ACLN - Issue #47
- - - - - - - - - - - - - - - Contracts
Best Endeavour Clauses - Are They What They Seem?
Chris Burton,
Mallesons Stephen Jaques,
Solicitors, Melbourne.
Over recent months several project managers have
during contract negotiations expressed the view that "best
endeavour" clauses impose strict obligations on the party
to whom the clause applies (the "covenantor"). The actual
situation is that depending on the wording ofthe particular
clause and the factual circumstances which arise, such
clauses may not impose strict obligations at all.
In the recent case of Hawkins and another v Pender
Bros Pty Ltd and Douglas J Moran, unreported, Court of
Appeal, Supreme Court of Queensland, Macrossin Cl,
McPherson lA, Helman J, 29/8/95, a developer engaged
the services of a consultant in 1987 in respect of
development and construction of a nursing home and
retirement village. The agreement in relation to payment
of the consultant's fees was structured around payments
being made upon achieving various stages of unit sales.
The developer covenanted "to use its best endeavours
to obtain and retain all necessary approvals, consents and
permits" and "to effect sales and/or leases" ofunits upon
completion of construction. Furthermore, the developer
covenanted to proceed with due expedition in construction.
Between 1987 and 1990 plans had been drawn up and
various applications and negotiations had taken place.
Building approval had been sought in 1989 but a new
application had to be made in 1990 due to revision of the
layout. Building approval was extended in October 1992
and again in December 1994. The Court found that in 1995
the project was no further advanced than it was in 1990.
In 1991 the developer as a member of a group of
companies entered into a facility agreement with a bank
which disabled it from 0~taining finance to complete the
development.
In its deliberations the Court indicated that the
covenantor was obliged to "proceedwith all due expedition,
but not beyond the bounds ofreason and not to the point of
ruin". The Appeal Court agreed with the lower Court's
interpretation that the contract "imposed upon the
covenantor the obligation to do all that it reasonably could
in the circumstances to achieve the contractual-object, but
no more".
9
------------------+
Earlier authority indicates that a "best endeavour"
clause shall be interpreted so that:
1. the obligations imposed are considered with regard
to what is reasonable in the circumstances;
2. the standard of reasonableness, where a company
is involved, is that of a prudent board of directors
considering the relevant contractual obligations
and acting properly in the interest ofthe company;
3. the standard of reasonableness prescribed by a
clause should be determined with regard to the
nature, capacity, qualification and responsibility
ofthe party to which the clause applies in the light
of the particular contract;
4. such a clause, again depending on its wording,
would not ordinarily impose a duty on a party to
disregard its own interest.
Accordingly, ifa "best endeavours" clause is not well
drafted, a party seeking to rely on such a clause faces the
prospect ofthe clause being interpreted as only a reasonable
endeavours clause which is of course of lesser effect.
The recent appeal of Hawkins, does however, indicate
that the covenantor, although not required to disregard its
own interests, cannot go to the extent of attempting to rely
on an obstacle it has deliberately placed in the path of its
own performance. The Court, in light of the factual
situation, found in favour of the consultant.
It can be seen from the above test that the capacity
(possibly financial or resource capacity) and qualifications
(possibly experience, technical capabilities, and
competence) should be taken into account in detelmining
what is reasonable in relation to that party's "best
endeavours". For example, a company approaching
insolvency may be required to do less to pursue a result
than a solvent company and a contractor oflimited size and
financial capacity may not be expected to put on as many
additional resources as a larger contractor.
In the earlier High Court case of Transfield v Arlo
International Ltd (1980) 3 BCLRS 183, a "best
ACLN - Issue #47 10

endeavours" clause in a licence agreement required the of the original pole was left by the relevant clause as an
covenantor to: issue open to the Court).
"use its best endeavours in and towards the design "Best endeavours" clauses should therefore not be
fabrication installation and selling ofthe ARLO PTL written using terminology which creates a loose catchall
pole throughout the licensed territory and to type of provision. When drafting such a clause,
energeticallypromote anddevelop thegreatestpossible consideration should be given to what it is that the other
marketfor the ARLO PTL pole ". party is required to do and what it is that you do not want
the other party to be able to do in an attempt to avoid its
The covenantor, at the time one of the three main obligations. It is ofcourse difficult to pre-empt all situations
contractors in Australia in transmission pole fabrication but such a clause can be made inclusive of specified
and erection, had used the Arlo pole previously and had consi~erations rather than being said to be exhaustive.
encountered some difficulties (which the Court thought It would be prudent when using a "best endeavours"
may have been due to its own manufacturing processes) in clause to ensure that it is drafted in a manner which
its use. identifies the extent of the obligation so as to give the
In a tender to the New South Wales Electricity maximum definition and therefore limit the court's
Commission, the covenantor did not expressly provide for interpretation of what was required of the covenantor.
use ofthe Arlo pole but the tendered sum was based on use This added definition is especially important when it is
of the Arlo pole. remembered that the courts may well apply a test which
During tender negotiations the authority expressed can water down the "best endeavour" clause to only a
considerable concerns about the suitability of the Arlo "reasonable endeavours clause".
pole. The covenantor decided not to press the use of the Reprinted with permission from Mallesons
Arlo pole but to propose instead its own pole based on the Stephen Jaques, Construction Update.
Arlo pole design. The covenantor won the contract and
used its own pole.
At trial it was argued that the covenantor had not used
its "best endeavours" to promote the Arlo pole. It was
apparently common ground that the use ofthe covenantor's
pole effectively destroyed the market in Australia for the
Arlo pole in respect of which it had covenanted to use its
"best endeavours ".
Despite what appears on its face to be a breach of the
particular "best endeavours" clause, the Court was of the
view that, upon more detailed analysis, the clause did not
compel the covenantor itselfto use the particular pole and
did not prohibit or restrict the contractor from using
alternative poles. ..
The decision in Transfield may have been different had
a more strictly drafted "best endeavours" clause been
used. For instance, the clause couldhave expressly required
the covenantor to use the particular pole, tender only on the
basis of use of the particular pole, develop the design in
case of design problems and not use its own poles or
develop its own designs employing any of the principles
used in relation to the pole in respect ofwhich the covenant
applied. These provisions could only be enforced to the
extent that they did not contravene Trade Practices
legislation.
In Hawkins, the Court stipulated that where a failure to
achieve the obligations ofa "best endeavours" clause was
due to defaults of the covenantor, then that party will not
be able to rely on those defaults. So the court will look at
the factual circumstances which lead to an inability to meet
contractual requirements. The Court will be less likely to
construe "best endeavours" clauses to the benefit of a
defaulting party unless the default was brought about by
some external circumstance beyond the control of the
defaulting party. (Unfortunately for Arlo, in Transfield,
the failure ofthe covenantor to develop the design and use