'Reasonable endeavours' undertaking - Commercial Court clarification

"Reasonable endeavours" and “best endeavours” undertakings are very commonly found in contracts of almost every description, and whether a party may be prepared to accept such an obligation is regularly debated in commercial negotiations.  Despite the frequency with which these obligations are routinely accepted, there is surprisingly little reasoned authority on the scope and extent of what such an obligation actually entails.  What authority that does exist is often confusing, considering that this is such a deceptively straightforward concept. 

For this reason, the recent first instance decision of the Commercial Court in Rhodia International Holdings Limited & Another v Huntsman International LLC [2007] EWHC 292 (Comm) provides some useful clarification in this area to parties entering into these obligations.

Why the uncertainty?

In Rhodia v Huntsman, the Commercial Court rejected an argument that a "reasonable endeavours" undertaking should be equated with a "best endeavours" undertaking, and that there was simply no discernible difference between the two. The fact that such a submission was made is, perhaps, surprising. However, this point has remained open as a result of what the Commercial Court held to be "some division of judicial opinion". 

For example, in IBM v Rockware Glass [1980] SFSR 335 the Court of Appeal held that an obligation to use best endeavours "should be understood to mean…to do all he reasonably can". Wheras in UBH (Mechanical Services) v Standard Life (unreported, 1986) Rougier J held, since supported by other cases including Jolley v Carmel Limited [2000] 2 EGLR 154, that an obligation to use best endeavours is more stringent than an obligation to use all reasonable endeavours which is, in turn, more stringent than an obligation to use reasonable endeavours. 

Facts

The claimant seller and the defendant purchaser entered into an agreement whereby the claimant transferred a chemical business to a recently-incorporated subsidiary of the defendant. The agreement was a thorough and sophisticated contract drafted with the assistance of professional advisers. It contained provisions governing the manner in which the parties agreed to transfer and novate a number of contracts from the seller to the purchaser. 

Those contracts that did not require third party consent to assignment were transferred at the time of sale. Those which did require such consent, including an Energy Supply Contract relating to a power plant on the same site as the transferred chemical business, were subject to an obligation whereby the parties agreed to use their respective reasonable endeavours to obtain the third party's consent to the novation to the purchaser. 

Pending consent to the novation, the purchaser took over operation of the Energy Supply Contract and the associated power plant at the site as agent pending consent. As a result of the third party raising concerns about the purchaser's financial standing, and the purchaser's refusal to provide a parent undertaking, the Energy Supply Contract was not transferred within the agreed time frame. 

The purchaser later closed down the power plant and the third party commenced successful arbitration proceedings against the seller for non payment of invoices in the sum of about £15m. The seller in turn issued proceedings against the purchaser, claiming that the Energy Supply Contract had not been transferred to the purchaser as a result of the purchaser's failure to exercise “reasonable endeavours” to secure consent to the transfer. The purchaser insisted that it had taken reasonable steps and sought the price reduction. The scope of this obligation therefore fell to be considered.

“Reasonable endeavours" does not equal "best endeavours"

Although finding for the seller on the facts of the case, Mr Julian Flaux QC (sitting as Deputy High Court Judge in the Commercial Court) rejected the submission by the seller that best endeavours and reasonable endeavours mean the same thing. In doing so, he accepted in part, but also expressly rejected part of, the decision of Rougier J in UBH (Mechanical Services) v Standard Life, which imposed the hierarchy that "best endeavours" meant more than "all reasonable endeavours" which in turn meant more than "reasonable endeavours". 

In reaching this conclusion, the Commercial Court held that the observations of the judges in the cases set out above had not been given after a full debate on the issue by the parties and that it was likely that the judges had not been directing their minds specifically to this issue at the time. As a result of this judgment, the most recent state of the law, albeit first instance only, would therefore seem to be as follows:

"Best Endeavours"

According to the Commercial Court, this “probably” requires the party subject to the obligation to exhaust all of a number of reasonable courses which could be taken in a given situation to achieve a particular aim. In other words, best endeavours requires a party to take all the reasonable courses he can. Other cases have also imposed limitations such as:

• Best endeavours incorporates a concept of reasonableness and excludes steps which would cause serious detriment. The courts will take account of the commercial viability of any actions taken and the interests of the party under the obligation.
• Earlier case law supports the proposition that "best endeavours" is equivalent to the standard of a reasonable and prudent director acting properly in the interests of his company to do what reasonably can be done in the circumstances and having regard to existing contractual relations.
• A best endeavours obligation can require the party under the obligation to invest and take the risk of success or failure, but only where there is a reasonable prospect of commercial success. For example, there may be a duty to litigate provided there is a reasonable chance of success and subject to other financial considerations.

"Reasonable Endeavours"

According to the Commercial Court, this “probably” requires the party subject to the obligation to take only one reasonable course in a given situation to achieve a particular aim, but not to exhaust all of them. In other words, the Commercial Court confirmed that an obligation to use reasonable endeavours is less stringent than one to use best endeavours. Other cases have added that:

• The use of reasonable endeavours has been defined by reference to an objective standard of what an ordinary competent person might do in the same circumstances. Reasonable endeavours do not require the taking of an action insofar as it disadvantages the party under the obligation.  
• An exception to this arises if the contract, as it did in this case, specifies that certain steps have to be taken in performance of the obligation. If so, these steps must be taken even if they involve the sacrificing of a party's commercial interests.
• Cases where there is a reasonable endeavours obligation rather than a best endeavours obligation appear to offer the parties greater scope to balance the weight of their contractual obligations against relevant commercial considerations.
• Again, there may be an obligation to litigate, subject to the costs and the likelihood of success.

What about "All Reasonable Endeavours"?

The court in the Rhodia case doubted that an obligation to use “all reasonable endeavours” was any different to an obligation to use "best endeavours". This was because, in the court's view, “it may well be that” both obligations required a party to take all reasonable courses it could in the circumstances (see above). 

In coming to this conclusion, the court expressly agreed with the analysis contained in a passage in the recent judgment of Lewison J in 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." This alignment between “all reasonable endeavours” and “best endeavours” now appears to be the preferred modern construction. (Note that the Court of Appeal last week allowed an appeal against the judgment of Lewison J in Yewbelle, but without disturbing the judge's analysis of the obligation to use "all reasonable endeavours": [2007] EWCA Civ 475.)

Conclusions

The fundamental question of whether a party should agree to use "best", "reasonable" or "all reasonable" endeavours is very regularly raised during negotiations in almost every type of commercial agreement. These phrases have no specific definition, but well established common principles illuminating the standard imposed by these phrases have evolved. It is not possible to study any of these standards of obligation in isolation. Instead, it is necessary to consider and compare all three against each other in order to gain an understanding of the extent of each.

Despite the recent Commercial Court decision, this area of the law is still confusing. This is contributed to by the fact that careful analysis of the cases shows that the extent of these obligations is rarely at the heart of the previous case law and so, in fairness to the judges concerned, are rarely in the forefront of their minds (a point made in Rhodia). Nor, often, do the judges have the benefit of all previous authority, a symptom of the fact that many cases on this topic are (remarkably) either unreported or reported in obscure law reports. 

As a result, there is clearly still scope for full, comprehensive and reasoned analysis illuminating the standards imposed by these very common phrases.
 
In the meantime, when considering whether to incorporate any of these obligations into a contract, it is worth bearing in mind that it may be preferable, if possible, to try to add certainty by setting out specific obligations to be met. For example, that a party is to use reasonable endeavours, including providing a parent undertaking. Alternatively, it may be preferable to specify in the drafting what will not fall within the reasonable endeavours obligation, for example, that a party is to use reasonable endeavours but without incurring expenditure above a certain limit. However, if a particular action is absolutely essential to make the transaction worthwhile, it would be wise to avoid this uncertainty entirely and insist upon an absolute obligation in the contract.