Japanese parties often enter into contracts with international counterparties that are governed by English law. Where the parties wish to impose qualified rather than absolute obligations, it is common for formulations such as "best endeavours" and "reasonable endeavours" to be used.
Despite the frequency with which such "endeavours" clauses occur, their legal meaning is surprisingly uncertain and the case law produced by the English courts has at times been inconsistent and difficult to interpret. This newsletter considers the meaning of such endeavours clauses in light of the recent decision of the English High Court in Rhodia International Holdings v Huntsman International,1 which provides further guidance in this area.
Rhodia v Huntsman
The parties entered into a sale and purchase agreement ("SPA") under which Rhodia would transfer its chemical business and certain related contracts to a subsidiary of Huntsman. One of the contracts to be transferred was an energy supply contract ("ESC") between Rhodia and a third party relating to a power plant, which required the consent of the third party to be given before it could validly be transferred.
Under the SPA, Rhodia and Huntsman were each under an obligation to use their "reasonable endeavours" to obtain the third party's consent to the transfer. The third party raised concerns about the financial standing of Huntsman's subsidiary and requested a guarantee from Huntsman. Huntsman refused to grant a guarantee, the ESC was not transferred as required and the power plant was shut down. The third party commenced successful arbitration proceedings against Rhodia for unpaid invoices and Rhodia in turn sued Huntsman on the basis that the non-transfer of the ESC was a result of its failure to exercise "reasonable endeavours" to obtain consent (and in particular, Huntsman's refusal to provide the requested guarantee). The court found that Huntsman had breached its "reasonable endeavours" obligation but rejected Rhodia's contention that "reasonable endeavours" and "best endeavours" mean the same thing.
The endeavours spectrum
Previous cases had suggested that there was a spectrum of endeavours clauses ranging from "reasonable endeavours" (the least onerous) through "all reasonable endeavours" to "best endeavours" (the most onerous).2 This approach was endorsed in Rhodia, subject to some modification. In deciding what an obligation to use reasonable endeavours entailed, the court stated that:
"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, whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses he can."
The court therefore rejected Rhodia's argument that "reasonable endeavours" meant the same as "best endeavours". However, as a result of its definition of "best endeavours" by reference to taking all reasonable courses of action, the court potentially simplified the spectrum by suggesting that "all reasonable endeavours" probably meant the same as "best endeavours".
The decision of the court in Rhodia suggests that a party subject to a best endeavours obligation must take all the reasonable courses of action that he can. "Best endeavours" has also been defined as taking all steps in one's power that are capable of producing the desired results, being steps that a prudent, determined and reasonable person acting in his own interest would take.3 The concept of reasonableness is therefore at the heart of a "best endeavours" obligation. The question then naturally arises: what is a reasonable course of action?
In determining reasonableness for the purposes of best endeavours, the courts will take account of commercial viability, the interests of the party under the obligation and any conflicting obligations. Thus the party under the obligation may be required to expend time and money, but not to take steps that would cause "serious detriment" to it.4 It may also be required to litigate or appeal against a decision, but only where there is a reasonable chance of success.5 In addition, its duty to use its best endeavours may be overridden by other duties, such as the duty of the directors of a company not to give bad advice to shareholders.6
All reasonable endeavours
Until recently an obligation to use "all reasonable endeavours" was considered to occupy the middle ground between "best endeavours" and "reasonable endeavours".7 The court in Rhodia, however, suggested that it "may well be that an obligation to use all reasonable endeavours equates with best endeavours". This alignment of "all reasonable endeavours" and "best endeavours" is logical given the court's definition of "best endeavours" and is consistent with other recent court decisions.8
Rhodia confirms that "reasonable endeavours" is a less demanding obligation than "best endeavours" because it only requires the party under the obligation to take one of the reasonable courses of action available to it. "Reasonable endeavours" has been said to impose on a party an obligation to take action to the extent that such action does not financially or commercially disadvantage that party.9 The exception, as stipulated in Rhodia, will be where certain steps are specified in the contract as constituting reasonable endeavours, in which case they must be complied with regardless of the financial or other impact upon that party.
There is no general principle that whether or not a particular step falls within the scope of reasonable endeavours depends upon whether it will achieve the desired results,10 but it appears that the chances of success can be an additional factor to be taken into account in deciding whether it is necessary to pursue a certain course of action.11
Although the decision in Rhodia helps to clarify the relationship between "best endeavours" and "reasonable endeavours", it remains to be seen how the guidance provided in the decision is to be treated by the courts. There is still clear scope for a more full and comprehensive analysis of the content of the obligations imposed by these common phrases by an appeal court. In the meantime, the drafting tips below are intended to offer some general guidelines for use in contract negotiations, but you should always exercise caution before including an endeavours clause in a contract and consider seeking specific legal advice in each case.