"Reasonable endeavours" and "best endeavours" undertakings arise in almost every type of commercial agreement but what is the difference between the terms and what obligations do they put on the performing party?
The recent first instance decision of the English Commercial Court in Rhodia International Holdings Limited & Another v Huntsman International LLC [2007] EWHC 292 (Comm) provides some clarification in this area to parties entering into these obligations.
Exercising reasonable endeavours – how hard do you have to try?
The claim arose out of a sale and purchase agreement under which the claimant, Rhodia, sold its chemicals business to a subsidiary of Huntsman. The agreement obliged the parties to use their respective reasonable endeavours to obtain the third party's consent to the novation of contracts to the purchaser. The relevant contract in this case was an Energy Supply Contract relating to a power plant. Huntsman was required to provide a direct covenant if a third party reasonably required one. Pending consent to the novation, Huntsman took over Rhodia's obligations under the contract.
The third party supplier raised concerns about the purchaser's financial standing and requested a guarantee from Huntsman before it would agree to the novation. Huntsman refused, with the result that the Energy Supply Contract was not transferred. Huntsman then gave notice to Rhodia that it no longer intended to fulfil Rhodia' s obligations under the contract and closed down the power plant. The third party supplier commenced arbitration proceedings against Rhodia for non-payment of invoices and Rhodia in turn issued proceedings against Hunstman as a result of its failure to exercise "reasonable endeavours" to secure consent to the transfer by failing to provide the guarantee.
The court found in Rhodia's favour and in doing so, considered generally what is meant by "reasonable endeavours". It had been argued that previous cases indicated it should equate with best endeavours. This suggestion was rejected with confirmation that an obligation to use reasonable endeavours is less stringent than one to use best endeavours. There might be a number of reasonable courses that could be followed in a given situation to achieve a particular aim. An obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses he can.
Huntsman was accordingly in breach because:
- Although the obligation to use reasonable endeavours did not in general require a party to sacrifice its commercial interests, where the contract actually specified certain steps that had to be taken as part of the exercise of reasonable endeavours, those steps would have to be taken, even if that could involve the sacrificing of a party's commercial interests.
- In this case, the requirement to provide a direct covenant was expressed in mandatory terms and it was therefore no answer to say that it might have involved Huntsman sacrificing its commercial interests.
What is the difference between reasonable and best endeavours?
As a result of comments made during the course of this decision, some tentative conclusions can be drawn:
"Best Endeavours"
According to the court in Rhodia, this "probably" requires the party subject to the obligation to exhaust all of a number of reasonable courses that could be taken in a given situation to achieve a particular aim. Earlier cases have also imposed limitations such as:
- While best endeavours may require expenditure, they do allow the party some regard for its own commercial interests and exclude steps that would cause serious detriment.
- An obligation to use best endeavours may impose an obligation to litigate or appeal against a decision, providing there is a reasonable chance of success and subject to other financial considerations.
"Reasonable Endeavours"
Reasonable endeavours are a less tangible concept. According to Rhodia, this "probably" requires the party subject to the obligation to talk only one reasonable course in a given situation to achieve a particular aim but not to exhaust all of them. Earlier cases have suggested that:
- The party obliged to use its reasonable endeavours can weigh up the obligation in the contract against commercial considerations including the uncertainties and practicalities related to fulfilling its obligation when deciding what action was required.
- An exception to this arises if the contract, as it did in Rhodia, specifies that certain steps must be taken in performance of the obligation. If so, these steps must be taken even if they involve sacrificing a party's commercial interests.
- The obligation may not extend to taking legal action of a doubtful outcome, but that is not to say it would never require any legal action to be brought as is sometimes suggested.
"All Reasonable Endeavours"
This term is often adopted as a compromise between best and reasonable endeavours. The court in Rhodia doubted that an obligation to use "all reasonable endeavours" was any different to an obligation to use "best endeavours", because it may well be that both obligations required a party to take all reasonable courses it could in the circumstances.
In coming to this conclusion the court expressly agreed with the decision of Yewbelle v London Green Developments [2006] EWHC 3122 (Ch) where it was held that the obligation to use all reasonable endeavours "requires you to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted."
Earlier cases have suggested that the term is probably a middle position somewhere between the two, i.e. something more than reasonable endeavours but less than best endeavours.
The position in Scotland
There is little or no case law in Scotland on the meaning of "best", "reasonable" or "all reasonable" endeavours, although such terms are commonly used in Scottish contracts. Decisions of the English Courts are not binding on their Scottish counterparts but are likely to be of significant influence in a Scottish case.
Conclusion
The terms "best", "reasonable" or "all reasonable" endeavours have no specific definition but common principles identifying the standard imposed by the terms have evolved.
In many cases, rather than argue about which particular endeavours obligation should be imposed in each case, certainty can be added by setting out specific obligations. For example, the specific requirement to provide a parent company guarantee was a determining factor in Rhodia. It should be remembered that any specific activities or services that a party agrees to undertake or provide will be enforceable even if they place the party at a commercial disadvantage.
To read the full text of the decision in this case, go to: http://www.bailii.org/ew/cases/EWHC/Comm/2007/292.html