Like London buses, cases on the meaning of ‘reasonable endeavours’ have been coming in groups recently. That is not surprising given the frequency with which these (or similar) words are used in contract drafting, and not only in the IT sector. Very often, these words are used to reach a compromise on a difficult point in negotiations, with arguments about whether a party should accept an obligation to use its best/all reasonable/reasonable endeavours – or perhaps some hybrid formulation. But what do these expressions mean in practice?
The case of CPC Group Limited v Qatari Diar Real Estate Company [2010] EWHC 1535 looked briefly at the issue – although it was the involvement of the Prince of Wales which made this case more newsworthy. It is time to take stock of where we stand and see what we can learn from the cases.
Background
The Chelsea Barracks is a well known site in London. Of late it has been falling into neglect, but its proximity to the West End and the beauty of its position opposite the Royal Hospital and its gardens make it a prime location for re-development. Unfortunately, when architecture has become something of a battleground for competing ideas of beauty and when the Mayor of London has been invested with powers over planning applications of potential strategic importance, this was never going to be an easy re-development.
Facts
The claimant (CPC) and the defendant (QD) entered into a joint venture to develop the Chelsea Barracks. A planning application was made for the re-development of the site and CPC sold its interest in the joint venture for a large sum, with a large deferred payment to be made against progress being made in the planning application. QD owed CPC various duties, including one to use ‘all reasonable but commercially prudent endeavours’ to progress the planning application and thus to pay the deferred sums. However, it was under an obligation not to withdraw any planning application unless the Mayor of London indicated that he would use his power to refuse the planning application or unless a defined planning consultant indicated that a revised planning application stood a better chance of succeeding.
In fact, the Prince of Wales wrote to the Emir in March 2009 to express his dislike of the proposed plans. They met later in the same month and the Emir expressed his own surprise at the plans and said he would have them changed. At various times, the Mayor of London was expressing his own concerns about the plans as well. While the Prince of Wales thought the plans were insufficiently traditional, the Mayor thought they lacked variety. In any event, QD withdrew the planning application in June 2009 in very difficult circumstances.
Judgment
The judge, Vos J, rejected the idea that ‘all reasonable endeavours’ was to be equated to ‘best endeavours’, an idea which came from Rhodia International Holding v Huntsman International [2007] 1 CLC 59 (at [33]). The better description of the principle was to be found in Yewbelle v London Green Developments [2007] EWCA Civ 475, where the judge accepted that a party under an obligation to use reasonable endeavours was not required to sacrifice its own commercial interests. Going on from this, the judge in this case did not think that the expression ‘all reasonable endeavours’ always required a party to sacrifice its own commercial interests. In this case, it was made clearer by the addition of the words ‘but commercially prudent’ after ‘all reasonable’.
This meant that QD was entitled to take its own commercial interests into account in deciding how to proceed after the Prince of Wales intervened; however, it did not mean that it could take into account its political interests (to the extent that they differed from its commercial interests).
Looking at the circumstances, the views of the Prince of Wales had leaked into the press, and those of the Mayor of London were crystallising into opposition. The judge accepted that the planning application might well not be successful. With that background, and whatever the Emir thought, QD had to do something, and not just carry on with things as they were. While putting in a new design carried with it the risk of some delay, this had to be measured against the improved chances of having the later application approved.
In conclusion, QD had complied with its obligation to use ‘all reasonable but commercially prudent endeavours’.
Analysis
While contracts have used expressions such as ‘best endeavours’ and ‘reasonable endeavours’ for a considerable time, cases illustrating their meaning have been thin on the ground until recently. Before analysing the cases, always remember that normally contractual obligations are ‘strict’ or ‘absolute’, meaning that they must be complied with no matter what – and the difficulty or cost of the task is no excuse. Using an expression like ‘reasonable endeavours’ will always mean that an absolute obligation is being softened somewhat – and the consequences may or may not be what you intend.
Reasonable endeavours
In CEP Holdings v Steni [2009] EWHC 2447, there was a distribution agreement for minimum term of 20 years, and the distributor had to use ‘all reasonable endeavours’ to promote and sell the supplier’s products. The judge took account of the length of the minimum term and decided that the expression meant that the distributor had to do everything which a reasonably competent and energetic distributor would do. Looking in more detail at what the distributor had done (or rather, not done), there were no proper internal systems, no sales plans, no cooperation with the supplier, no appropriate marketing materials, no attendance at trade fairs – in short, there was nothing to show that the distributor had done much to reverse the decline in sales which had been suffered.
With facts like those, it can be seen that it is easier to say what are not reasonable endeavours rather than what reasonable endeavours actually are.
What recent cases have done is show that there is a sliding scale of obligation, with ‘best endeavours’ being at one end, ‘reasonable endeavours’ at the other and ‘all reasonable endeavours’ somewhere in the middle. The most difficult question is whether, or to what extent, a party had to ignore its own interests in carrying out any of these obligations. It is quite useful that the judge in CPC v Qatari Diar seemed to think that ‘all reasonable endeavours’ could not be equated with ‘best endeavours’ – a possible confusion stemming from the case of Rhodia v Huntsman.
This case of CPC v Qatari Diar is also useful in indicating that a party could take its own interests into account – but it should be remembered that the obligation here was qualified by the words ‘but commercially prudent’. The judge said (at [253]) that these words meant that the clauses ‘are not equivalent to a “best endeavours” obligation’, and they do not require QD to ignore or forego its commercial interests’ – very much implying that a ‘best endeavours’ obligation would not allow a party to have regard to its own interests. As we shall see, on this point the judge seems to have been ignoring some earlier cases.
Reasonable endeavours to agree is not the same as an obligation to agree something reasonable!
This is a point which has come up in a couple of important cases. They have not been widely reported, and it is worth describing them in full here for future reference. In Philips Petroleum v Enron [1997] CLC 329, where the contractual provisions were extremely complicated, the parties had to use reasonable endeavours to co-ordinate construction of their respective facilities for the supply of natural gas from the North Sea. Each party had to give to the other a sequence of good faith estimates of when its facilities would be ready. The parties then had to use reasonable endeavours to agree the commissioning date on which deliveries would commence; if no agreement could be reached about the commissioning date, the contract provided a long-stop date.
In fact what happened was that the seller pressed the buyer to agree the commissioning date, but the buyer declined to agree anything. What had happened in the interval was a severe fall in the short-term market price of natural gas – so much so that the contract price would exceed what the buyer could get it for on the open market, leading to a potentially large loss for the buyer.
The seller argued that the contract meant that the parties had to use best endeavours to agree a commissioning date, and in so doing could only take into account technical and operational practicality. The buyer on the other hand said that the obligation to agree a commissioning date amounted to nothing more than an agreement to agree, and was unenforceable; in any case, so the buyer argued, it could take its own financial position into account when agreeing a commissioning date.
The Court of Appeal (two judges to one) examined the complex provisions and concluded that the buyer could take into account the financial effects on the buyer of complying with the obligations ahead of the commissioning date. If the parties wanted to constrain a party’s choice in that way, you would expect the contract to say so in express terms. The result was that the buyer could hold out to the long-stop date and so minimise its losses from the falling market.
There are some lessons from this case:
· an agreement to agree a date against a long-stop provided in the contract has sufficient certainty to be enforceable because the long-stop means that there is always a date for compliance; an obligation to use reasonable endeavours without a long-stop date might be unenforceable
· a party can take into account its own financial situation when deciding how to discharge such a reasonable endeavours obligation
· if you want to exclude a party from taking its own circumstances into account, the contract should set out the specific criteria which are exclusively to be taken into account.
In P & O Property Holdings v Norwich Union (1994) 68 P&CR 261 a developer and a head lessor contracted that they should use reasonable endeavours to obtain sub-lettings of units in a shopping centre. Again, it was a situation where the market moved rapidly and the developer was unable to let many units, leading to the shopping centre being very underutilised. The head lessor argued that the clause meant that the developer should have acted as a hypothetical reasonable landlord, and if that meant, for example, that it should have paid a reverse premium to attract tenants, then it should have done so.
The House of Lords disagreed. There is a difference, they thought, between a contractual obligation which obliges you to use reasonable endeavours to agree terms, and one which obliges you to use reasonable endeavours to agree reasonable terms. This might sound like splitting hairs, but it is in fact an important distinction. The clause in question did not provide any criteria against which a court could assess what the reasonable terms for a lease would be: if the parties required the developer to act like a ‘hypothetical reasonable landlord’, then the contract should explicitly have said so.
Again, as with Philips Petroleum v Enron, if you mean to say that the parties must come to a reasonable agreement, then you must say so. The court envisaged that both parties might use their reasonable endeavours but both fail to agree anything, leaving neither of them in breach.
All reasonable endeavours
There is much less case law on this expression. One case where the expression was considered is Hiscox Syndicates v The Pinnacle [2008] EWHC 145 (Ch) where the judge made two interesting comments:
‘From the case of Rhodia International v Huntsman International … I derive two propositions. The first is that an obligation to use “best endeavours” is more onerous than an obligation to use “reasonable endeavours”. Secondly, that an obligation to use “all reasonable endeavours” should be equated with the more onerous obligation to use “best endeavours”.
…that obligation – to use “all reasonable endeavours” – is more onerous than an obligation simply to use “reasonable endeavours”, and is approaching an obligation to use “best endeavours”‘.
Best endeavours
Even when considering an obligation of best endeavours, the party bound by such an obligation is not bound to do things which would ruin its business. This came out in the case of Terrell v Mabie Todd (1952) 69 RPC 234 where the judge said that a party would not be required to do things which would result in ‘the certain ruin of the company or … the utter disregard for the interest of shareholders’. The case concerned a licence in favour of the defendant to manufacture and sell fountain pens and ink bottles against a royalty and an obligation to use best endeavours to sell them. In fact, control of the defendant passed to a new party (Biro) which decided that it did not suit it to continue with the agreements and it repudiated them. In reality, the defendant was never in a position to market the new pens – it had an enormous stock of its original design, which was selling poorly, and which meant that the defendant just did not have enough cash to market the new pens and bottles. The judge accepted that using ‘best endeavours’ would not guarantee success, and so took the potential problems of manufacture and risk of poor sales into account when assessing damages.
The Court of Appeal in IBM v Rockware Glass [1980] FSR 335 again accepted that ‘best endeavours’ should not be equated with guaranteed success, and said that parties obliged to use best endeavours were obliged ‘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’. The facts are not dissimilar to CPC v Qatari Diar as this case concerned the obligation attached to a sale of land for the purchaser to use its best endeavours to obtain planning permission (this was when IBM bought its site at Greenford). In fact, planning permission was sought and refused, although the purchaser failed to appeal to the Secretary of State. The vendor argued that ‘best endeavours’ meant that the purchaser should have pursued that route. It was held that the purchaser should have appealed – it was what an owner of the property would have done in managing its own affairs if it was keen to secure the planning permission, and so in this case the purchaser should have done so.
The case of Pips v Walton (1982) 43 P&CR 415 confuses the issue somewhat when it described the obligation of ‘best endeavours’ as meaning that it ‘must at least be the doing of all that reasonable persons reasonably could do in the circumstances’. At first glance, it could mean that ‘best endeavours’ meant little more than just ‘reasonable endeavours’. As we have seen, more recent cases have tried to introduce some sort of gradation.
The conclusion from these cases is that, while ‘best endeavours’ must mean something more onerous than ‘reasonable endeavours’, there is still some, albeit limited, scope for taking self-interest into account when discharging that obligation. Perhaps a good way of describing it comes from the old case of Sheffield District Railway Co v Great Central Railway Co (1911) 27 TLR 451, where it was observed that best endeavours did not mean ‘second best endeavours’.
Learning points
These expressions lie at the heart of modern contract negotiations – which is probably why there have been so many cases on them recently. What can we learn from the cases when negotiating contracts?
· It is much easier to identify ‘unreasonable endeavours’ than ‘reasonable endeavours’: remember that using such a term will always give a party some room to argue that it has complied with the obligation.
· It is very tempting, when in difficult negotiations, to resort to some sort of compromise, and the temptation to use one of these expressions is almost irresistible: do these words really mean what you actually want in the circumstances or do you really want the other party to be under an absolute obligation to carry out whatever it is you are negotiating?
· Instead of saying the other side is obliged to use ‘reasonable endeavours’ do you really mean that it is under an absolute obligation to achieve something but subject to certain, defined excuses for non-performance? Would it not be better to put it that way?
· Do not fall into the trap of thinking that an obligation to use reasonable endeavours to agree something means that both parties must come to an agreement which is itself reasonable. These are two very different concepts. If you want both parties to be obliged to come to a reasonable agreement, then you should say so. Otherwise, both parties could use reasonable endeavours to agree something yet fail to do so without breaching the obligation.
· If you are going to use one of these expressions, then consider adding further words to make clear exactly what considerations are to be taken into account when considering reasonableness: it is perfectly legitimate to add that a party cannot take into account its own financial circumstances, for example, if that is really what is intended.
· You can add hybrid words, as in the CPC v Qatari case – ‘but commercially prudent’ – and these words will qualify what has come before: therefore, choose them carefully as they may well limit the scope of the obligation.
Richard Stephens is Principal of LORS Online. As well as running his own law practice, he works as a mediator and arbitrator in IT disputes. He is a Fellow of the Chartered Insitute of Arbitrators and a Fellow of the Society for Computers and Law.
Copyright Richard Stephens 2010. The law is stated as at 12 October 2010.
