PLC Global Finance update for November 2010: Australia

Practical Law UK Articles 5-503-9698 (Approx. 5 pages)

PLC Global Finance update for November 2010: Australia

by Minter Ellison

Dispute resolution

Reasonable endeavours v best endeavours: no longer a difference in Australia?

Nigel Clark and Leigh De Jong

Summary

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.

Facts

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:

Both Centennial Hunter and Xstrata Mangoola use "all reasonable endeavours" to novate Centennial Coal's rights and obligations under the relevant NCIG agreements to Xstrata Mangoola and transfer the relevant shares Centennial Coal held in NCIG to Xstrata Mangoola;
If the novation and transfer had not occurred by completion, both parties were to use "all reasonable endeavour" to ensure the novation and transfer occurred as soon as reasonably practicable after completion
If the novation and transfer had not occurred by completion, Centennial Coal was to use "reasonable endeavours" to hold their interest in NCIG to ensure that the coal from Anvil Hill continued to be transported to NCIG's port in Newcastle.

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.

Decision

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.

Conclusion

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:

Have done everything that could have been reasonably done in the circumstances to achieve the contractual object.
Must not have hindered or prevented achievement of the contractual object.
Have continued to attempt to discharge their obligations until it can be reasonably determined that any further attempts to satisfy the contractual obligations would be viewed as futile or wasted.
Had allowed for all events (including extraordinary events) as they unfold.

Key message

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.

Secured lending

Implications for suppliers (and their financiers) exporting goods into Australia under the Personal Property Securities Act 2009

Nigel Clark and Ian MacKenzie

Suppliers who export goods to businesses in Australia will be directly affected by the Personal Property Securities Act 2009 (Cth) ('PPSA').

From May 2011, conditional sale agreements that meet the PPSA's 'in substance' definition of security interest (by securing payment or performance of an obligation to the seller) will be treated as security interests. Sales of goods on retention of title terms will therefore meet this definition. If the goods are supplied subject to any form of non-land related security arrangement (such as a retention of title arrangement, for example), then depending on the location and nature of the goods and the location of the grantor, the PPSA will apply. This means that suppliers of goods to Australian customers on these terms will need to comply with the PPSA's requirements in order to protect the priority of their security interest in those goods.

Financiers to such suppliers will also need to be cognisant of these PPSA implications so that they can include appropriate covenants in facility documents. This will ensure that borrowers are able to protect their retention of title security interests if goods are being supplied on such terms to Australian customers comprises a material part of the borrower's business.

When the PPSA applies

Generally, the PPSA will apply in the following circumstances:

If the grantor of the security interest (i.e. the purchaser) is an Australian entity.
If the goods are located in Australia when the security interest attaches to the goods.

In these circumstances, the PPSA will apply irrespective of the location of the secured party (for example, the supplier).

Perfecting security interests

In the context of goods exported to Australia, there are specific provisions of the PPSA that apply to the "perfection" of security interests. These provide that:

The validity perfection and effect of perfection of a security interest will be governed by the PPSA if at the time of "attachment" of the relevant security interest, it was:
- reasonable to believe that the goods would be moved to Australia;
- at the relevant time, the goods are located in Australia.
For rights evidenced by letters of credit, the validity of that security interest will be governed by the PPSA if:
- the security interest has attached;
- the grantor of the security interest is located in Australia at the time of attachment or the secured party has possession or control of the property.

If the supply arrangement falls into any of the above categories then, if the supplier is to preserve their priority over the interest, they will need to perfect the security interest by lodging a financing statement on the Personal Property Securities Register.

In situations where goods are located outside Australia at the attachment time, a security interest will be considered perfected until the goods become located in Australia so long as, before the goods arrive in Australia, the security interest:

Is effective.
Is enforceable against third parties.
Has been perfected and/or registered in the previous jurisdiction (if required by the law of that jurisdiction). This means that, for example, in other PPSA jurisdictions like Canada and New Zealand, a supplier of goods on retention of title terms would have to perfect its security interest (most likely by registering a financing statement) in that jurisdiction.

Effect

If the above criteria are satisfied, the PPSA affords the security interest temporary perfection once the goods arrive in Australia until the earlier of:

56 days after the goods arrive in Australia.
5 business days after the secured party has actual knowledge that the goods have arrived in Australia.

Previous updates have discussed the meaning and importance of concepts like "attachment" and "perfection" under the PPSA. In summary, perfection (or non-perfection) of a security interest is crucial in determining the outcome of a priority dispute between two security interests (which could arise, for example, between the interest of a supplier of goods on retention of title terms and the secured financier of the purchaser of those goods).

The PPSA rules relating to "purchase money security interests" would also apply to retention of title security interests where all or part of the purchase price is secured. As we have explained in previous updates, these rules provide a secured party with 'super priority' over other security interests provided that the secured party adheres to the relevant provisions relating to timing of perfection of security interests.

Bills of lading

Finally, specifically relevant to export situations involving bills of lading, the PPSA provides that a security interest over goods that are in the possession or control of a bailee are automatically perfected as long as the security interest has attached to the goods. However, it is worth noting that the PPSA generally does not apply to an interest of a supplier who has shipped goods to a buyer under a negotiable bill of lading, unless there is evidence of a specific intention to create a security interest in the goods (for example; unless the underlying supply arrangement is itself a security interest).

In summary, this means that suppliers of goods to Australian customers will need to register a financing statement on the Personal Property Securities Register, ideally as soon as possible, but certainly within the time frames prescribed by the PPSA to protect their interest in those goods.

PLC Global Finance update for November 2010: Australia | Practical Law