Legal Updates

Commercial Law – Contract Construction – ‘Reasonable’ & ‘Best’ Endeavours

The recent case of Rhodia International Holdings Limited and Rhodia UK Limited v Huntsman International LLC [2007], provides new guidance on a long-disputed area of contract law. According to the judgment of the High Court, a duty to exercise ‘reasonable endeavours' requires less than 'best endeavours' but can still demand a party to act against its own commercial interests, although the case does not resolve all the uncertainty surrounding the difference between ‘reasonable’ and ‘best’ endeavours.

The case confirms that ‘reasonable endeavours’ is a less stringent obligation than ‘best endeavours’ – a concept which is commonly assumed. The case also confirms that a ‘reasonable endeavours’ obligation may be discharged by exhausting just one of a number of possible solutions, whereas a ‘best endeavours’ obligation requires all avenues to be explored.

Huntsman International LLC (“Huntsman”) had agreed to buy Rhodia International Holdings Limited and Rhodia UK Limited (“Rhodia”), a chemicals company. As part of the sale and purchase agreement both parties were to use reasonable endeavours to ensure that all supplier contracts passed from Rhodia to Huntsman, including one with a power company called Cogen.

However, Cogen refused to accept the transfer of the contract without a guarantee from Huntsman's parent company. The argument over what was meant by reasonable endeavours focussed on Huntsman's refusal to provide that guarantee. That refusal therefore affected the transfer of the contract with Cogen for the supply of power.

Huntsman paid for the power from the date of its purchase of Rhodia in 2001 until 2004. However, in 2004 Huntsman told Rhodia that it was pulling out of the location and that responsibility for the power contract remained with Rhodia until the contract expired in 2009. Huntsman submitted the reason for this being that the contract for the supply of power had not been transferred. Cogen claimed that £14.8m worth of power and services was owed, and the case concerned Huntsman and Rhodia arguing over who owed Cogen that amount.

The case was eventually decided on what constituted 'reasonable endeavours' to ensure the contract transferred from one company to the other. It was ruled that Huntsman International had breached the sale agreement by not using its reasonable endeavours to provide a guarantee for a power contract. Julian Flaux QC, sitting as a deputy High Court Judge in the case 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. In that context, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours…"

The ruling in the case made it clear that the terms of the sale contract were binding, even if its terms no longer suited one of the parties. The companies must abide by their contractual obligation to make a reasonable endeavour even if it is against their company interests.

However, there are other authorities which suggest a slightly different viewpoint. In the absence of a specific course of action assumed by a party in the context of a reasonable or best endeavours obligation, neither obligation is likely to require a party to sacrifice it own commercial interests. It appears from the other authorities – which were not discussed in this case - that ‘reasonable endeavours’ may not even require the party giving such an obligation to act to its own disadvantage. This would suggest that relatively little effort is required to comply with a ‘reasonable endeavours’ obligation.

As far as the drafting of contracts is concerned, the best way to achieve certainty would be to specify the actions a party must take in using its ‘best’ or ‘reasonable’ endeavours wherever possible. The relevant party will then be bound to take those actions in any event and the question of whether those actions are contrary to that party's commercial interests will not arise.

Please contact us for more information on assessing damages due under termination of a contract at enquiries@rtcoopers.com

Visit http://www.rtcoopers.com/practice_corporatecommercial.php; http://www.rtcoopers.com/practice_corporatefinance.php

© RT COOPERS, 2007. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.

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