The search for meaning

The American editor Elbert Hubbard once wrote that polygamy was an endeavour to get more out of life than there is in it. Not being a lawyer, he forgot to consider whether it was a “best” or a “reasonable” endeavour. Thankfully for legal pedants everywhere, a recent High Court case provides some elucidation.

Building contracts, collateral warranties, consultants appointments and transfer agreements such as novations are often littered with terms whose meaning may not always be absolutely clear to the parties, their advisers or indeed the courts.

It is plainly important for the parties to know what action is required by them to properly discharge their contractual obligations.

Frequently, the party seeking to impose an obligation on the other is likely to want to draft the obligation so that it is seen as absolute or strict. The other party might only be prepared to accept the obligation if it is qualified or watered down. To avoid a deadlock, sometimes the parties simply agree that the contract requires the party accepting the obligation to use “reasonable endeavours” or “best endeavours” to comply.

Such phrases might get the contract signed, but the resulting lack of certainty could lead to a dispute as to whether or not the party with the obligation has endeavoured hard enough.

A straightforward answer to the question of what these phrases actually mean has been a long time coming, but the recent case of Rhodia vs Huntsman provides some guidance.

Huntsman agreed to buy Rhodia’s chemical business. As part of the sale agreement both parties entered into an obligation to use reasonable endeavours to ensure that all supply contracts were transferred from Rhodia to Huntsman, including an energy supply contract with a firm called Cogen. Huntsman’s subsidiary did take over the running of the energy supply contract, but Cogen would not accept the novation of its supply contract from Rhodia to Huntsman until Huntsman provided Cogen with a parent company guarantee.

Huntsman refused to provide the guarantee, so the novation was not effected. Rhodia therefore remained liable for Cogen’s energy supply bills, which totalled £14.8m. Rhodia claimed that any liability it had to Cogen was a result of Huntsman’s breach of its obligation to use reasonable endeavours to provide the parent company guarantee.

An obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable
course, not all of them

So the case turned on whether or not Huntsman had in fact exercised reasonable endeavours in order to ensure the novation of the contract with Cogen from Rhodia to Huntsman.

The judge decided that Huntsman had failed to use reasonable endeavours to obtain Cogen’s consent to the novation of the energy supply agreement by refusing to provide a parent company guarantee. Huntsman was therefore in breach of the sale agreement with Rhodia.

The judge rejected the argument that there was no difference between the phrases “reasonable endeavours” and “best endeavours”, although in any event the case did not turn upon the distinction.

He said: “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.”

An obligation to use reasonable endeavours is, on the basis of this decision, less stringent than one to use best endeavours but an obligation to use “all reasonable endeavours” is likely to equate to best endeavours.

As to what reasonable endeavours might entail, the judge said the party required to do something was not required to sacrifice its own commercial interests.

There was an important exception to this rule, however. Where the contract actually specifies certain steps to be taken as part of the exercise of reasonable endeavours, those steps have to be taken even if they could involve the sacrificing of a party’s commercial interests.

The learning from this is simple. To avoid costly arguments over whether or not a party has endeavoured hard enough to discharge an obligation, the parties would be wise, where possible, to record in the contract those actions that it is envisaged must be taken. The party will then be bound to take those actions even if they are against its own commercial interests.