November 20, 2023
Various phrases commonly appear in construction contracts which impose an implicit threshold of obligation on a party the subject of that obligation – where that threshold may be unknown, misunderstood, or may otherwise be different to that intended to be imposed by the parties, disputes will likely arise.
The final Part of this series will discuss some of those “common” phrases, to assist parties in understanding their obligations, and the necessary amendments / clarifications which may be required to ensure the contract’s wording represents the parties’ intended outcome.
“Reasonable” v “Best” Endeavours
It is common for a contract to specify that a party must take “best endeavours”, “reasonable endeavours” (or even “all reasonable endeavours”) to bring about an action, or to fulfill an obligation. However, the level of obligation created under these phrases may be higher (or lower) than that which the parties intended to create.
It was previously accepted (as it is the British approach) that there was a “hierarchy” of endeavour obligations, with “best” being the most onerous and “reasonable” being less; and this rationale has likely played into contract drafting for some time. However, this position has changed, and it no longer appears to be the case (in Queensland) that there is much (if any) difference between the obligations imposed under a requirement to undertake “reasonable” or “best” endeavours – both phrases are based on the notion of “reasonableness”, and as such, the Courts in NSW, Vic, WA and Qld have favoured the approach that there is little (or no) difference between them.
This distinction (or lack thereof) is important to understand in translating your intended obligations into a contract. Where a lower (or higher) standard is required by the parties, explicit wording should be included to that effect.
So, what is the standard of obligation?
The position has come a long way since the 1911 British approach that “best endeavours” obliged a party to “leave no stone unturned”.[1] The Australian approach now considers that neither expression imposes an absolute, unconditional obligation on a party to achieve a required objective. Rather, the focus has shifted to a standard of “reasonableness”.
Generally, an obligation to use reasonable or best endeavours involves an element of honesty, to actively perform the required tasks (which may include the incurring of expenses), and to not hinder or prevent the fulfilment of the purpose. The Courts have clarified this by providing the following insights into the level of obligation imposed:
- It prescribes a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications, and responsibilities of the party, viewed in the light of the particular contract;[2]
- The obligation does not require the party who is to undertake the obligation, to “go beyond the bounds of reason” – that party is only required to do what they reasonably can in the circumstances to achieve the contractual objective, but not more;[3]
- Whether a party has used their “best endeavours” to achieve the objective, must be determined objectively in light of what is required to be done, in the circumstances that exist, to achieve said objective”.[4]
However, the steps a “reasonable person” will take in fulfilling the condition to use “best” or “reasonable” endeavours will change depending on the factual scenario, and the obligation would not go so far as to require a party to forfeit their own interests in favour of the other party.
To avoid uncertainty in what the parties consider their obligations to be under a contract (which may be different to the obligations actually imposed by using “best” or “reasonable” endeavours), parties should ensure their contracts use certain language (i.e., a party “must” bring about an objective), or contain definitions for “endeavours” or “reasonable steps” which a party’s obligation can be measured against.
Acting in “Good Faith”
Similarly, it is also common for a contract (or the negotiation of same) to be subject to an obligation to act in good faith – whether it applies to the negotiation of a contract, the contract as a whole (and must be exercised throughout the entire contract), or a certain aspect or power under a contract.
In Australia (except for in a few narrow circumstances), an obligation to act in good faith will not be implied into every contract. As such, if it is the parties’ intention that this obligation apply, it should be explicitly stated and defined in the contract.
Where your contract does explicitly impose a duty to act in “good faith”, the standard of obligation under that duty is unsettled in Australian contract law, and its meaning is still being considered by the Courts. Notwithstanding this, a duty to act in good faith is likely to be much wider than to simply act honestly,[5] and is likely to involve an obligation to:
- To act with reasonableness, fairness, and standards of decency;
- Honour a duty undertaken;
- Fair dealings between parties;
- Not act dishonestly, undermine the contractual objectives, or otherwise act in “bad faith”;
- Not acting arbitrarily or without regard to the other party and the provisions, aims and purposes of the contract. However, this does not extend insofar as a requirement to put the other party’s interests before their own, to minimise their self-interest, or to act against their own interests.
Further, any perceived additional obligations placed on a party by adding an obligation to act “reasonably and in good faith”, may only be perceived. As the obligation to act in good faith already involves an obligation to act reasonably (and goes beyond that obligation), additional contract drafting on this point may become redundant.
What does this mean for my contract?
Similar to any other obligation a party wishes to make clear, an obligation to act in good faith should be explicitly drafted into a contract as such an obligation will not necessarily be implied. Further, given the unsettled position from the Courts on what exactly constitutes “good faith”, parties should also consider defining what actions (in the context of the contract and/or clause in which the duty is to apply) constitute an “good faith”.
Lamont Project & Construction Lawyers
Our Team have the industry knowledge and experience to assist both Principals and Contractors in all major projects and payment disputes. If you would like to discuss any matters raised in the above article or this series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Lili Hoelscher
Email: [email protected] or [email protected]
Phone: (07) 3248 8500
Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064
Postal Address: PO Box 1133, Milton Qld 4064
[1] Sheffield District Railway Co v Great Central Railway (1911) 27 TLR 451.
[2] Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83, 101.
[3] Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41.
[4] Paltara Pty Ltd v Dempster (1991) 6 WAR 85.
[5] Commonwealth Bank of Australia v Barker [2014] HCA 32.