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Singapore – The Interpretation Of “All Reasonable Endeavours” Clauses In Commercial Contracts.

2 October 2014

 

In the landmark case of KS Energy Services Ltd v BR Energy (M) Sdn Bhd [2014] 2 SLR 905, the Singapore Court of Appeal (“CA“) has set out for the first time a decisive interpretation of a “all reasonable endeavours” clause/obligation. “Endeavours” clauses are often of significant importance in commercial contracts; and the CA’s judgment is timely and immensely helpful in clarifying the local position on the scope of such obligations.

 

Brief Facts 

 

BR Energy (M) Sdn Bhd (“BRE“) and KS Energy Services Ltd (“KSE“) had entered into a joint venture agreement (“JVA“) to inter alia procure the construction and delivery of an oil rig by a prescribed deadline. Clause 6.2 of the JVA set out the following obligation:

“6.2 [KSE] shall use all reasonable endeavours to procure the [oil rig] is constructed and ready for delivery in Abu Dhabi or other location specificed by [KSE] within six months after the Charter Agreement is executed.” (emphasis added).

 

The CA’s Holding 

 

The CA noted that various phrases such as “reasonable endeavours”, “all
reasonable endeavours” and “best endeavours” are widely used to formulate non-absolute obligations. While this suggested a distinction between the different standards of obligation, the CA also noted that there appeared to be no consensus on the
meaning of these phrases.

 

After careful consideration of English and Australian authorities, the CA held that:

 

(a) The general approach would be that there was little or no relevant practical distinction between “best endeavours” and “all reasonable endeavours” clauses, even if both types of clauses appeared in the same contract. A distinction could possibly occur if parties specified how the two types of obligations differed and what steps are required to fulfil each type of “endeavours” obligation.

 

(b) The CA did however accept that “all reasonable endeavours” clauses were ordinarily more onerous than “reasonable endeavours” obligations as the latter might require a party bound by the clause (“the Obligor”) to only take one reasonable course of action, and not all of them but declined to define the applicable standard any further than that.

 

(c) Accordingly, the CA affirmed that the test for “best endeavours” clauses would ordinarily apply to “all reasonable endeavours” clauses i.e. that the Obligor had to take all reasonable steps which a prudent and determined man, acting in the counterparty’s interests and anxious to procure the contractually-stipulated outcome within the available time, would have taken.

 

(d) Further, the CA laid down a set of helpful guidelines clarifying the extent and operation of both “all reasonable endeavours” and “best endeavours clauses”:

 

  • Such clauses require the Obligor to go on using endeavours till all reasonable  endeavours have been exhausted.
  • If there is an obstacle that is impossible to overcome in the course of procuring the contractually-stipulated outcome, the Obligor is not required to do anything more to overcome other problems which also stood in the way of procuring that outcome but which might have been resolved.
  • The Obligor is not always required to sacrifice its own commercial interests in satisfaction of its obligations but it may be required to do so where the nature and terms of the contract indicate that it is in the parties’ contemplation that it should make such a sacrifice.
  • An Obligor cannot just sit back and claim it could not have reasonably done more to procure the contractually stipulated outcome in cases where if, it had asked the counterparty, it might have discovered that there were other steps which could reasonably have been taken.
  • Once the counterparty points to certain steps which the Obligor could have taken, the burden ordinarily shifts to the Obligor to show that it took those steps, or that those steps were not reasonably required or bound to fail.

 

(e) The CA also emphasised that whether an “all reasonable endeavours” obligations or “best endeavours” obligation had been fulfilled can only be ascertained through a fact-intensive inquiry.

 

Recommendations 

 

Such “endeavours” clauses are very much a feature of the modern commercial contract, and the decision by the CA goes very much toward clarifying the law in this aspect. Commercial parties should note that the CA’s decision appears to be primarily aimed at promoting commercial certainty and aligning the contractual interests of commercial parties.

 

The standards of such “best endeavours” and “all reasonable endeavours” obligations may appear onerous at times, and given commercial realities, an Obligor may wish to consider stipulating the specific steps required to discharge either obligation in order to protect its commercial interests.

 

Further, if parties wish to make a distinction between “best endeavours” and “all reasonable endeavours” standards, they may wish to consider specifying such distinctions within the contract.

 

 
 
For further information, please contact:

 

Ang Kai Wen, ATMD Bird & Bird

kaiwen.ang@twobirds.com

 

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