With the ongoing issues with supply chains; the pressure upon individual distributors or particular contractors; the anticipated increase in costs arising from expected interest rate rises and increased energy costs, many businesses are faced with having to review what their contractual position is, what they must do to avoid being sued when facing difficulties; and how if at all they can improve that position. Those steps will inevitably lead to disputes over potentially broken contracts.
We have looked elsewhere at when parties do or do not have binding agreements. However, the other situation many businesses are grappling with at the moment is where there is no dispute that the contract is valid and binding, but there is a question about what a party has to do under the contract and whether it can avoid having to perform a contract if circumstances change. Where contracts have the extremely demanding “best endeavours” obligation, then getting out of performing such a contract is very difficult. A middle ground is often ‘all reasonable endeavours’ which can afford some leeway but again is limited.
It is where a contract provides that a party must use its reasonable endeavours, that the other party to a contract should potentially be concerned. The reason for that is simple; whereas best endeavours means a party must do its very best to perform; what is reasonable is much less demanding and when as now circumstances change a party wanting to get out of a contract; or simply struggling to perform it might be able to something.
What does reasonable endeavours mean?
This would change from contract to contract however it might be summed up as “we will try but no promises we will succeed”. In practical terms it means that you need not sacrifice your own commercial interests to try to comply with the contract where only reasonable endeavours are required; and you may only have to take one reasonable course of action and not explore all possibilities depending upon the circumstances.
In hard times businesses have to try to limit costs and importantly avoid losing money, so the terms of contracts must be carefully scrutinised. To take an example, does the fact that the cost of performing a contract goes up, so much that a party will suffer a loss by delivering the service or goods mean it can get out of the contract or change it if they only have to do what is reasonable? The simple answer is no, even though losing money will not seem reasonable to any business, that is not enough of a reason on its own. It requires doing what is reasonable in the circumstances and what is reasonable can be a commercial burden – there is no guarantee that the deal struck will be a good deal, or will remain a good deal. Simple changes in price therefore will not always justify not delivering.
To take a different example if a party is obliged to deliver goods to a customer but cannot find any shipping options to deliver it in time, will it be in breach of contract if it does not deliver? The probable answer here would be no if the party only has to use its reasonable endeavours and has really tried. More demanding clauses would require it to explore the market more widely however if for example, that party’s goods are stuck in one of the many storage containers stockpiled around the world; or waiting in a container that cannot be made available then that party may well be able to avoid liability under a contract.
That example considers a delay; but what if a party wants to avoid delivering the goods at all – how far must it go to try to find a delivery option before it has done what is reasonably required? The answer to that situation will vary but price would be relevant. If a party has to use its reasonable endeavours to comply (not more erroneous all reasonable endeavours or best endeavours), then the price that may be required to be paid to deliver on time could be too much if it would have a significant enough effect on the business for it to be able to say it has used its reasonable endeavours to comply and cannot deliver.
Ultimately a business wanting to get out of an obligation might be able to do so, but relying upon such an argument will need robust legal advice upon its position and to be very certain of the underlying facts.
However we now see a very current example potential energy price where increases which will mean businesses will not be able to afford to produce in the quantities that they have previously for fear of insolvency, and the scope of endeavours required by a party to comply with a contract are going to be a critical battleground. We are already seeing questions about such issues and the potential disputes brewing and parties that understand their contracts and their obligations as early as possible, and importantly have the advice of litigator about such potential disputes will be in the strongest position.
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