‘Reasonable endeavours’ - High Court considers meaning
Legal background
Contractual terms often require a party to use its ‘best endeavours’, ‘all reasonable endeavours’, or ‘reasonable endeavours’ to achieve a particular result.
There is no consensus on the exact meaning of these three phrases, save that all are less burdensome than an absolute contractual obligation.
Judicial opinion has tended to suggest that ‘best endeavours’ goes further than ‘reasonable endeavours’. The former requires the party to do what can reasonably be done in the circumstances, whereas the latter is thought to require only those steps which do not put the party at a commercial disadvantage. ‘All reasonable endeavours’ seems to fall somewhere between the two.
The thoughts of Flaux J
In the present case, Julian Flaux QC, sitting as a Deputy High Court Judge, put forward a number of suggestions on the meanings to attach to these phrases.
He rejected the submission, put forward by the Claimants, that ‘reasonable endeavours’ and ‘best endeavours’ have the same meaning. ‘As a matter of language and business common sense, untrammelled by authority, one would surely conclude that they did not’, he said.
According to Flaux J, the law will recognise ‘a distinction between best endeavours and reasonable endeavours and that the latter is less stringent than the former’.
On the meaning of ‘all reasonable endeavours’, he said only that ‘it may well be that an obligation to use all reasonable endeavours equates with using best endeavours’.
Facts of the case
The Defendant purchased a chemicals business from the Claimants. Under the sale and purchase agreement (SPA), both the Claimants and Defendant were to use their ‘reasonable endeavours’ to procure the novation of certain contracts that the purchaser would require to operate the business it was buying. To effect the purchase, the Defendant incorporated a new subsidiary company as a special purpose vehicle (SPV).
The dispute arose partly because the Defendant failed to procure the novation of an agreement with a third party energy supplier. The energy supplier was not prepared to permit novation to the Defendant’s SPV unless the Defendant gave a parent company guarantee; the Defendant refused to do so.
Decision
Faux J held that, whilst an obligation to use reasonable endeavours does not usually require a party to sacrifice its own commercial interests, in this case the Defendant should have offered the guarantee, and was in breach of the SPA when it refused to do so.
The Defendant’s obligations went beyond the ordinary meaning of ‘reasonable endeavours’ because the SPA stated specifically that, if reasonably required to do so, the Defendant would ‘enter into a direct covenant … to perform and observe’ the terms of any novated agreements.
Faux J’s reasoning is that ‘where the contract actually specifies certain steps have to be taken (as here the provision of a direct covenant if so required) as a part of the exercise of reasonable endeavours, those steps will have to be taken, even if that could on one view be said to involve the sacrificing of a party’s commercial interests’.
Comment
This case sheds some light on the meaning of ‘reasonable endeavours’, but does not appear to change its ordinary meaning. What it does make clear is that if a party agrees to take certain steps as part of the exercise of ‘reasonable endeavours’, it must take those steps or it will have failed to meet its contractual obligation.
Companies should be aware that where the terms of an agreement are drafted in this way, they may in certain circumstances be required to guarantee the performance of a subsidiary to which agreements are novated. This could apply not only to a company acquiring another business, but also to a company whose subsidiaries are assigned licences or other agreements as part of an outsourcing arrangement during transition or exit.
For the full text of the decision in Rhodia International Holdings Limited and Rhodia UK Limited v Huntsman International LLC [2007] EWHC 292 (Comm), please click here.
