[Shinoj Koshy and Radhika Malpani are with Luthra and Luthra Law Offices]
Globalisation has led to a significant increase in the cross-border transactions and this in turn has led to “legal transplants” – a phenomenon where contracts memorializing cross-border transactions tend to include legal terms and concepts which are prevalent in other legal systems. The term “legal transplant” was coined by Alan Watson in 1974 as the “moving of a rule or a system of law from one country to another, or from one people to another.” Simply put, it is transfer of rules, laws, legal principles and concepts from one legal system to another.
As has been highlighted by Professor Afra Afsharipour in her publication “Legal Transplants in the Law of the Deal: M&A Agreements in India”, some legal concepts have been successfully borrowed into India in the context of commercial transactions, like evolved principles of representations and warranties, backed by indemnities, with knowledge and materiality qualifiers.
However, there are multiple foreign concepts and terms that are followed and used in India without much deliberation and care. We will discuss one such concept – the use of the “endeavours” clause in Indian law governed documents. We shall analyse whether Indian Contract Act, 1872 or judicial decisions deal with this concept. Thereafter, we will discuss the jurisprudence that has developed in the source jurisdiction i.e., English law. Finally, in conclusion, we will highlight the issues associated with the “legal transplant” of the “endeavours” clause and suggest ways to avoid associated complications.
Imagine a situation where a fashion designer in Rajasthan, A, has been sourcing certain fabric from a wholesaler in Ahmedabad, B, on an ongoing basis. A and B have a long standing contractual relationship over past 3 years. A regularly uses the fabric supplied by B for designing its apparels. In relation to a recent purchase order, B is supposed to supply a consignment of fabric to A by January 01, 2022. However, due to heavy rainfall in the region, the railways and road transportation are badly affected. This prevents B from delivering the consignment by January 01, 2022. Consequently, A had to source similar fabric from a local supplier, C, at a higher price. What recourse will A have against B on account of such breach?
Under these circumstances, A can approach the court and claim compensation under Section 73 of the Indian Contract Act for the loss incurred on account of non-delivery of the consignment on time by B. A can claim compensation for the difference between the contract price of the fabric that was to be delivered by B and the price at which A ended up sourcing the fabric from C.
Now, in the same fact pattern, imagine a situation where the contract included the following “endeavours” clause:
“Each party shall use its best efforts to perform or to fulfill all obligations to be performed or fulfilled by such party under this Agreement.”
In order to evaluate whether each party has indeed used their “best endeavours” to perform their obligations we will have to appreciate the interpretation of what constitutes “best endeavours” under Indian law.
In this article, the term “best endeavours” and “reasonable endeavours” are interchangeably used as “best efforts” and “reasonable efforts”.
Analysis under Indian Law
Section 37 of the Indian Contract Act casts a general obligation on the parties to a contract to perform their respective promises, without elaborating on the standard of such performance which will discharge a party as having duly performed its obligations under a contract. Further, while Section 73 of the Indian Contract Act specifies the manner of ascertaining the loss and computing compensation in case of a breach, it does not elaborate on the standard of performance to be applied by a party.
Since Indian courts have not been called upon to adjudicate on the issues arising from the use of the “endeavours” clauses, there is no guidance on the meaning assigned to such terms under Indian law. Accordingly, in the absence of the Indian Contract Act or any judicial pronouncements dealing with the concept accompanying the use of the “endeavours” clause, we must look across our borders for jurisprudence to understand how terms like “best endeavours” and “reasonable endeavours” have evolved and been interpreted by English courts as their decisions continue to hold persuasive value in Indian courts.
“Best Endeavours” vis-a-vis “Reasonable Endeavours” under English Law
Under English law, the term “best endeavours” is used wherein the obligor/ promisor is bound “to take all those steps in their power which are capable of producing the desired results … being steps which a prudent, determined and reasonable [obligee], acting in his own interests and desiring to achieve that result, would take”, as held in IBM United Kingdom Ltd v. Rockware Glass Ltd.
Furthermore, in Jet2.com v. Blackpool Airport Ltd, the concept was elaborated upon wherein it was held that “the fact that he [obligor] has agreed to use his ‘best endeavours’ pre-supposes that he may well be put to some financial cost, so financial cost cannot be a trump card to enable him to extricate himself from what would otherwise be his obligation.”
On the other hand, the term “reasonable endeavours” indicates a less onerous obligation than “best endeavours” which means that if one reasonable path is taken even when there are other courses of action available, that itself would discharge the obligee of its contractual obligation, as held in Brooke Homes (Bicester) Limited v. Portfolio Property Partners Ltd and Others (“Brooke”) Further, the party may take into account preserving their own commercial interests and need not suffer any losses while fulfilling the obligation.
Over the years, the English courts have expanded the “endeavours” spectrum beyond “best endeavours” and “reasonable endeavours”, and it now includes a range of standards of performance based on the agreement between the parties.
“All Reasonable Endeavours” and Other Variations of the “Endeavours” Spectrum
In UBH (Mechanical Services) Ltd v. Standard Life Assurance Co. T.L.R. (unreported) while interpreting the use of the term “all reasonable endeavours”, it was held in passing said that on the “endeavours” spectrum “all reasonable endeavours” is “probably a middle position somewhere between the two, implying something more than ‘reasonable endeavours’ but less than ‘best endeavours’.” It was held in the case of Yewbelle Ltd v. London Green Developments Ltd that “under ‘all reasonable endeavours’, the obligation to use ‘reasonable endeavours’ continues until the point is reached at which all reasonable efforts have been exhausted.” However, the obligor may not be required to sacrifice its own commercial interests in discharging its obligations to use such “reasonable endeavours”.
Nonetheless, there is less clarity over what the standard of performance is to discharge the obligation under “all reasonable endeavours” clause as later in Rhodia International Holdings Ltd and another v. Huntsman International LLC, the court observed that “an obligation to use ‘best endeavours’ probably requires a party to take all the reasonable courses he can. In that context, it may well be that an obligation to use ‘all reasonable endeavours’ equates with using ‘best endeavours’.”
Subsequently, it was aptly highlighted in the Brooke case, that “these categorisations do not tell the whole story, since the precise requirement will depend on the precise wording and the context in which that wording arises.” Accordingly, the Court opined that although it is less likely, “even with ‘all reasonable endeavours’ clauses, some subordination of commercial interest may be required.”
In addition to the above, lately, other derivatives of the “endeavours” clause have emerged like “commercially reasonable endeavours”, “all commercial endeavours” etc., without much clarity on their respective meanings.
English courts have been called upon to also interpret terms like “all reasonable but commercially prudent endeavours” in the recent past wherein it held in CPC Group Ltd v. Qatari Diar Real Estate Investment Co that “the phrase ‘all reasonable but commercially prudent endeavours’ is not equivalent to a ‘best endeavours’ obligation, and they do not require [obligor] to ignore or forego its commercial interests. Instead, they allow [obligor] to consider its own commercial interests alongside those of [obligee], and require it to take all reasonable steps …, provided those steps are commercially prudent.”
Analysis of Illustration II
Under Illustration II what is the extent to which B should go to fulfill its obligations?
If we were to analyse the obligation from an English law perspective, B will be required to deliver the fabric to A even if it means undermining its own commercial interest. Essentially, B would be required to look at all possible alternatives, like delivering the fabric through other modes of transport or sourcing the fabric from a local dealer at a higher cost and making it available to A, even if it means reduction in B’s profit margins, i.e., a commercial detriment to B.
However, in India, in the absence of any jurisprudence on what the term “best endeavours” entails, it is unclear as to what should B do to discharge his ‘best efforts’ obligation. Clearly B cannot be expected to know the English law jurisprudence on the concept. This results in a rather vexatious situation as the parties in Illustration II have through a “legal transplant” borrowed a concept and a term that has no jurisprudence in India. The important question in such situation is how would the intention of the parties be assessed? What did the parties intend while agreeing to the ‘best efforts’ clause? Can B claim that the contract is void on account of uncertainty relating to what constitutes ‘best efforts’?
While “legal transplants” in international commercial contracts can increase efficiency and reduce transaction costs by reducing the time required to reach a consensus, one must also recognize the accompanying limitations. These limitations present significant challenges when legal concepts are transplanted from jurisdictions where the concepts have evolved through judicial pronouncements into a host jurisdiction with an absolute lack of corresponding jurisprudence.
With time, in India, the transplant of the “endeavours” clauses has moved from international commercial contracts to domestic commercial contracts. This has happened without the domestic parties fully appreciating the legal implications associated with inclusion of such terms in contracts. Therefore, if the parties intend to include an “endeavours” clause, then they would be well-advised to consider including other supporting clauses that clearly define the minimum standard of performance required, the extent of efforts required to discharge the obligations, the maximum cost that should be incurred by the obligor/ promisor while fulfilling the obligation, the time period for expiry of the obligation and the consequences for non-fulfillment of such obligation.
If the above suggestions were implemented then clause in Illustration II should read as follows:
“Each party shall use its best efforts to perform or to fulfill all obligations to be performed or fulfilled by such party under this Agreement.
In case B is unable to deliver the fabric to A by January 01, 2022, then B shall, till January 15, 2022 make efforts to procure and deliver to A through alternate sources provided that such actions of B shall not reduce B’s profit margin by more than 5%.
In the event B fails to deliver the fabric to A beyond January 15, 2022, A may source the fabric from any other vendor and B will be required to make good difference between the contract price of the fabric agreed between A and B, and the cost at which A sources the fabric from any other vendor, notwithstanding the cost incurred by B in pursuance of discharging its obligation as mentioned herein-above.”
Including such clear and objective standards to evaluate the performance would prevent the parties from being exposed to the vagaries of judicial interpretation of terms like ‘best efforts’ or ‘reasonable efforts’ or any of their derivatives, where the adjudicator is left to interpret the intention of the parties to a private arrangement.
– Shinoj Koshy & Radhika Malpani