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Meaning of reasonable endeavours

In Rhodia International Holdings & Anor v Huntsman International LLC, the High Court decided that where a party was contractually obliged to use reasonable

Jonathan Rands

endeavours to obtain a third-party consent, and the contract prescribed certain specific steps to be taken (in this case, providing a parent-company guarantee to induce the third party to give consent) the party was obliged to take those steps, even though they might be detrimental to its own commercial interests. The Court also considered the difference between the terms "reasonable endeavours" and "best endeavours" and expressed the view, that the former imposed a less stringent obligation than the latter.

BACKGROUND
The difference between an obligation to use "best endeavours", or "all reasonable endeavours", or "reasonable endeavours" to fulfil an obligation, in the context of a commercial contract, has been a matter of some debate. The Court of Appeal has held that a person's obligation to use best endeavours means that he had to do "all he reasonably can" to obtain the desired result. On the other hand, the High Court has held that an obligation to use reasonable endeavours, was less stringent than an obligation to use best endeavours.What actually constitutes "reasonable endeavours" will vary according to the circumstances of the case, but an obligation to use reasonable endeavours does not generally require a party to do anything that would involve sacrificing its own commercial interests.

FACTS
In February 2001, RIH agreed with HIL to sell a chemical manufacturing business to HIL and/or its designated purchaser, HSS, a special purpose vehicle recently incorporated by HIL. The relevant terms of the sale agreement were that:

• HIL would procure that HSS carried out and completed specified customer and supplier contracts and punctually performed and discharged RIH's obligations under those contracts (clause 14.1)
  
• Where such a contract contained some restriction on its transferability (defined as a 'Restricted Contract'), RIH and HIL undertook to use their respective reasonable endeavours ..... to obtain all requisite consents or agreements of all parties to each Restricted Contract to whatever assignment, transfer or novation is necessary to enable [HIL] to perform such Restricted Contract on or after Completion or, as the case may be, to transfer the benefit and,for the purpose of obtaining any such consent or agreement, [HIL] shall, if such other party to the Restricted Contract…so reasonably requires, [HIL], its immediate parent company or one of [HIL]'s subsidiaries or subsidiary undertakings with sufficient standing and net worth shall enter into a direct covenant with such other party to perform and observe such Restricted Contract…from the date of its assignment, novation or transfer in favour of [HIL]." (clause 15.1.2).

• Until the necessary consents were secured, HIL would procure that HSS, at its own expense, performed RIH's obligations under the restricted contracts as RIH's agent, and paid RIH for any liabilities arising as a result of any non-performance or negligent performance (clause 15.1.3).

• Provided that HIL had performed its obligations under clause 15.1.2, if any of the restricted contracts could not be transferred to HSS within six months of the date of completion, then HIL would be entitled by written notice to require RIH to exclude that contract from the business assets sold under the agreement and to pay HIL an amount equal to the diminution in value of the business caused by the exclusion (clause 15.1.4).

One of the assets of the business was a manufacturing plant power for which was provided by an on-site facility owned and operated by NPL. The energy supply contract between RIH and NPL provided that RIH could assign, novate or otherwise transfer its rights under the contract, provided that RIH satisfied NPL that the party to whom the proposed transfer was made was capable of fulfilling its obligations under the contract, and that RIH gave at least 90 days' notice of its intention to assign, novate or otherwise transfer.

Pending novation, HSS undertook to perform RIH's obligations under the energy supply contract, and in fact did so from March 2001. The first step towards novation was made by HIL's solicitors, who produced a draft form of novation and sent it to both RIH and HIL. However, in July 2001, NPL informed RIH by letter that while it was happy in principle for the novation to proceed, it had concerns about the financial strength of HSS (which, as a new company, had yet to file statutory accounts) and that it was only prepared to novate if it received an acceptable guarantee of HSS's obligations. NPL provided HIL with a copy of the letter. In October 2001, following a meeting with NPL, RIH informed HIL that NPL was still insisting on a guarantee.

In January 2002, HIL sent to NPL a file of financial information on HSS, but stated that it did not guarantee the debts of its subsidiaries. In March 2002, NPL replied that it could not take the information as a substitute for full accounts and, pending publication of satisfactory accounts, it still required some sort of guarantee, bond or letter of credit before it would agree to the novation. In October 2002, HIL sent NPL a copy of HSS's first statutory accounts, which showed HSS to be financially weak, and in January 2003 NPL replied that it would not consent to the novation until HSS posted substantially improved financial results.

There was no further communication between HIL and NPL concerning the novation and by then HIL was already contemplating closing the plant. In March 2004, HIL gave RIH notice that it no longer intended to perform RIH's obligations under the energy supply contract, and also purported to give RIH written notice under clause 15.1.4 of the sale agreement requiring the energy supply contract to be excluded from the sale. A few days later the plant was closed.

• In October 2005, NPL commenced arbitration proceedings against RIH for unpaid invoices, to a total of £14.8 million, submitted by NPL under the take-or-pay provisions of the energy supply contract. RIH in turn issued proceedings against HIL, claiming that HIL had breached its obligations under clause 15.1.2 by not using reasonable endeavours to procure the novation of the energy supply contract, so that its purported notice under clause 15.1.4 was invalid and it remained liable, pursuant to clause 15.1.3, to perform RIH's obligations under the energy supply contract.

DECISION
Although incidental to its decision the High Court also considered the difference between "reasonable endeavours" and "best endeavours". It concluded that an obligation to use reasonable endeavours was less stringent than an obligation to use best endeavours. For example there might be a number of reasonable courses which could be followed in a given situation to achieve a particular aim, and an obligation to use reasonable endeavours to achieve the aim probably only required a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably required a party to take all the reasonable courses it could. In this context, the Court thought that an obligation to use "all reasonable endeavours" was equivalent to an obligation to use “best endeavours”. However, the Court found that HIL was in breach of clause 15.1.2 because although an obligation to use reasonable endeavours does not usually require a party to sacrifice its commercial interests, where the contract was, as in this case, very specific as to what ‘reasonable endeavours’ signified in terms of the practical steps to be taken, those steps would have to be taken, even if it damaged that party's commercial interests.

CONCLUSIONS

1. There may be no practical difference between obligations to use ‘best endeavours’ and ‘all reasonable endeavours’.
2. An obligation to use ‘reasonable endeavours’ is inferior, in terms of the severity of the obligation, to an obligation to use ‘best’ or ‘all reasonable’ endeavours.
3. There is a definite benefit, when the other contracting party has undertaken to use endeavour to do something, in specifying in the contract what the other party must do (in effect, quantifying the endeavours obligation).

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