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28th April 2017

Is it reasonable to comply with a reasonable endeavours obligation?

28th April 2017

Is it reasonable to comply with a reasonable endeavours obligation?

James McNeil

Posted: 28th April 2017

T: 023 8048 2108

E: Email Me

The courts have often been tasked with deciding what the obligations to use “all reasonable endeavours”, “best endeavours” or “reasonable endeavours” mean in commercial/corporate transactions.

Unsurprisingly, the general consensus is that “best endeavours” imposes the highest level of obligation, whilst “reasonable endeavours” imposes the least onerous level of obligation. Other terms such as “all reasonable endeavours” and “commercially reasonable endeavours” and all “reasonably commercial endeavours” are seen as being in the middle of the scale of endeavours obligations. It is also important to note that the obligations imposed by an endeavours clause will depend on the other provisions of the agreement and the surrounding commercial matrix.

In Astor Management AG and another v Atalaya Mining Plc and others [2017] EWHC 425 (Comm), 6 March 2017, the High Court was asked to consider whether an obligation to use all reasonable endeavours to obtain a senior debt facility was in fact enforceable and whether an agreement included an implied duty to act in good faith, so as not to act in a way which circumvented the obligation which was subject to the “all reasonable endeavours” obligation.

The facts were that Party A bought out Party B’s interest in a copper mine. However and as is common in commercial agreements, part of the consideration was deferred. The trigger for the payment of the deferred consideration was when Party A secured “senior debt finance… for a sum sufficient for the restart of the mining operations”. Importantly, Party A was under an obligation to use “all reasonable endeavours” to obtain the senior debt finance by 31 December 2010. Party A did not obtain such a facility and instead used its parent’s company funds to recommence mining. Party B argued that the payment of the deferred consideration had been triggered. Party A disagreed and argued that it hadn’t and because the funds had been raised from another source it could never be triggered.

The High Court disagreed with previous thinking which stated that an obligation to reasonable endeavours will only be enforceable if the object of the endeavours is sufficiently certain and there are sufficient objective criteria by which to evaluate the reasonableness of the endeavours. Again, it’s clear that the court believed that its role was to give effect to what the parties had agreed. It also held that it was a question of fact as to whether a party had performed that obligation. Where parties adopted a reasonableness test, the court was being asked to judge what is/what’s not reasonable. Importantly, it is clear that the burden of proof is on the party alleging failure to comply with the obligation.

On the facts, the Court found that an obligation to use all reasonable endeavours to obtain a senior debt facility was a legally enforceable obligation. The courts also found that where there is an express term to use “all reasonable endeavours”, there was no need or scope to imply a term requiring the party to act in good faith.
 
Parties frequently use “reasonable endeavours” obligations in contracts and when there is a disagreement as to what this obligation entails, they are often before the courts asking the court to decide for them. Whilst it’s true that what is/what’s not “reasonable endeavours” will depend upon the facts of the situation, parties should expressly set out what obligations are implied by this reasonable endeavours obligation e.g.:

  • what actions is a party required to undertake?
  • how are the actions to be reported on/measured?
  • is the goal to be achieved by only one set of actions?
  • how long must a party seek to undertake the obligation?
  • what happens if the obligation cannot be complied with?

as this should help them avoid the expense and distraction of litigation.

 

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James McNeil

Posted: 28th April 2017

T: 023 8048 2108

E: Email Me