Centennial Coal Company Limited v Xstrata Coal Pty Ltd1 (Xstrata Case) is the latest case in Australia to consider whether there is any substantive difference in the meaning and practical application of the terms "reasonable endeavours" and "best endeavours" in a commercial contract.

In this case, the New South Wales Court of Appeal upheld Brereton J's decision at first instance and agreed that there is no real difference between the two thresholds. The Court of Appeal held that the use of either term in a commercial contract places an obligation on the relevant parties to do what is reasonable in the specific circumstances. The Australian position is a departure from the law in the United Kingdom where the use of the term "best endeavours" places a higher burden upon the parties, requiring the discharging party to essentially "leave no stone unturned" when attempting to discharge a contractual obligation.

Centennial Hunter Pty Limited (Centennial Hunter), a subsidiary of Centennial Coal Company Limited (Centennial Coal) and Xstrata Mangoola Pty Limited (Xstrata Mangoola) entered into an asset sale agreement in relation to Centennial Hunter's Anvil Hill coal mine in the Hunter Valley. As part of the asset sale agreement the parties agreed that Centennial Coal's relevant rights and shares in the Newcastle Coal Infrastructure Group (NCIG), were to be novated and transferred to Xstrata Mangoola. Xstrata Mangoola required these relevant interests in NCIG as it enabled the coal mined from Anvil Hill to be transported to and shipped from NCIG's port in Newcastle, New South Wales.

The asset sale agreement provided, amongst other things, that:

Notwithstanding the efforts of all parties following completion of the asset sale agreement, Centennial Coal's interest and shares in NCIG had not been novated and transferred to Xstrata Mangoola. This was largely due to pre-emptive rights and other requirements contained in the relevant agreements between Centennial Coal and NCIG not being satisfied. Consequently, Centennial Coal and Centennial Hunter sought a declaration from the NSW Supreme Court stating that they had discharged their obligations in the asset sale agreement and they were no longer required to comply with them.

Brereton J in the NSW Supreme Court rejected the application from Centennial Coal and Centennial Hunter and provided useful commentary on the Australian position in relation to the use of the terms "reasonable endeavours" and "best endeavours".

Although the relevant clauses as set out above, only required the parties to use "reasonable endeavours" in Brereton J's assessment, the obligations should be viewed as if the parties were to use "best endeavours". Brereton J followed a long line of precedents in Australia and held that an exercise of meeting obligations using "best endeavours" was no different than from using "reasonable endeavours" or "all reasonable endeavours". His Honour referred to Gibbs CJ in Hospital Products Limited v United State Surgical Corporation, who stated that an obligation to use best endeavours "does not require the person who undertakes the obligation to go beyond the bounds of reason, he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more".

Ultimately, the outcome of the case hinged on Brereton J's interpretation on the parties' agreement to novate and transfer the rights and shares in NCIG as soon as reasonably practicable after completion. Because the clause in question did not include a limit as to when the parties expected this to occur, it was still reasonably practicable that it could occur in the future. As a result, Brereton J decided that the parties had not yet discharged their obligations and rejected the application by Centennial Coal and Centennial Hunter.

On Appeal, the NSW Court of Appeal affirmed Brereton J's decision.

The Xstrata Case affirms that in Australia, there is no practical difference in the meaning and application of the terms "reasonable endeavours" and "best endeavours" in a commercial contract. The use of either term requires an assessment of what is reasonably required given the specific circumstances.

That position is to be determined from an objective perspective having regard to what reasonably could have been done or not done given the specific set of circumstances and generally equates to the discharging party providing evidence that they:

Given this, parties should refrain from spending time negotiating whether an obligation should be discharged using "reasonable endeavours" or "best endeavours" but rather determine what specific actions will be required to discharge the relevant obligation.