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Focus: 'All reasonable endeavours' – endeavour forever?

27 August 2009

In brief: A recent decision by the New South Wales Supreme Court provides guidance on the scope of contractual obligations requiring the use of 'all reasonable endeavours' and points out that such obligations can subsist indefinitely. Partner Leighton O'Brien (view CV) and Law Graduate Julian Brun report.

How does it affect you?

  • An agreement to 'use all reasonable endeavours' to effect a contractual object may impose an obligation that lasts indefinitely.
  • Even if all avenues of endeavour are exhausted, the obligation may still exist if achievement of the contractual object becomes reasonably practicable in the future.
  • Parties should consider whether an appropriate time limit should be included in their agreements.

Background

On 17 September 2007, Centennial Hunter Pty Ltd (Hunter) sold the Anvil Hill coalmine to Xstrata Mangoola Pty Ltd (Xstrata). In addition to the mine, rights under the agreement with Newcastle Coal Infrastructure Group Pty Ltd (NCIG) held by Hunter's parent, Centennial Coal Co Ltd (Centennial), were also to be novated to Xstrata. These permitted shipping via Newcastle Port facilities of coal mined at Anvil Hill. The sale deed included clauses relating to Centennial's shareholding and contractual obligations with NCIG, providing that:

  • Hunter and Xstrata must 'use all reasonable endeavours' to novate the relevant 'rights and obligations under the NCIG arrangements to the buyer', and transfer the shares in NCIG, with effect from completion;
  • where such novation and transfer 'has not occurred on and with effect from completion', then:
    • the seller and buyer must 'use all reasonable endeavours to ensure that the novation and transfer occurs as soon as reasonably practicable after completion'; and
    • until the novation occurred, the entitlement to capacity at the NCIG terminal had to be held and made available for the Anvil Hill mine.
  • Xstrata could waive Centennial's obligations to novate and transfer, if required.

On 17 October 2007, the sale was completed but transfer and novation had not occurred.

Under the NCIG arrangements, if a shareholder wanted to transfer all or part of its shares and its capacity entitlement under its ship-or-pay agreement, it first had to offer them to the existing shareholders. Any proportion not acquired could be transferred to a qualified third party (someone with marketable coal reserves sufficient to enable it to meet its capacity entitlement).

In May 2008, Centennial began efforts to transfer the shares and entitlements to Xstrata under the NCIG arrangements. Centennial failed in its attempts.

Centennial and Hunter brought proceedings in the New South Wales Supreme Court seeking declarations that they had discharged their obligations under clauses 8.6(a), (b) & (c) and/or they had no continuing obligation to comply with them.

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The decision

Justice Brereton held that1 the effect of a 'best endeavours' clause depends on the wording and the circumstances of each case. It is not an obligation to ensure that the contractual object occurs as soon as is reasonably possible. It is an obligation to do what can reasonably be done in the circumstances to achieve the contractual object, without hindering or preventing its achievement.2 Reasonable endeavours must keep being made, unless they would have 'such remote prospects of success that they are simply likely to be wasted'3 and 'until the point is reached where all reasonable endeavours are exhausted.'4 In doing so, one must allow for events, including extraordinary events, as they unfold.5 To what extent, and for how long regard must be had to the possibility of the situation changing, will depend on the contractual context of each individual case.

His Honour held that, just because there are currently no more reasonable endeavours to take, it does not mean that all endeavours have been exhausted or that the parties are discharged from their obligations. His Honour held that, in the context of the case, future changes of circumstance may allow for new avenues of endeavour:

  • negotiations were on foot for the implementation of a long-term solution for access to and the expansion of the export capacity of the port;
  • the climate for obtaining consent from the other NCIG shareholders may change; and
  • some other commercial realignment may emerge presenting an opportunity for transfer not currently available.

His Honour held that Centennial was under the obligation in clause 8.6(b) of the sale deed to make reasonable endeavours if transfer becomes reasonably practicable at any time in the future, until either transfer and novation is effected, or Xstrata waives the obligation under clause 8.6(e). Interestingly, his Honour did not specifically limit this by reference to a point in time where further effort would be wasted due to remote prospects of success.

His Honour confirmed that Hunter was not in breach of the obligation but had also not discharged it. Likewise, clause 8.6(c) remained in effect to regulate the arrangements until clause 8.6(b) was discharged.

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Implications for industry

An agreement to 'use all reasonable endeavours' to effect a contractual object may impose a never-ending obligation. How long the obligation might last will depend on the circumstances and context of the contract in question. Contractual objects that are required to make the contract commercial are more likely to attract long-term obligations.

The practical implication of this finding is that, even if all avenues of endeavour are exhausted, the obligation may still exist if achievement of the contractual object becomes reasonably practicable in the future. The length of time for which one should have regard to changes of events will depend on the circumstances of each case; there is no one rule.

Parties wishing to avoid obligations that might continue indefinitely should consider using the following drafting principles when including 'all reasonable endeavours' clauses in their agreements:

  • include an appropriate time limit or sunset clause on the obligation; and
  • provide that the time limit is not affected by any changes in circumstances that may make the achievement of the contractual object reasonably practicable in the future.

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Conclusion

Parties often choose the language of 'reasonable or best endeavours' where they are reluctant to take on an absolute obligation. What they may often not consider is that that obligation may continue for a very long time (if not indefinitely) until the object is satisfied.

The decision was appealed unsuccessfully to the NSW Court of Appeal in Centennial Coal Co Ltd v Xstrata Coal Pty Ltd [2009] NSWCA 341 per Appeal Justices Hodgson, Tobias and Campbell. The court affirmed Justice Brereton's reasoning and dismissed the appeal.

Updated 8 February 2010

Footnotes
  1. Centennial Coal Company Ltd v Xstrata Coal Pty Ltd [2009] NSWSC 788.
  2. Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41.
  3. Hawkins v Pender Bros Pty Ltd [1990] 1 Qd R 135.
  4. Yewbelle Ltd v London Green Developments Ltd [2007] EWCA Civ 475.
  5. Yewbelle v London Green Developments (above).

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