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In the recent decision of CEP Holdings Ltd and CEP Claddings Ltd v Steni AS [2009] EWHC 2447, the High Court has provided some useful guidance on the meaning of "all reasonable endeavours" in the context of an exclusive distribution agreement.
In this case, Steni AS (Steni) signed a 20-year exclusive distribution agreement with CEP Holdings Limited (CEP). This imposed an obligation on CEP as distributor to use "all reasonable endeavours" to promote the marketing and sale of Steni's products in the relevant territory.
Part-way through the term of the agreement, and after giving CEP a grace period to rectify breaches, Steni wrote to CEP terminating the agreement on the basis that (among other things) CEP had failed to comply with its "all reasonable endeavours" obligation.
The High Court had to decide whether CEP had been doing enough to meet the obligation.
The law
Where parties agree a qualified (rather than an absolute) obligation, it is usually expressed as an obligation to use either "reasonable endeavours" or the more onerous "best endeavours". It is often assumed (incorrectly) that an obligation on a party to use "all reasonable endeavours" sits half-way between the two. As a less common formulation, however, there is little precedent for what this phrase actually means (and even the meanings of "reasonable endeavours" and "best endeavours" are not entirely objective or certain).
Given the diverse range of contracts in which "endeavours" clauses are used, there can never be a definitive or "one size fits all" test as to their meaning. Each case turns on its specific facts and surrounding commercial context, so the courts can only ever produce a framework for assessing what each different "endeavours" clause requires in terms of performance.
Following the Steni case, however, we have some useful aids to interpreting what "all reasonable endeavours" might mean.
What did "all reasonable endeavours" mean in this context?
The High Court decided that Steni was entitled to terminate the distribution agreement for CEP's breach of its "all reasonable endeavours" obligation. In reaching that decision, the court decided the following:
- To discharge an "all reasonable endeavours" obligation, CEP (as distributor) must have done "everything that a reasonably competent and energetic distributor would do to promote the marketing and sales of the supplier's products in the relevant territory, knowing that the supplier was entirely dependent upon his, the distributor's, efforts ..."
- In applying this test, CEP (as distributor) must be afforded a "reasonable margin of appreciation or discretion in deciding how best to market and promote the sale" of Steni's products in the territory. In other words, it was recognised that the obligation was of a flexible and commercial nature.
What performance factors did the court consider?
In deciding whether or not CEP had met the test described above, the court looked at the following factors:
- Did the distributor have an adequately structured and directed sales and marketing organisation? A reasonably competent and energetic distributor should prepare and utilise a detailed written marketing or promotional plan to assist in the sales and promotion of the products.
- Did the distributor have adequate systems in place for the preparation of rolling forecasts, for the supply of the products? A reasonably organised exclusive distributor, using all reasonable endeavours, should have effective systems in place in relation to information flows and procedures for forecasting future sales.
- Did the distributor exhibit a willingness to co-operate with the supplier? A reasonably competent exclusive distributor, using all reasonable endeavours, should engage in positive dialogue with its supplier in order to maximise the promotion and sales of the supplier's products.
- Did the distributor make use of literature and marketing materials? An obligation to use all reasonable endeavours to promote the marketing of products should include a requirement on the distributor to produce and disseminate appropriate marketing literature about the products.
- Did the distributor attend trade fairs and seminars? Where attending trade fairs or seminars is a means of marketing the supplier's products to potential customers, a low attendance record can demonstrate a lack of endeavour on the part of the distributor to drive sales trends upwards and to ensure that its sales force is properly motivated and directed.
Interestingly, a number of other factors were not considered relevant:
- Pricing beneath main competitor: The High Court decided that using all reasonable endeavours to promote sales would not oblige the distributor to price the products beneath that of its main competitor. As long as the distributor's decision on pricing is "within its margin of appreciation", this is a commercial decision for the distributor.
- Renewal of product certifications: Where the distributor can show commercial factors behind a decision not to obtain a particular certification for the product, then again, if the distributor's decision is "within its margin of appreciation", this is a commercial decision for the distributor.
While the factors listed above should not be seen as a tick-box list to comply with (as distributor) or to enforce (as supplier), they do provide useful guidance on the sorts of issues that a court will look at when considering compliance with an "all reasonable endeavours" obligation in an exclusive distribution context.
What does this mean for you?
- To support a catch-all "all reasonable endeavours" obligation, it is always preferable to include specific, quantifiable obligations and targets as contractual terms. In this case, for example, Steni had not imposed any annual sales targets on CEP and there was no obligation on CEP to prepare marketing plans, forecasts or budgets. Including precise obligations in a distribution agreement will:
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allow the parties, rather than a court, to define precisely what the obligations of a "reasonably competent and energetic distributor" should be; and |
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give a supplier much better visibility over the activities of its distributor, making breaches (and so grounds for termination) easier to establish. |
- Although Steni was successful in this case, terminating a contract only on the grounds of a failure to use "all reasonable endeavours" will continue to be risky. The burden of proof lies on the party claiming the breach, and it is clear that a whole range of factual circumstances will need to be examined by a court to look at the actions of a distributor in the round. Predicting in advance what will prove to be the decisive factor(s) is not a precise science.
- That said, the list of factors that the court considered is a helpful illustration of some of the lengths that a distributor needs to go to in order to discharge an "all reasonable endeavours" obligation.
Caroline Copeland and Angus Bujalski
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