Factual and Procedural Background
By a Sale and Purchase Agreement ("the SPA") dated 27 February 2001, the First Claimant and the Second Claimant (collectively "Rhodia") agreed to sell their European chemical surfactants business, including operations at a site in The City, to the Defendant ("Huntsman") and/or its Designated Purchaser ("HSSUK"). At the time of sale, Rhodia retained other manufacturing operations at the site but closed them shortly thereafter.
Steam and electricity for the site were supplied by a Combined Heat and Power Plant ("CHP Plant") owned by Company A ("Cogen") under a 15-year Energy Supply Contract dated 31 March 1993. The contract allowed assignment or novation subject to certain conditions, including a 90-day prior written notice and the transferee's capability to perform obligations.
Clause 15 of the SPA imposed obligations on both parties to use reasonable endeavours to obtain consent to novation of Restricted Contracts, including the Energy Supply Contract. Pending novation, Huntsman performed Rhodia's obligations under the Energy Supply Contract from March 2001 to March 2004. Rhodia ceased operations at the site in May 2002.
By March 2004, novation had not occurred, and Huntsman notified Rhodia it would no longer perform under the Energy Supply Contract. The CHP Plant was shut down shortly after and dismantled. Subsequently, Cogen commenced arbitration against Rhodia for unpaid invoices under the contract's "take or pay" provisions, claiming approximately £14.8 million plus interest and costs. Rhodia claimed indemnity or damages from Huntsman, alleging breach of SPA obligations, with the trial limited to liability issues.
Legal Issues Presented
- Did Huntsman use its reasonable endeavours to obtain Cogen's consent to novate the Energy Supply Contract to HSSUK, including whether Huntsman was obliged to provide a direct covenant (such as a parent company guarantee) and whether failure to do so constituted a breach?
- Whether the notice given by Huntsman on 5 March 2004 was valid under clause 15.1.4 of the SPA.
- Whether Huntsman remained under an obligation under clause 15.1.3 of the SPA to perform Rhodia's obligations under the Energy Supply Contract after 5 March 2004.
Arguments of the Parties
Appellant's Arguments (Rhodia)
- Huntsman breached the SPA by failing to provide a parent company guarantee or other direct covenant as reasonably required by Cogen to secure novation.
- Cogen's requirement for a guarantee was effectively communicated to Huntsman through correspondence and meetings.
- Huntsman's notice under clause 15.1.4 was invalid due to its prior breach of reasonable endeavours obligations.
- Huntsman remained liable under clause 15.1.3 to perform obligations under the Energy Supply Contract.
Appellee's Arguments (Huntsman)
- There was no obligation to use reasonable endeavours specifically to obtain novation to HSSUK as opposed to Huntsman itself.
- Huntsman was not required to provide a parent company guarantee and was justified in waiting for statutory accounts before offering one.
- The letter from Cogen dated 31 January 2003 constituted a categorical refusal of consent, relieving Huntsman of further obligations.
- The notice under clause 15.1.4 was valid and relieved Huntsman of further obligations regarding the Energy Supply Contract.
- Performance by Huntsman without prior consent from Cogen was unauthorized, thus no obligation under clause 15.1.3 applied.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| IBM v Rockware Glass [1980] FSR 335 |
Interpretation of "best endeavours" and "reasonable endeavours" obligations. |
Used to analyze the meaning and stringency of reasonable endeavours versus best endeavours, concluding reasonable endeavours is less stringent. |
| Overseas Buyers v Granadex [1980] 2 Lloyd's Rep 608 |
Equating best endeavours with what can reasonably be expected. |
Supported the view that best endeavours and reasonable endeavours may be similar, but the court found reasonable endeavours less stringent. |
| Marc Rich v SOCAP (1992) |
Best endeavours equated with due diligence. |
Referenced to support the interpretation of endeavours obligations. |
| Galaxy Energy v Bayoil [2001] 1 Lloyd's Rep 512 |
Reasonable efforts equated with due diligence. |
Used to support the interpretation of reasonable endeavours obligations. |
| UBH (Mechanical Services) v Standard Life (1986) (unreported) |
Distinction between reasonable endeavours and best endeavours. |
Noted that reasonable endeavours is less stringent than best endeavours. |
| Jolley v Carmel Limited [2000] 2 EGLR 154 |
Spectrum of implied terms regarding efforts to obtain permissions. |
Confirmed reasonable endeavours as the lowest level of effort in the spectrum. |
| Yewbelle v London Green Developments [2006] EWHC 3166 (Ch) |
Obligation to use reasonable endeavours to reach agreement with a third party. |
Clarified that reasonable endeavours do not require sacrificing commercial interests and must continue until all reasonable efforts are exhausted. |
| Hyde v Pimley [1952] 2 All ER 102 |
Distinction between prior consent and waiver or forbearance. |
Applied to determine that no prior consent was given for subcontracting under the Energy Supply Contract. |
| Hendry v Chartsearch Limited (1998) |
Distinction between prior consent and waiver or forbearance. |
Supported the interpretation regarding consent issues under the contract. |
| 29 Equities Ltd. v Bank Leumi (UK) Ltd [1986] 1 WLR 1490 |
Effect of categorical refusal of consent on obligations to use best endeavours. |
Referenced to assess whether a letter from Cogen constituted a categorical refusal relieving Huntsman of obligations. |
| Lipman Wallpaper Ltd v Mason & Hodgton Ltd [1969] 1 Ch. 20 |
Requirement to use best endeavours before rescinding a contract. |
Supported the principle that a party cannot escape obligations without using best endeavours. |
Court's Reasoning and Analysis
The court analyzed the contractual obligations under the SPA, particularly Clause 15 concerning novation of Restricted Contracts. It examined correspondence and communications between the parties and Cogen, noting that Cogen required a parent company guarantee or equivalent security before consenting to novation of the Energy Supply Contract to HSSUK.
The court distinguished between "reasonable endeavours" and "best endeavours," concluding that reasonable endeavours require a less stringent level of effort but still mandate taking necessary steps specified in the contract, including providing a direct covenant if reasonably required.
It found that Huntsman was aware of Cogen's requirement for a guarantee by October 2001 but failed to provide any form of guarantee or to adequately inquire about what form would be acceptable, constituting a breach of Clause 15.1.2. The court rejected Huntsman's argument that it was entitled to wait for statutory accounts before offering a guarantee, noting internal communications revealed reluctance to provide such security.
The court further found that the letter from Cogen dated 31 January 2003 did not amount to a categorical refusal of consent that would relieve Huntsman from continuing reasonable endeavours. Huntsman did not respond with an offer of guarantee thereafter, remaining in breach.
Regarding the notice given by Huntsman on 5 March 2004 under Clause 15.1.4, the court held it invalid because Huntsman had not fulfilled its reasonable endeavours obligations. It also considered competing interpretations of the clause and preferred the view that a valid notice following compliance would relieve Huntsman of further obligations, but this was academic given the breach.
Finally, the court addressed Huntsman's contention that no obligation under Clause 15.1.3 arose because prior consent for subcontracting was not obtained from Cogen. The court held that the Energy Supply Contract permitted subcontracting with prior consent, which was effectively given by acquiescence. Thus, Huntsman remained liable under Clause 15.1.3(b) to perform Rhodia's obligations.
Holding and Implications
The court's holdings on the three liability issues were:
(1) Huntsman was in breach of its obligation under Clause 15.1.2 of the SPA to use reasonable endeavours to obtain Cogen's consent to novate the Energy Supply Contract;
(2) The notice served by Huntsman on 5 March 2004 under Clause 15.1.4 was invalid;
(3) Huntsman remained obligated under Clause 15.1.3(b) to perform Rhodia's obligations under the Energy Supply Contract after 5 March 2004.
Implications: The decision means Huntsman remains liable for obligations under the Energy Supply Contract and cannot rely on the purported notice to avoid responsibility. The ruling does not establish new precedent but clarifies the application of reasonable endeavours obligations and novation requirements in the context of SPA contracts involving Restricted Contracts.