In contracts where achieving a specific outcome is crucial but the exact steps to reach it are uncertain, parties often include a clause requiring one or both sides to take “reasonable steps” or to use “reasonable endeavours” to reach the desired result. This approach ensures a commitment to the goal while allowing flexibility in how it is pursued. The recent High Court decision in Remediation NZ Ltd v Enviro NZ Ltd confirms what taking “all reasonable steps” requires.

Background

Remediation (NZ) Ltd, part of the Revital Group (Revital), operates a green waste collection and composting facility. Enviro (NZ) Ltd and its subsidiary, Enviro Waste Services Ltd (together Enviro) provide waste collection and disposal services. Revital and Enviro signed a Letter of Intent (LOI) and collaborated on Enviro’s tender submission to the Tauranga City Council (TCC) and Western Bay of Plenty District Council to provide organic waste processing at TCC’s site in Mt Maunganui. The tender was successful.

Enviro then negotiated and signed a services agreement with TCC, but Revital and Enviro failed to agree a services contract between themselves. Revital brought proceedings alleging that Enviro had breached its obligation in the LOI to take “all reasonable steps” to enter into a service agreement with Revital within six months of Enviro’s successful tender.

Was the obligation to take “all reasonable steps” enforceable?

The parties agreed that the LOI was binding, but Enviro argued that the clause requiring it to take “all reasonable steps” to enter into a subcontract with Revital was unenforceable because it was merely “an agreement to negotiate or agree”.

The Court categorised the LOI as a “process contract” and held that the obligation to “take all reasonable steps” to enter into a subcontract was enforceable. It found that the obligation was not merely to “negotiate an agreement in the abstract” and, taking into account the commercial context of the LOI, it was possible to give effect to the obligation in relation to both process and substance.

All reasonable steps

An obligation to take “all reasonable steps” requires the parties to exhaust all reasonable paths or actions but does not require them to overlook their own commercial or reputational interests. The courts will look objectively at the parties’ actions, taking into account the commercial contract and the nature and terms of the contract.

The Court held that Enviro had breached its obligation to take “all reasonable steps” to enter into a services contract with Revital within six months of Enviro’s successful tender, because Enviro failed to consult with Revital, and delayed negotiations with Revital for most of the six-month window. Enviro also delayed informing Revital of matters where TCC was seeking something different from the tender submission solution, which necessarily precluded Revital from having any input in Enviro’s negotiations with TCC. Once Enviro concluded its contracts with TCC, it did not promptly disclose them to Revital. The Court found that Revital was entitled to loss of chance damages (in an amount to be determined). 

Bringing certainty to an uncertain process

A clause requiring parties to take "all reasonable steps" to achieve a desired outcome is valuable when the process is uncertain. However, parties may worry about further uncertainty if the Court is required to determine what steps reasonableness requires. To mitigate this, parties could include in the contract context for the obligation, including:

• Examples of "all reasonable steps": provide clear examples of what the parties expect “all reasonable steps” to include can help avoid miscommunication and clarify expectations.
• Deadlines: set specific deadlines for when “reasonable steps” must be completed.
• Procedural requirements: outline any necessary procedural steps that the parties must take to fulfil their obligations.
• Financial obligations: expressly state whether a party must incur financial obligations as part of taking “reasonable steps”, and if so, up to what amount and for what activities.

By including in the contract context for the obligation to take “all reasonable steps”, parties will have greater certainty as to their desired outcomes, which should reduce the risk of disputes.

Get in touch

If you would like advice on any aspect of the decision or how it might impact your business, please get in touch with one of our experts.

Special thanks to Rosie Dossor for her assistance in writing this article.