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Reasonable endeavours clauses – “how hard do you have to work to make yourself liable to pay £1.4 million?”

This was the question posed in the opening words of the judgment in the recent English case of Gaia Ventures Limited v Abbeygate Helical (Leisure Plaza) Limited, which featured detailed arguments on the application of a ‘reasonable endeavours’ clause. The decision was appealed and the Court of Appeal decision, expected later this year, will be keenly awaited by practitioners both in the UK and the Caribbean.

For better or for worse, reasonable endeavours clauses are a common feature of commercial contracts as parties.

In Gaia, the High Court decided that a developer, Abbeygate, had failed to fulfil its obligation to use reasonable endeavours to satisfy certain contractual conditions. The Court ruled that Abbeygate had "dragged its feet" and orchestrated matters in order to avoid the paying out the overage of £1.4 million. Rather than taking steps as soon as reasonably practicable, Abbeygate delayed and took the approach of seeing how late it could safely leave matters before performing. A key tenet of Abbeygate’s defence was that a party subject to such a clause is entitled to take into account, and even give preference to, its own commercial interests. Abbeygate argued that it was entitled to await approval on a loan of £30 million before steps which would have resulted in the overage payment.

An obligation to use reasonable endeavours is invariably viewed as being less onerous than one to use ‘best endeavours’. In Rhodia International v Huntsman, the Judge succinctly opined that such an obligation probably only requires a party to take one reasonable course of action, not all of them (which would probably apply to ‘best endeavours’ clauses).

Having heard Abbeygate’s appeal, the Court of Appeal must now weigh up two distinct viewpoints. On the one hand, there is Abbeygate’s ‘commercial interest’ argument which also places reliance on the Huntsman dicta that one reasonable course out of many is sufficient. On the other hand is Gaia’s counter-argument that (1) a party obligated to achieve something with reasonable endeavours must not delay, even if this adversely affects its commercial interests, and (2) if the party tries to achieve the desired result only in combination with another outcome which is unlikely to be achieved on time, or at all, then that party is in breach.

The first instance decision underlines the importance of taking particular care when drafting such clauses in order to avoid uncertainty at a later stage. In an ideal world, such a clause will set out in detail what an obligor is required to do or not to do.

Reasonable endeavours clauses – “how hard do you have to work to make yourself liable to pay £1.4 million?”

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