A recent English case provides useful guidance on the enforceability and scope of an obligation to use all reasonable endeavours to enter into an agreement with a third party.
The defendants bought out the claimants’ interest in a dormant copper mine. Most of the consideration was deferred. The deferred element came to about Euros 43.8m.
The contract provided that payment of the deferred consideration was to be triggered when the defendants secured “senior debt finance” for a sum sufficient for the restart of mining operations.
The defendants did not obtain the facility. Instead, sufficient funds were raised by issuing shares to existing and new investors in return for funding. Mining operations restarted.
The claimants argued that:
- payment of the deferred consideration had been triggered; or
- if payment had not been triggered, this was due to the defendants’ breach of the reasonable endeavours obligation.
The court found that:
- the obligation to pay the deferred consideration had not been triggered;
- the obligation to use reasonable endeavours to obtain senior debt finance was enforceable; and
- the defendants were not in breach of that obligation.
Was the obligation to use “all reasonable endeavours” enforceable?
The defendants argued that the obligation was unenforceable because there were not enough objective criteria to judge whether their efforts to obtain the debt facility had been reasonable.
The court disagreed.
In many circumstances it could be extremely difficult to show that a contracting party has not used reasonable endeavours to make an agreement with a third party. For example, it could be difficult to judge whether he ought reasonably to have pursued a negotiation with a particular lender, or accepted a given offer, or proposed a lower rate of interest.
However, difficulties of proof do not mean there is no obligation at all. The court’s role was “to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy.”
Had the defendants breached the reasonable endeavours obligation?
It was clearly in the defendants’ financial interests to fund the restart of mining operations without obtaining a senior debt facility, as this would avoid triggering payment of the deferred consideration. The court said that, on its own, that could not be a legitimate reason for them to prefer another form of finance.
But that did not mean that financial considerations were irrelevant and that the defendants were required to try to obtain a senior debt facility at any cost. The defendants needed to be comfortable that the anticipated revenue from the mining operations was sufficient to cover the anticipated project costs for the foreseeable future – including the costs of servicing the senior debt and making the payments due to the claimants.
The defendants did in fact investigate raising finance by way of senior debt. Those willing to provide finance were not willing to do so on that basis.
The court found that the defendants had not breached the reasonable endeavours obligation. While this finding turned on the facts of the case, the decision confirms that a contracting party obliged to use reasonable endeavours to do something is entitled to take account of its financial interests.
Many contracts contain obligations to use reasonable endeavours to do something, rather than an absolute obligation to do it. It is a common compromise reached during contract negotiations.
This case shows that, if contracting parties disagree over whether reasonable endeavours have been used, the courts are not going to shy away from making a decision about it.
To reduce the risk of dispute, parties should try to expand on what is meant by “reasonable endeavours” to flesh out any mismatch in expectations. For example, consider whether it is possible to specify precisely:
- what steps the party should take or what things it should do to achieve the result;
- whether/how regularly a party must report on the steps taken or efforts made;
- whether it is permissible or possible to achieve the result by alternative means;
- how long the obligation should continue;
- the consequences of failing to achieve the desire result.
On April 3, 2017