When selling a business, or part of one, you are often asked to make every effort to secure the transfer of various commercial arrangements to the purchaser, e.g. supply agreements or customer contracts. How much effort do you need to put in to do this? Do you need to incur costs in your efforts and if so do you have to bankrupt your remaining business in trying to fulfil your obligations? The answer depends on the form of wording that you agreed to in the contract with the purchaser. It is crucial to understand the implications of the different forms of legal wording and only to commit to what is reasonable for your business in the circumstances.
A brewer (“Brewer A”) agrees to take on the free trade accounts which another brewer (“Brewer B”) no longer wants. Brewer A asks Brewer B to assist it to ensure the smooth transfer of the trade accounts. How much effort and resource does Brewer B need to devote to ensuring that these accounts transfer?
The starting point will be the written agreement between Brewer A and Brewer B.
If the agreement obliges Brewer B to ensure that the accounts transfer to Brewer A then this is not a qualified but an absolute obligation. If B fails to fulfil the obligation it will be in breach of contract. Brewer B would be well advised not to agree to an absolute obligation as the transfer of the accounts is really outside its control – customers may decide not to transfer their accounts to Brewer A for a variety of reasons. Some form of qualified obligation would be more appropriate.
There are two common forms of qualified obligation. “Best” endeavours is the most stringent and “reasonable” endeavours is less onerous. What efforts does each of these obligations require?
The Courts have made it clear that “best” endeavours means what it says and does not mean second-best endeavours. It is not an absolute obligation and there is an element of reasonableness. If Brewer B agrees to use its best endeavours it must ”take all those steps in its power which are capable of producing the desired results …. being steps which a prudent, determined and reasonable Brewer A acting in its own interests and desiring to achieve that result, would take”. (in the case of IBM United Kingdom Limited v Rockware Glass Limited )
If Brewer B agrees to use its best endeavours this may require financial expenditure but it will not require the ruin of the company. Brewer B may be required to litigate or appeal a decision unless the case had no reasonable prospect of success. In addition, Brewer B’s requirement to comply with the endeavours obligation in the contract may be overridden by another duty, for example, the duty to act in the best interests of shareholders.
If Brewer B agrees to use “reasonable” endeavours then this is a less stringent obligation than “best” endeavours but the obligation is not toothless if drafted clearly and precisely. When determining the scope of reasonable endeavours it would be important to consider the contractual obligation itself, how likely it is to be able to be fulfilled and also all relevant commercial considerations e.g. Brewer B’s reputation and the cost involved. Brewer B would not be obliged to sacrifice its own commercial interests to fulfil the obligation.
Where the fulfilling of an obligation is within a party’s own contol then using reasonable endeavours may mean that the party has to act against its own commercial interests. For example, in the recent case of Jet2.com v Blackpool Airport Ltd the court found that the airport should extend its opening hours to accommodate J2s low cost flights even though it lost money doing this. However, if Brewer B would have to rely on a third party to fulfill the contractual obligation it would not be obliged to sacrifice its own commercial interests to do this.
Case Study – Observations
In our case study Brewer B agreed to use its “reasonable” endeavours to assist Brewer A with the transfer of the free trade accounts. Brewer B wrote to all its customers and tried to affect a transfer. In fact some of Brewer Bs customers decided not to transfer their accounts to Brewer A. If Brewer B had agreed to use “best” endeavours to affect the transfer then it is likely that it would have had to have done more than just writing to its customers. It would have been reasonable to expect, for example, that Brewer B would instruct its sales force to make visits to its customers to discuss a transfer to Brewer A. This would have involved more time commitment and expense on behalf of Brewer B.
- Precise obligation – It is always prudent to try to agree the steps which the party accepting the obligation is required to take and to set them out in the contract. This might involve setting out the maximum level of expense that will be incurred, the length of time that it must try to carry out the obligation, whether legal action would be required and at what point it would be reasonable to hand over to the purchaser.
- Record Keeping – If you have accepted an endeavours obligation it is sensible to keep a written record of the efforts that you have made to comply with this in case a subsequent argument results over whether you have complied fully with the obligation.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.