By HUGH MURRAY and Joanne Emerson Taqi
THE use of some legal phrases in contract documentation or correspondence is considered, by most, as commonplace. However, it is important to ensure that such phrases are properly understood.
Misunderstanding such terminology, particularly when the interpretation of some key terms can differ depending on whether the words are in a document governed by English law or by another law, can potentially affect the efficacy of the commercial bargain.
Let us look at how a couple of important and commonly used legal phrases (“best endeavours” and “reasonable endeavours”) can be interpreted under English law and, by way of example, under regional laws, in order to demonstrate their proper use to avoid costly misunderstandings.
“Endeavours”
• Position under English law: It must be remembered at the outset that while case law has helped to establish some principles clarifying the difference between the underlying concepts of “best endeavours” and “reasonable endeavours”, the precise requirements of both remain unclear and will always depend on the particular circumstances.
For “best endeavours”, the common starting point is to take a literal interpretation (“best” does not mean “second-best” endeavours). However, while past cases have established that a “best endeavours” obligation meant the obliged party must leave no stone unturned, such clauses are now judged by standards of reasonableness and so entail doing all that can reasonably be done in the circumstances. In practice, this means a party that is under a “best endeavours” obligation must take action which, having regard to the costs and difficulty of the obligation, is commercially practical. This may require significant expenditure to achieve but not to the extent that it could lead to financial ruin.
“Reasonable endeavours” is a less stringent standard than “best endeavours” and only requires a party to take one reasonable course of action, not all. It has been held, under English law, that a party obliged to use “reasonable endeavours” is entitled to balance the duty to use “reasonable endeavours” against all relevant commercial considerations including costs of, and the uncertainties and practicalities relating to, compliance with the undertaking. Therefore, an obligation to use “reasonable endeavours” does not require an obligor to sacrifice its own commercial interests (unless steps to be undertaken by the obliged party are specified in the contract).
• Other variations: “All reasonable endeavours” is often adopted as a compromise between “best” and “reasonable endeavours”, although its interpretation under English law is less clear than those wider standards. Certain cases have seen the term used interchangeably with both “best endeavours” and “reasonable endeavours”. However, the consensus appears to be that when it comes to considering the number of courses of action a party must take, the term is more akin to “best endeavours”, but when it comes to sacrificing a party’s commercial interests, it is more akin to “reasonable endeavours”. These interpretations are by no means clear cut and parties should always be cautious when using the term as there is more uncertainty as to the degree of obligation it creates.
Further variations include the terms “commercially reasonable endeavours” and “reasonable commercial endeavours” often used to try and soften a “reasonable endeavours” obligation. There is little precedent to support this interpretation and it is not clear that the English courts would differentiate between the terms, given that a “reasonable endeavours” obligation already involves balancing all relevant commercial factors. Similarly, the term “utmost endeavours” is sometimes seen as advancement on a best endeavours clause, though again there is little precedent on its use in commercial contracts.
The final factor to consider is the certainty of the underlying objective. If there is a lack of certainty, then an obligation to endeavour to achieve that result will also fail. For example, an undertaking to use “best endeavours” to obtain a specific certificate, or licence, is sufficiently certain and capable of enforcement. However, an undertaking to use “best endeavours” to agree on something is no different to trying to agree, or to negotiate with a view to reaching an agreement and is uncertain and not an enforceable obligation.
• Position under Bahraini and UAE law: The local law position in Bahrain and the UAE is that while there is no definition for “best endeavours” or “reasonable endeavours” and no distinction as to the requirements for both, it appears that where the context allows (and depending on circumstances of the case), the court may interpret “best endeavours” as imposing stricter requirements to achieve the subject matter of the endeavours, taking into consideration the intention of the parties at the time of entering into the agreement.
Therefore, it is important to ensure that, once the governing law of a contract is determined, any obligations drafted on a “best” or “reasonable” endeavours basis are carefully considered to ensure that the appropriate and agreed standard is imposed on the obligor. Under English law, the courts have defined certain principles applying to these phases, however if the contract is governed by local law, these phrases may impose obligations that are difficult to anticipate at the date on which the parties entered into the contract.
Conclusion
The understanding and correct application of legal terms and concepts cannot be overstated. This is particularly relevant in the Middle East where as many contracts are governed by English law as they are by local law. Caution should be taken when qualifying the standard of effort on an obligation. While it does appear possible, under Bahraini local law, to set a higher standard of performance capable of enforcement by the court, the interpretation will likely not be as sophisticated as that established under English law. With that in mind, it is important to remember that the objective of the obligation should always be clearly identifiable and if possible also state the exact steps to be performed to give the best possible chance of enforcement.
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