Commercial Law – Contract Construction – ‘Reasonable’ & ‘Best’ Endeavours

The recent case of Rhodia International Holdings Limited and Rhodia UK Limited v Huntsman International LLC [2007], provides new guidance on a long-disputed area of contract law. According to the judgment of the High Court, a duty to exercise ‘reasonable endeavours’ requires less than ‘best endeavours’ but can still demand a party to act against its own commercial interests, although the case does not resolve all the uncertainty surrounding the difference between ‘reasonable’ and ‘best’ endeavours.

The case confirms that ‘reasonable endeavours’ is a less stringent obligation than ‘best endeavours’ – a concept which is commonly assumed. The case also confirms that a ‘reasonable endeavours’ obligation may be discharged by exhausting just one of a number of possible solutions, whereas a ‘best endeavours’ obligation requires all avenues to be explored.

Huntsman International LLC (“Huntsman”) had agreed to buy Rhodia International Holdings Limited and Rhodia UK Limited (“Rhodia”), a chemicals company. As part of the sale and purchase agreement both parties were to use reasonable endeavours to ensure that all supplier contracts passed from Rhodia to Huntsman, including one with a power company called Cogen.

However, Cogen refused to accept the transfer of the contract without a guarantee from Huntsman’s parent company. The argument over what was meant by reasonable endeavours focussed on Huntsman’s refusal to provide that guarantee. That refusal therefore affected the transfer of the contract with Cogen for the supply of power.

Huntsman paid for the power from the date of its purchase of Rhodia in 2001 until 2004. However, in 2004 Huntsman told Rhodia that it was pulling out of the location and that responsibility for the power contract remained with Rhodia until the contract expired in 2009. Huntsman submitted the reason for this being that the contract for the supply of power had not been transferred. Cogen claimed that £14.8m worth of power and services was owed, and the case concerned Huntsman and Rhodia arguing over who owed Cogen that amount.

The case was eventually decided on what constituted ‘reasonable endeavours’ to ensure the contract transferred from one company to the other. It was ruled that Huntsman International had breached the sale agreement by not using its reasonable endeavours to provide a guarantee for a power contract. Julian Flaux QC, sitting as a deputy High Court Judge in the case said:

“An obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses he can. In that context, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours…”

The ruling in the case made it clear that the terms of the sale contract were binding, even if its terms no longer suited one of the parties. The companies must abide by their contractual obligation to make a reasonable endeavour even if it is against their company interests.

However, there are other authorities which suggest a slightly different viewpoint. In the absence of a specific course of action assumed by a party in the context of a reasonable or best endeavours obligation, neither obligation is likely to require a party to sacrifice it own commercial interests. It appears from the other authorities – which were not discussed in this case – that ‘reasonable endeavours’ may not even require the party giving such an obligation to act to its own disadvantage. This would suggest that relatively little effort is required to comply with a ‘reasonable endeavours’ obligation.

As far as the drafting of contracts is concerned, the best way to achieve certainty would be to specify the actions a party must take in using its ‘best’ or ‘reasonable’ endeavours wherever possible. The relevant party will then be bound to take those actions in any event and the question of whether those actions are contrary to that party’s commercial interests will not arise.

© RT COOPERS, 2007. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.

What Is Business Law?

In today’s society, many people are starting new businesses and they need to legally register their company. If a business is not registered, the owners may be breaking the law as they would be accused of running the business illegally. When a company wants to merge with another firm, they should have a written contract which both parties need to sign. These agreements should be drafted by a business lawyer who should guide the firms during the process. Business law covers a wide branch of knowledge across a variety of disciplines.

Business law covers all aspects of trade from the registration of a business to hiring employees and selling goods across the globe. A business may need a lawyer to help with the relevant terms of agreement and sales and present them to the other parties. When a company wants to bid for tender or have a project, the lawyer needs to come up with various proposals to present to the other parties. At times, disputes arise and when there was no binding agreement, the business suffers a huge loss.

There are some companies that do not keep in mind the terms and codes of trade especially within their intentional market. Failing to comply with the law is a serious offense and the company may end up folding as a result. A company should look to hire a lawyer who is aware of the business laws set by the Department of Trade and the lawyer ought to find out how the company performs in their industry without bypassing federal laws.

Business law also covers the partnership aspect of the company. At times, the companies who want to merge but they may still want to maintain their rights and recognition within their market. A good contract should be put in place and both parties should agree to work within the laid down rules and regulations in the contract. Many partnerships have landed in court simply because some codes were not met or the other party had more benefits than the other party did. Some aspects like profits, shares, and investments need to be addressed fully before signing a partnership agreement.

Before someone starts any business, they need to know the codes, laws, and terms of reference. Business law applies to all types of businesses whether it is a corporation, a sole proprietorship, or a company. The law requires that all companies and businesses need to be registered and trade within the law. When someone trades in illegal goods, they are required by the law to stand trial. The codes of trade need to be enforced fully and that every businessman understands what they mean. Business law terms are difficult to understand hence there is sometimes a need to hire a lawyer to interpret the message and ensure that the client know what each business documents entail. At times, some businesses may want to trade with other companies and need advice from their lawyers and other business professionals on the proposed plan. Business law can also cover issues such as privacy, copyright and issues involving tax.

All in all, business law ensures that a company practices in the correct way and that the business runs smoothly and that all the parties involved in the various commerce sectors understand the codes of operation.

Commercial Law – Why It’s So Important for Businesses to Have Legal Backup

The business environment can be tricky, and sometimes just plain nasty. Small businesses find themselves in a legal minefield/maze without warning, when a client, employee or business associate turns difficult. It’s always a good idea to have a working relationship with some commercial lawyers who know the business and understand the issues involved, to have someone on your side when you need backup.

Commercial law is often extremely complex in terms of its application to specific situations. Non-specialist lawyers often can’t help much, because this is a particularly demanding area of law. The sheer range of possible issues needs expert management.

For example, these are some of the areas covered by commercial law:

· Contract law
· Public liability
· Commercial practices
· Consumer law
· Commercial disputes
· Commercial property
· Supply chain issues

There are also possible combinations of these issues, and they’re never simple. There may also be multiple parties involved in a dispute, which further complicates the issues.

This is a typical case in point:

· Business A is a contractor installing kitchens for Business B. The situation is:
· Business A is waiting for kitchens to be supplied by Business C, an importer.
· Business B is complaining about breach of contract, because the kitchens are supposed to be installed by a due date under the terms of the contract.
· Business B further claims that an onsite accident was caused by Business A’s truck, injuring a construction worker.
· Business B is threatening legal action on both counts.

· Business A wants to put pressure on Business C to get the kitchens delivered by being sourced elsewhere.

This isn’t the sort of situation which a business can or should handle for itself. If legal action results, legal representatives need to be hand. They also need to get up to speed ASAP, to manage the situation. So it’s better to have legal representatives on standby at the start, not after the situation has escalated to the point of no return.

In this case, there are quite a lot of legal options:

· Business A can negotiate the contract issues with Business B on the basis that it’s simply unable to obtain the kitchens. In practice, contracts can’t be expected to require the impossible. Business A has been acting in good faith, and the efforts to get Business C to source the kitchens elsewhere is proof of its attempts to deliver on its contract obligations.

· The public liability issue needs to be assessed on its merits. The truck was in fact owned by Business C, delivering a kitchen. Liability may be on Business C, not Business A.

Not simple, is it? At the corporate level, issues like this can involve contracts worth millions of dollars, and corporate lawyers also have to deal with the related corporate law issues, which can be a range of statutory, as well as commercial problems as well.

That’s why small businesses need legal backup. They’re like insurance, something you pay for that you hope you’ll never have to use, but it’s nice to know you have the support when you need it.

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