The words all 'reasonable endeavours' are common additions to clauses in commercial transaction documents, and are often intended to provide comfort to parties who, at the time of a transaction, are unwilling or unable to commit fully to a particular contractual obligation.
Although each 'reasonable endeavours' clause must be read in the context of its circumstances, the general obligation requires the relevant party to do what can reasonably be done in the circumstances to achieve the contractual obligation (Hospital Products v United State Surgical Corporation). Traditionally, the obligation will continue until the obligor '...should reasonably judge in the circumstances that further efforts would have such remote prospects of success that they are simply likely to be wasted' (Hawkins v Pender Bros Pty Ltd).
The recent decision of Centennial Coal Company v Xstrata has delivered a warning to parties who use these words expecting that their obligations will be discharged as soon as reasonable attempts are made to execute them. The NSW Supreme Court found that despite there being no chance of contractual obligations being fulfilled at a particular time, those obligations may continue if there remains a chance they could be fulfilled in the future.
As a result of Centennial Coal Company v Xstrata, parties drafting contracts should be aware that:
- the obligation to use 'reasonable endeavours' to satisfy a particular contractual obligation may last indefinitely;
- even if all 'reasonable endeavours' would not result in an obligation being fulfilled now, obligations may continue if such endeavours could be successful at a future point; and
- parties should consider including a time limit or sunset clause to qualify an obligation to use all 'reasonable endeavours', to ensure that the obligation will lapse at some time.
Background
Both Centennial Coal Company (Centennial) and the Xstrata group owned coal mines in the Hunter Valley, an area which shipped coal exclusively through the port of Newcastle. In 2004, the volume of coal passing through the port of Newcastle exceeded its shipping capacity, and in response the Newcastle Coal Infrastructure Group (NCIG) obtained a license to develop a new port. NCIG provided its shareholders (which included Centennial) the option to enter into an agreement for additional shipping capacity, which Centennial exercised.
In August 2007, Centennial Hunter Pty Limited (a subsidiary of Centennial) (Centennial Hunter) obtained approval to develop a coal mine to be known as 'Anvil Hill', and a month later Centennial Hunter entered into an asset sale agreement with Xstrata Mangoola (Xstrata Mining's subsidiary) for the sale of Anvil Hill. Clause 8.6 of the asset sale agreement (Agreement) provided that:
- Centennial Hunter would use all 'reasonable endeavours' to novate Centennial's rights and obligations under their port and shipping agreement with NCIG (novation), as well as transfer all of Centennial's shares in NCIG to Xstrata Mangoola (transfer);
- if the novation and transfer did not occur at the completion of the Agreement, Centennial Hunter would use all 'reasonable endeavours' to ensure that the novation and transfer occurred as soon as reasonably practicable after completion; and
- if novation and transfer did not occur at the completion of the Agreement, Centennial Hunter would not dispose of or otherwise deal with its interest, obligations and shares relating to NCIG and the port and shipping agreement.
Under clause 8.6(e), Xstrata could waive its rights in respect of the novation and the transfer.
Due to provisions under various NCIG agreements as well as other complications, the novation and transfer did not occur at completion of the Agreement.
Centennial and Centennial Hunter (the Plaintiffs) brought proceedings in the NSW Supreme Court seeking a declaration that they had discharged their obligations under clauses 8.6(a), (b) and (c) of the Agreement.
Key aspects of the decision
The court held that:
- the Plaintiffs had not discharged their obligations to use all 'reasonable endeavours' with regard to the novation and transfer;
- there is no rule as to when an obligation to use all 'reasonable endeavours' will be fulfilled; instead, it depends entirely on the particular circumstances in which the obligation was undertaken;
- although the Xstrata group had been uncooperative during the Plaintiffs' attempts to procure the novation and transfer, this did not affect Centennial Hunter's 'reasonable endeavours' obligation;
- even though the Agreement stipulated that novation and transfer were to occur 'as soon as reasonably practicable' after completion of the Agreement, obligations to use 'reasonable endeavours' were still enduring. In particular, Brereton J held that '...the obligation imposed by clause 8.6(b) [was] an on-going one which subsists until a novation and transfer is achieved';
- despite the Plaintiffs doing all that was required of them to discharge their novation and transfer obligations under Schedule 7 of the Agreement, further steps were required to absolve them of their 'reasonable endeavour' obligations. No time limit was suggested for how long Centennial Hunter should continue its reasonable endeavours to complete its novation and transfer obligations;
- at the time Centennial and Centennial Hunter sought the declaration to discharge their novation and transfer obligations, Brereton J believed that the Plaintiffs were unable to take any further 'reasonable endeavours' to fulfil those obligations; and
- the court identified that a further step which could be taken by Centennial would be to request that all other shareholders in NCIG waive their pre-emptive rights to purchase Centennial's terminal interests. Although this was considered to be futile at the time of the decision, Brereton J noted that negotiations for access to, and the expansion of, port capacity were on foot and, therefore, the climate for obtaining consent from the other NCIG shareholders may change in the future. Because there was potential for the obligations to be fulfilled in the future, their respective obligations in respect of novation and transfer were not discharged.
Consequences of the decision
Depending on the circumstances in which an obligation to use all 'reasonable endeavours' is agreed to, the requirement to fulfil the contractual obligation may last indefinitely.
The practical implication is that although all existing possible avenues may have been explored by a party in order to fulfil 'reasonable endeavours' obligations, the possible avenues may change over time, and as a result the 'reasonable endeavours' obligation may not end until it has been satisfied. To what extent and for how long the obligation to use 'reasonable endeavours' will continue will depend on the circumstances of each individual case.
To create certainty and ensure that the intentions of the party that is assuming a particular obligation to use all 'reasonable endeavours' are realised, a time limit or sunset clause should be included with any requirement to use all 'reasonable endeavours' to fulfil a contractual obligation. It is also prudent to provide that the time limit or sunset clause will not be affected by a change in circumstances that may make the contractual obligation achievable in the future.