Reasonable or Best Endeavours
11 May 2012
In April 2012, the English Court of Appeal dismissed Blackpool Airport's appeal in Jet2.com Ltd v Blackpool Airport Ltd. This is an important ruling that is likely to have a bearing on the interpretation of commercial contracts in Hong Kong. The Court held that the context in which the contract was made was key to interpreting the scope of its provisions, adding momentum to a trend towards drawing on extrinsic evidence to clarify the parties' obligations.
Whose business is it anyway?
The case involved a dispute between a budget airline and an airport over whether the airport was required to allow flights outside of its normal opening hours for the benefit of the airline. The airline relied on a clause in the agreement that the airport would use "best endeavours" to promote the airline and "all reasonable endeavours" to provide a cost base that would facilitate the airline's low-cost pricing. The provisions in the clause could be described as outcome-based, and did not specify any particular obligations towards reaching the outcomes. As a result, the scope of the obligations and their enforceability was disputed.
The majority judgment held that the clause required the airport to act contrary to its own commercial interests by allowing flights outside its normal opening hours because aircraft movements outside these hours were essential to the airline's low-cost business model. It was therefore treated as fundamental to the agreement, even though the obligation was not specifically laid out.
In contrast, the dissenting judgment of Lewison LJ found the clause to be unenforceable for lack of certainty. He considered the objectives towards which the endeavours were to be directed too vague. Further, there was a separate clause that set out a large number of detailed obligations: if the airport had contractually committed itself to keeping open beyond its normal opening hours it was felt that such obligation would have been included.
Best or Reasonable?
In this case, the parties agreed that there was no difference between the standard required to satisfy "best" and "reasonable" endeavours. More important was the object of those endeavours, and the context in which the agreement was entered.
The Jet2 case is a timely reminder of the inherent risk of accepting "endeavour" obligations and that parties can be required to act contrary to their own commercial interests if their contractual obligations are not set out more clearly. It also highlights the trend towards drawing on extrinsic evidence to assist in the interpretation of uncertain clauses and in particular, outcome-based endeavours clauses.
However, there are some straightforward measures that can be taken when entering into contracts to avoid many of these difficulties:
First, if it is necessary to include an endeavours clause for an outcome rather than fixed obligations, you should consider the potential steps required to achieve that outcome in advance and set them out explicitly in the contract. This would lessen the need to rely on extrinsic contextual factors to determine its scope.
Second, it may be prudent to draw up an accompanying memorandum setting out objectives and reasons for entering into the contract. If a dispute were to arise later, such a memorandum would be a useful evidential document in considering the context in which the contract was made.