no longer required to try.

Practical points

  • When drafting reasonable endeavours clauses ensure that the object is clearly defined and possible to achieve.

  • Reasonable endeavours clauses to contract with third parties can be enforceable if the third party contract is set out in sufficient detail in advance and the terms are likely to be acceptable to the third party. However, such clauses should be treated with a high degree of caution.

  • If you are required to perform an obligation under a reasonable endeavours clause and cannot achieve its objective, ensure that you have exhausted all reasonable means of completion. Ceasing efforts after this point is less likely to attract liability.

 

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