UK: Use Of Best And Reasonable Endeavours In Contracts

Best And Reasonable Endeavours

The difference between an obligation to use 'best endeavours' and 'reasonable endeavours' in a contract has long been the subject of debate. However, it is now well established that 'best endeavours' is a more onerous obligation than 'reasonable endeavours'.

Previous case law (IBM United Kingdom Ltd v Rockware Glass Ltd (1980)) has stated that best endeavours requires a party to take "all those steps in their power which are capable of producing the desired results...being steps which a prudent, determined and reasonable [party], acting in his own interests and desiring to achieve that result, would take".

Reasonable endeavours, on the other hand, requires more of a balancing act (UBH (Mechanical Services) Ltd v Standard Life Assurance Company (1986)), comparing the weight of the contractual obligations against all relevant commercial considerations. This is a subjective test depending on the circumstances of the relevant party. A party is not, however, required to sacrifice its own commercial interests (Yewbelle v London Green Developments (2006)).

Rhodia International Holdings v Huntsman International LLC

The Facts

In 2001 Rhodia agreed to sell a chemical manufacturing business to a subsidiary of Huntsman. The sale agreement included clauses that:

• both parties were obliged to use reasonable endeavours to obtain third party consents to transfer certain agreements;
• Huntsman would supply information to a third party suppliers if reasonably requested; and
• Huntsman would provide a parent company guarantee if reasonably requested by a third party supplier

One of the agreements to be transferred under the sale agreement was an energy supply contract. However, by 2004 the agreement had still not been transferred to Huntsman, although the subsidiary was performing the obligations under the agreement. The energy supplier had concerns about the financial strength of Huntsman's subsidiary and stated that it was only prepared to agree to a transfer if Huntsman provided a guarantee. Huntsman supplied financial information on its subsidiary but refused to provide a guarantee.

In March 2004 Huntsman gave notice to Rhodia that the chemical plant was closing and that it no longer intended to perform Rhodia's obligations under the energy supply contract.

The energy supplier subsequently brought a claim against Rhodia for unpaid invoices under the energy supply agreement and Rhodia in turn issued proceedings against Huntsman claiming that it had breached its obligations under the sale agreement by failing to use its reasonable endeavours to procure the transfer of the energy supply agreement.

Huntsman argued that it was not in breach of the sale agreement because, among other things, a requirement to use reasonable endeavours was less stringent than a requirement for best endeavours and Huntsman was not required to do anything detrimental to its own commercial interests.

The Court's Decision

The court concluded that, as a matter of common sense and language, the two terms could not mean the same thing and that an obligation to use reasonable endeavours was less onerous than an obligation to use best endeavours.

The court said that there might be a number of reasonable courses a party could take. An obligation to use reasonable endeavours probably only required a party to take one reasonable course of action, whereas an obligation to use best endeavours probably required a party to take all reasonable courses open to it.

The court went on to say that the term 'all reasonable endeavours' in this context could be equated with best endeavours.

As the case did not turn on the difference between best and reasonable endeavours the comments of the court on this issue are not binding. However, the comments are persuasive as arguments on this issue were fully run by the parties.

The court also stated that although an obligation to use reasonable endeavours did not generally require a party to sacrifice its commercial interests, where specific steps have been set out those steps must be taken in order to comply with an obligation of 'reasonable endeavours'. This imposes an obligation akin to using best endeavours. In the Rhodia case, specific steps had been set out in the contract (ie. to provide information and a guarantee, if reasonably requested) and those specific steps had to be taken, even if they involved sacrificing Huntsman's commercial interests.

Summary Of Rhodia Case

In summary, the Rhodia case indicates that:

• 'reasonable endeavours' is a less onerous obligation than 'best endeavours';
• where there are a number of possible courses of action, 'reasonable endeavours' probably requires a party to take only one reasonable course of action;
• 'all reasonable endeavours' amounts to the same level of obligation as 'best endeavours'; and
• if an obligation requires 'reasonable endeavours' but sets out specific steps to be taken, the requirement to follow those steps equates to a 'best endeavours' obligation, even if taking those steps would be against a party's commercial interests.

However, while the comments in Rhodia are persuasive they are not binding on other courts and there is therefore still some scope for uncertainty.

Drafting Considerations

To avoid uncertainty, consider stipulating specific steps that must be taken rather than relying on an endeavours clause.

If specific steps are set out, consider:

• who bears any costs and the level of those costs;
• the period for which a party should pursue a particular objective;
• whether a party must take legal action to achieve an objective; and
• whether there are specific activities a party is expected to carry out.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.