Corporate e-bulletin 3 September 2010 - Issue no.

2010/27

Endeavouring to understand endeavours

obligations
"Reasonable endeavours", "best endeavours" and "all Contacts
reasonable endeavours" undertakings are commonly found in
all types of commercial contracts and are frequently subject to
negotiation. However, despite their ubiquitous use, the actual
meaning of these expressions, and the extent of the
obligations they impose, is not entirely clear. In addition, the
case law creates a somewhat confusing picture. Michael Walter
Partner
Whilst not entirely eradicating the uncertainty in this area, the +44 20 7466 2841
recent decision of the High Court in CPC Group Limited v
Qatari Diar Real Estate Investment Company [2010]
EWHC 1535 (Ch) offers some clarification and provides a
salutary lesson that parties should carefully consider the extent
of the "endeavours" obligations they want to impose. In this e-
bulletin we summarise the current state of the law in this area. Nicky Kerr
Associate
CPC Group v Qatari Diar case +44 20 7466 2234

In brief, Qatari Diar Real Estate Investment Company (QD) and CPC Group
Limited (CPC) were joint venture partners for a project to develop the former Related links
Chelsea Barracks site in London. The parties entered into a sale and purchase
agreement, pursuant to which QD owed CPC various obligations, including an Herbert Smith website
obligation to "use all reasonable but commercially prudent endeavours to Herbert Smith
enable the achievement of the various threshold events and Payment Dates" publications
(Clause 7.1 of the SPA).
Herbert Smith news
In June 2009, QD withdrew the planning application to redevelop the site
following the intervention of the Prince of Wales and the resulting public and
political objection. This effectively delayed one of the Payment Dates under the
SPA. One of the questions the judge was asked to consider was whether the
withdrawal of the planning application was a breach of QD's obligation to "use
all reasonable but commercially prudent endeavours".
The judge rejected the submission that QD's behaviour was in breach of this
obligation and having considered the Court of Appeal's decision in Yewbelle
Limited v London Green Developments [2007] EWCACiv 475 he found that:
the wording "all reasonable but commercially prudent endeavours" did
not equate to a "best endeavours" obligation; and

the obligation to use "all reasonable endeavours" does not always

require the obligor to sacrifice his commercial interests.
Whilst in CPC v QD the inclusion of the wording "but commercially prudent
endeavours" helped clarify the obligation, it was not determinative to the judge's
decision.

As a result of this judgment, the current legal position can be summarised as

follows:
"Reasonable Endeavours"
A"reasonable endeavours" obligation does not require the taking of an
action insofar as it disadvantages the party under the obligation.
However, this is subject to the important exception that if the contract
specifies that certain steps have to be taken in performance of the
obligation these steps must be taken even if they involve the sacrificing
of a party's commercial interests. There may also be an obligation to
litigate, subject to the costs and the likelihood of success.

This probably requires the obligor to take only one reasonable course in
a given situation to achieve a particular aim, but not to exhaust all of
them1.

The use of "reasonable endeavours" has been defined by reference to

an objective standard of what an ordinary competent person might do in
the same circumstances and it allows commercial considerations to be
taken into account (e.g. relationships with third parties, the reputation of
the obligor and the costs to be incurred by the obligor).

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"Best Endeavours"
Whilst not akin to an absolute obligation, a "best endeavours" obligation
is more onerous than a "reasonable endeavours" obligation.

A"best endeavours" obligation is qualified by a test of reasonableness.

Case law supports the contention that "the standard of reasonableness
is that of a reasonable and prudent Board of Directors acting properly in
the interests of their company and in applying their minds to their
contractual obligations".

Satisfying a "best endeavours" obligation does not require a party to

take steps that would bring about its bankruptcy, or to continue in a
course of action which would lead to the "certain ruin of the company or
to the utter disregard of the interests of shareholders".

Aparty should probably exhaust all of a number of reasonable courses

which could be taken in a given situation to achieve a particular aim.

A"best endeavours" obligation can require the party under the

obligation to invest and take the risk of success or failure (e.g.
proceeding to litigate), but only where there is a reasonable prospect of
commercial success.

A"best endeavours" obligation can be qualified by other duties such as

the duty of directors to act in the best interests of the company.
"All Reasonable Endeavours"
This term remains the most nebulous of the three, although CPC v QD
helpfully revisited the concepts touched on in the case of Rhodia v
Huntsman.

An "all reasonable endeavours" obligation does not necessarily equate

to a "best endeavours" obligation (CPC v QD). However, in the context of
the number of courses of action a party must take, there is some
alignment between “all reasonable endeavours” and “best endeavours"
(e.g. as is the case with "best endeavours", it appears that an "all
reasonable endeavours" clause "requires you to go on using
endeavours until the point is reached when all reasonable endeavours
have been exhausted" (Yewbelle v London Green)). However, these
concepts may be distinct in terms of the commercial sacrifice an obligor
has to bear.

The obligation to use "all reasonable endeavours" does not always

require the obligor to sacrifice his commercial interests (CPC v QD).

An analysis of what is required to satisfy an "all reasonable

endeavours" obligation will very much depend on the commercial
context in which it appears2.
Practical tips
When considering whether to incorporate any of these obligations into a
contract, parties may be wise to adhere to the following practical guidance:
Try to add certainty by setting out exactly what an obligor is required to
do (or not do) to satisfy the obligation (for example, the obligor must
make at least three planning applications). In some circumstances this
may be difficult (for example, in relation to future and ongoing
obligations). Where this is the case, to avoid being too prescriptive and
limiting the scope of the actions an obligor is required to undertake, it is
preferable, where possible, to use a formulation along the lines of
"[best] [[all] reasonable] endeavours, including but not limited to:
[specific actions ]", in the same way that, for example, a force majeure
definition is often formulated.

If the obligor is required to bear particular costs or incur expenditure to

satisfy the obligation, consider including monetary caps or minimum
spend thresholds.

Explicitly state for how long an obligor should be required to pursue a

certain course of action to satisfy its obligation and after what period of
time a party will be able to "give up" without risking a claim for breach of
the endeavours obligation.

If it is envisaged that the obligation may entail taking legal action,

specifically provide in the drafting for legal action (and subsequent
appeals) to be undertaken to satisfy the objective.

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Of course, if a particular action is absolutely essential to the transaction, the
best course of action, to avoid any uncertainty, will be to insist upon an absolute
obligation in the contract.
Conclusion

The question of whether a party should agree to use "best", "reasonable" or "all
reasonable" endeavours is regularly raised during negotiations in almost every
type of commercial agreement. However, whilst there are common law
principles that offer some assistance in determining the scope of the
obligations imposed by these terms, and CPC v QD has provided further
guidance, their precise meaning remains ambiguous.

Whether future case law will assist in settling the meaning of these concepts in
more certain terms remains to be seen. However, given the importance of the
factual matrix in determining the extent of the obligations imposed it may be
inherently difficult for the common law to evolve a generic set of standards or a
test that will apply to all scenarios. This is an area of law which will undoubtedly
be revisited by the courts.

The CPC v QD case is available on the Bailii website.

1 Obiter, Rhodia International Holdings Limited & Another v Huntsman
International LLC [2007] EWHC 292 (Comm).
2 For example see the extensive analysis of the facts in CEP Holdings Ltd
and CEP Claddings Ltd v Steni AS [2009] EWHC 2447 for what the court
considered necessary for a distributor to discharge its "all reasonable
endeavours" obligation.

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