4 March, 2014
Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution
The Singapore Court of Appeal recently issued its judgement in KS Energy Services Ltd v BR Energy (M) Sdn Bhd [2014] SGCA 16. This landmark decision is the first time the Court of Appeal has set out what is meant by the phrase “all reasonable endeavours” commonly used in many commercial contracts.
In brief, the Court made it clear that there is no practicable difference between a clause requiring a party to use “all reasonable endeavours” and one which requires a party to use “best endeavours”. Both essentially require the party to take all those 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.
The obligation to use “all reasonable endeavours” in this case had been set out in a Joint Venture Agreement (“JVA”) between KS Energy Services Ltd (“KSE”) and BR Energy (M) Sdn Bhd (“BRE”). KSE had been obliged under that clause to use “all reasonable endeavours” to procure the construction and delivery of an oil rig known as a workover pulling unit (“WPU”) by a prescribed deadline.
While the High Court had found that KSE had breached the clause, the Court of Appeal reversed that decision holding that there had been no breach. WongPartnership acted for KSE.
Facts
BRE had, in November 2005, been awarded a contract to charter a WPU to Petronas Carigali Sdn Bhd (“PCSB”). Under the terms of the Letter of Award from PCSB, the WPU was to be delivered to PCSB in Labuan, East Malaysia by 21 March 2006. As BRE’s original partners for the project had by then pulled out, it needed a new partner which could arrange for a replacement rig builder. KSE was approached.
KSE could not itself build the WPU but it was in the business of chartering capital equipment in the oil and gas industry. Through its sources, KSE found a company in the Middle East to build the WPU, and KSE and BRE agreed to form a joint venture to procure the WPU and charter it out. After the JVA was signed, KSE entered into a contract with the Middle Eastern builder, Oderco Inc. (“Oderco”), to construct the WPU by 4 June 2006. Clause 6.2 of the JVA required KSE to:
“use all reasonable endeavours to procure the WPU is constructed and ready for delivery in Abu Dhabi or other location specified by [KSE] within six months after the Charter Agreement is executed.”
Unfortunately for the parties, Oderco turned out to be both unreliable and very difficult to work with. It failed to appreciate the need for urgency or the importance of the deadline. The WPU remained uncompleted in April 2007 when PCSB, after giving various extensions of time, eventually terminated its contract with BRE.
KSE nevertheless continued with the construction of the WPU, moving the partially completed rig out of Oderco’s yard to its recently acquired Dubai yard. However, relations between the parties soured in the latter half of 2007 and BRE terminated the JVA on the grounds that KSE had failed to deliver the WPU on time. It brought a claim for breach of contract, specifically, for failure by KSE to “use all reasonable endeavours to procure the WPU is constructed and ready for delivery” on time. KSE denied breaching the JVA, and counterclaimed for unlawful termination of the JVA by BRE.
“All Reasonable Endeavours” Vs. “Best Endeavours”
As noted above, the Court of Appeal held that in the Singapore context, an “all reasonable endeavours” obligation is ordinarily as onerous as a “best endeavours” obligation. In this regard, it called any attempt to draw a distinction between the two standards merely “a pointless hair-splitting exercise”, with any differences likely to be “more metaphysical than practical”.
The Court held that this would still be the case for parties who use both “all reasonable endeavours” clauses and “best endeavours” clauses in the same contract. The Court stated that the use of both types of clauses in the same contract, without specifying how the standards imposed by the two types of clauses differed, would not be sufficient to indicate an intention to depart from this approach.
Should the parties wish to finely calibrate their obligations, the Court opined that they could do so by expressly defining the obligations under each clause, or by carving out obligations that would otherwise be imposed by the clause in question. In that scenario, where a breach was alleged, the inquiry would be centred on whether the stipulated steps had been taken.
Finally, the Court accepted that an “all reasonable endeavours” obligation was ordinarily more onerous than a “reasonable endeavours” obligation. This was because the latter might require the party to take only one reasonable course of action, and not all of them. However, the Court stated that it would not be helpful to define the applicable standard any further than that.
The Test For “All Reasonable Endeavours” And “Best Endeavours” Obligations
The Court held that the test for both “all reasonable endeavours” and “best endeavours” obligations was therefore for the party bound by them to take all those 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.
It also set out the following guidelines vis-à-vis the operation and extent of both “all reasonable endeavours” and “best endeavours” clauses:
- Such clauses require the party bound by them to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted.
- The party need only do that which has a significant or real prospect of success in procuring the contractually- stipulated outcome.
- If there is an insuperable obstacle to procuring the contractually-stipulated outcome, the party 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 party 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.
- A party cannot just sit back and say that it could not reasonably have 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 party could have taken to procure the contractually-stipulated outcome, the burden ordinarily shifts to the party to show that it took those steps, or that those steps were not reasonably required, or that those steps would have been bound to fail.
The following additional propositions are also noteworthy:
- The obligation is not a warranty to procure the contractually- stipulated outcome.
- The amount or extent of “endeavours” required of the party is determined with reference to the available time for procuring the contractually-stipulated outcome; he is not required to drop everything and attend to the matter at once.
- The test for determining whether the obligation has been fulfilled is an objective test.
Notwithstanding the above Guidelines, however, the Court emphasised that whether an “all reasonable endeavours” or “best endeavours” obligation has been fulfilled in a specific case could only be ascertained through a fact-intensive inquiry.
The Court’s Fact-Intensive Inquiry Applying The “All Reasonable Endeavours” Test
The Court first considered the deadline for procuring the construction and delivery of the WPU. It held that the stipulated deadline indicated the upper limit of KSE’s obligations. While KSE had to use all reasonable endeavours to ensure that the deadline was not breached, it did not have to try any harder to bring about an earlier delivery. It further held that KSE’s obligation to exercise all reasonable endeavours continued beyond the relevant deadline should the WPU be incomplete by that time.
The Court noted that KSE’s employees were persistent in pushing Oderco to perform. They stepped in to the extent that was reasonable when persuasion proved ineffective – deploying staff to Oderco’s yard, assisting with the procurement of critical equipment, and making sizable payments on behalf of Oderco to ease its cash flow issues. Most tellingly, KSE eventually took over the construction of the WPU itself. It obviously wanted to have the WPU completed. The Court held that KSE’s conduct bore all the hallmarks of a prudent and determined company acting in BRE’s interests and anxious to procure the completion of the WPU within the time allowed.
The Court rejected BRE’s assertion that KSE should have deployed its own personnel to Oderco’s yard to supervise the construction of the WPU from the outset. It noted that the parties could have expressly stated in the JVA the terms on which KSE would contract with the WPU builder, in particular, that KSE should be allowed to have on-site supervision. The parties chose however to make provision for only the specifications, equipment, and inventory of the WPU. In so doing, BRE left it to KSE to negotiate the terms on which the WPU would be constructed by Oderco. It could not have been assumed that KSE would have to secure so intrusive a right vis-à-vis the third party builder as to station its representatives in the latter’s compound throughout the construction of the WPU, nor that it would be entitled to supervise the construction.
The Court also rejected the contention that KSE should have taken a more hardline approach with Oderco from the beginning. It noted that a party in KSE’s position will often have to choose between conflicting courses of action, and in so choosing, will have to exercise its judgment to determine which would be the most efficacious in the circumstances. A party should not be faulted for making a choice that was only revealed to be ineffective after the fact.
In any event, the Court was of the view that the hardline approach was only one possible approach, and it was not even the approach that was most likely to succeed. The Court noted that KSE had acted eminently sensibly in applying increasing pressure on Oderco by rachetting upward the vigour of its objections. It further had regard to the parties’ unfamiliarity with the operating environment or the bounds of acceptable business dealings in the Middle East and noted that there might have been cultural sensitivities that would have rendered a hardline approach inadvisable.
The Court was also mindful of the heated state of the rig building market at the relevant time which placed KSE in a disadvantageous bargaining position vis-à-vis Oderco.
In the final analysis, the Court of Appeal noted that a distinction must be drawn between an obligation to use all reasonable endeavours to have a third party do a thing (which was the position KSE was in) and an obligation to use all reasonable endeavours to do that thing on one’s own.
Based on all the facts, the Court therefore held that KSE had not breached its obligation to use all reasonable endeavours.
Our Comments / Analysis
The case provides useful guidance on the interpretation of “endeavours” clauses or obligations which are often found in contracts but infrequently considered by the courts here. It clarifies the local position on the standard imposed by an “all reasonable endeavours” clause which had not been considered by the Singapore courts previously, and on which there was a divergence of views expressed in the UK and Australian cases. The decision makes clear that an “all reasonable endeavours” clause does not set a lower standard of conduct than a “best endeavours” clause.
Looking at the Court of Appeal’s application of the test to the specific facts of the case, it adopted a nuanced approach that took into account the commercial realities and dynamic circumstances that the parties were faced with.
In light of this decision, a party who is to receive the benefit of such “endeavours” clauses and who require the counterparty to take certain steps to that end may wish to consider specifying such steps in the contract. In this case, BRE was precluded from contending that KSE should have provided for on-site supervision from the outset when this was not specified in the JVA.
Alvin Yeo, WongPartnership
Chan Hock Keng, WongPartnership
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