Contracts often include an obligation on a
person or company to use their best endeavours or to use reasonable
endeavours to achieve an outcome. While some cases have appeared to
equate the two, the High Court case has clarified their relative
meaning.
In a dispute over who owes an energy company
millions of pounds, Julian Flaux QC, sitting as a deputy High Court
judge, said that the burdens of reasonable endeavours were less
than those of best endeavours.
The distinction proved crucial to the £15
million case, as Huntsman International was found to have breached
a sale agreement when the judge ruled that it did not use its
reasonable endeavours to provide a guarantee for a power contract.
The ruling could leave Huntsman liable for the £15 million bill,
though that will be decided in a separate case.
Huntsman agreed to buy the other party in the
case, Rhodia, a chemicals company. As part of the sale and purchase
agreement both parties were instructed to use their reasonable
endeavours to ensure that all supplier contracts passed from Rhodia
to Huntsman.
One such contract was with power company
Cogen, which sold it power and steam from an on-site facility in an
agreement that stretched to 2009.
Cogen would not accept the transfer of the
contract because the Huntsman subsidiary was a brand new company
and had no financial results lodged with Companies House. It asked
for a guarantee from parent company Huntsman. The argument over
reasonable endeavours centred on Huntsman's refusal to provide that
guarantee, and thus effect the transfer to it of the obligations of
the power contract.
Huntsman paid for the power for a period, from
its purchase of Rhodia in 2001 until 2004, but at that point it
wrote to Rhodia saying that it was pulling out of the location and
that responsibility for the power contract remained with it,
because it had not been transferred.
Cogen claims that £14.8 million worth of power
and services is owed, and Huntsman and Rhodia were fighting over
who owed them that amount. The case eventually turned on what
constituted 'reasonable endeavours' to ensure the contract
transferred from one company to the other.
"There was some debate at the hearing as to
whether 'reasonable endeavours' is to be equated with 'best
endeavours', a question on which there seems to be some division of
judicial opinion," said Flaux in his ruling.
"Huntsman was in breach of Clause 15.1.2 of
the SPA in not providing whatever form of guarantee was acceptable
to Cogen from October 2001 onwards," ruled Flaux. "I find that
Huntsman was in breach of Clause 15.1.2 in not proffering a parent
company guarantee or similar."
Flaux dealt generally with what was meant by
'reasonable endeavours'. It had been argued that previous cases
indicated it should be taken to equate to best endeavours. "I am
not convinced that any of the judges in the cases upon which
[Rhodia lawyer] Mr Beazley relied were directing their minds
specifically to the issue whether 'best endeavours' and 'reasonable
endeavours' mean the same thing," he said. "As a matter of language
and business common sense, untrammelled by authority, one would
surely conclude that they did not. This is because there may be a
number of reasonable courses which could be taken 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. In that context, it may well be that an
obligation to use all reasonable endeavours equates with using best
endeavours," said Flaux.
The ruling made it clear that the terms of the
sale contract are binding, even if its terms no longer suit one of
the parties. The companies must abide by the contractual obligation
to make a reasonable endeavour even if it is against their
interests.
"Where the contract actually specifies certain
steps have to be taken (as here the provision of a direct covenant
if so required) as 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," said Flaux.
