"All reasonable endeavours" a lesser obligation than "best endeavours"

Monday 9th August 2010

The terms "best endeavours", "all reasonable endeavours" and "reasonable endeavours" appear in the majority of commercial agreements and often form the basis of debate during contractual negotiations between the parties.  The courts have considered the terms a number of times but the outcome has often been confusing.

In the recent case of CPC Group Ltd v Qatari Diar Real Estate Investment Co¹, the High Court considered what was meant by an obligation to use "all reasonable but commercially prudent endeavours".

In brief, Qatari Diar Real Estate Investment Co ("Qatari") entered into a joint venture with CPC Group Limited ("CPC") to acquire and carry out redevelopment work to the Chelsea Barracks.  In 2008 Qatari entered into a sale and purchase agreement ("SPA") with CPC in respect of CPC's share of the joint venture company for an initial sum of £37,917,806 with the remaining sums (up to £81 million) deferred until planning permission for the development was obtained.  In the agreement Qatari owed CPC various obligations including one to use "all reasonable but commercially prudent endeavours" to enable the achievement of the thresholds for the payment of the deferred sums.  Several influential people criticised the proposed designs for the Chelsea Barracks (including HRH the Prince of Wales and the Mayor of London) and Qatari withdrew the planning application.  CPC brought a claim that Qatari was in breach of the SPA.  In the case, the judge had to consider whether Qatari was entitled under the SPA to withdraw the planning application and whether the withdrawal constituted a  breach of QD's obligations under the SPA.  For the purposes of the remainder of this article we will focus on whether the withdrawal was a breach of Qatari's obligation to use "all reasonable but commercially prudent endeavours".  

Legal Counsel for CPC argued that an "all reasonable endeavours" obligation was equivalent to a "best endeavours" obligation and that accordingly Qatari was obliged to ignore its own commercial interests.  Mr Justice Vos, who gave the leading judgment, disagreed and said that an "all reasonable endeavours" obligation does not always require the obligor to sacrifice his commercial interests.  Further, the inclusion of the words "but commercially prudent" provided additional confirmation that Qatari was not required to sacrifice its commercial interests.  This meant that on the facts of the case, Qatari was entitled to consider its own commercial interests alongside those of CPC and to take all reasonable steps to secure the planning permission provided that those steps were commercially prudent.  Therefore, the withdrawal of the planning application was not a breach of that aspect of Qatari's obligations under the SPA.

In this particular case, although Qatari was not in breach of its obligation to use "all reasonable endeavours", the court found that it had breached other provisions of the SPA and Qatari has since settled the dispute with CPC with the payment of an undisclosed sum.

Practical points to take away:

• Previous case law² has considered the differences between a "best endeavours" obligation and a "reasonable endeavours" obligation.  In summary, the courts have confirmed that a reasonable endeavours obligation probably only requires the obligor to take one reasonable step, whereas a best endeavours obligation probably requires the obligor to take all reasonable steps available to achieve a particular aim;
• Where the contract spells out a particular step which must be taken by the obligor, the obligor will be obliged to take that step even where the obligation is qualified by the words "reasonable endeavours".  This means that where you need your counterparty to take a particular step, for example to apply for a planning permission, you need to expressly refer to that step in the contract; and
  
• During negotiations parties are often quick to concede the conversion of an absolute obligation to that of a best endeavours obligation.  We recommend that before agreeing to such a qualification the parties consider the impact on the obligation carefully.  It is important to remember that even an obligation to use best endeavours incorporates a concept of reasonableness and that case law has seen the courts assess the commercial viability of a given course of action.  Where a particular action is absolutely essential to your business operations you should insist upon an absolute obligation.
  

¹ [2010] EWHC 1535 (Ch)
² Rhodia International Holdings Limited & Another v Huntsman International LLC [2007] EWHC 292 (Comm)


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