20 October 2014
Legal News & Analysis – Asia Pacific – Singapore – Dispute Resolution
“Endeavours clauses” are often used in commercial contracts as a means of qualifying a contracting party’s undertaking with some form of endeavour to achieve the outcome. Despite the wide use of terms like “best endeavours”, “all reasonable endeavours” and “reasonable endeavours”, they are interpreted differently across the common law world.
In this Talking Point, we examine how an endeavours clause was construed in the recent Singapore Court of Appeal case of KS Energy Services Ltd v BR Energy Sdn Bhd [2014] SGCA 16 and contrast this with the English law position.
Singapore Slings Out The English Position
BR Energy and KS Energy entered into a joint venture agreement under which it was agreed that KS Energy would procure the construction and delivery of a workover pulling unit. KS Energy was not obliged to construct the unit itself but was to “use all reasonable endeavours” to ensure it was constructed and ready for delivery within six months.
After obtaining authorisation from BR Energy, KS Energy contracted with Oderco for the construction of the unit and its sale to the joint venture company. Oderco failed to construct the unit by the contractually stipulated deadline. Relations between KS Energy and BR Energy soured. BR Energy ultimately terminated the joint venture agreement and, in the High Court of Singapore, successfully claimed against KS Energy for KS Energy’s failure to use all reasonable endeavours to procure construction and delivery of the unit by the given deadline.
The Singapore Court of Appeal reversed this decision in February, concluding that, in the particular circumstances, KS Energy had discharged its obligation, having taken all reasonable steps that could be expected of it to get Oderco to complete the construction of the unit.
The Singapore Court of Appeal held that in the absence of express provisions clarifying the steps which an obligor has KS Energy had to take to fulfil its endeavours obligation or specifying how the standard to be applied differed from a “best endeavours” obligation, the obligation to undertake “all reasonable endeavours” is no less onerous than a “best endeavours” obligation and there is no practical difference between the two obligations, even if both phrases are used in the same contract. They both require an obligor to take all reasonable steps which a prudent and determined man, acting in the obligee’s interests and anxious to procure the contractually stipulated outcome within the time allowed, would have taken.
The court considered an “all reasonable endeavours” obligation ordinarily to be more onerous than a “reasonable endeavours” obligation since the latter may require an obligor to take only one reasonable course of action, not to exhaust all options.
Guidelines On The Operation And Extent Of An “All Reasonable Endeavours” Obligation
Applying the guidelines laid down by the High Court of Singapore inTravista Development PTE Ltd v Tan Kim Swee Augustine [2000] 2 SLR(R) 474, the Singapore Court of Appeal provided the following guidance on the operation and extent of “all reasonable endeavours” and “best endeavours” clauses:
(a) the obligor has a duty to do everything reasonable in good faith with a view to procuring the contractually stipulated outcome within the time allowed;
(b) the obligor may take into account its own interests;
(c) the obligation is not a warranty to procure the contractually stipulated outcome;
(d) the amount required of the obligor is determined by reference to the available time for procuring the contractually stipulated outcome. The obligor is not required to drop everything and attend to the matter at once; and
(e) an objective test is applied, although determination of breach is a fact-intensive inquiry.
It went on to provide the following additional guidelines:
(a) the obligor must try until the point is reached when all reasonable endeavours have been exhausted;
(b) the obligor need only do that which has a significant or real prospect of success;
(c) if there is an insuperable obstacle to procuring the outcome, the obligor need not attempt to overcome other problems which are capable of resolution;
(d) the obligor is not always required to sacrifice its own commercial interests in satisfaction of its obligations, but it might be required to do so where the nature and terms of the contract indicate that it was in the parties’ contemplation that the obligor should make such sacrifice;
(e) the court may take into account whether the obligor, if the obligor had asked the obligee, might have discovered other reasonable steps; and
(f) once the obligee has pointed to certain steps which the obligor could have taken to procure the contractually stipulated outcome, the burden shifts to the obligor to show that it took those steps, that those steps were not reasonably required or that those steps would have been bound to fail.
Comparison With The English Law Position
The English law position is that the spectrum of endeavours obligations represents a scale of onerousness. “Best endeavours” represents the most rigorous obligation and “reasonable endeavours” the least onerous, with “all reasonable endeavours” sitting somewhere between the two.
A “best endeavours” obligation is onerous. The English Court of Appeal in IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335 described the obligation as requiring that obligors “take all those steps in their power which are capable of producing the desired results…being steps which a prudent, determined and reasonable [obligee], acting in his own interests and desiring to achieve that result, would take”.
It has been held that while a best endeavours clause may require an obligor to incur significant expenditure in the fulfilment of its obligation, it will not be forced to take action which would lead to its financial ruin or to have a flagrant disregard for the interests of its shareholders.
Under English law, “all reasonable endeavours” is the most uncertain of the three endeavours clauses as the scope of such an obligation remains particularly ambiguous.
In contrast with the Singaporean position, English case law suggests there is a distinction between “all reasonable endeavours” and “best endeavours”. While both obligations may require a similar extent of actions to be taken (exhausting all reasonable courses of action), the distinguishing factor is that commercial sacrifice is less likely to be required by a party bound by an “all reasonable endeavours” obligation. The scope of an “all reasonable endeavours” obligation will also be affected by the level of control the obligor has over the obligation, for example the extent to which third party involvement is required to satisfy it.
Consistent with the Singaporean position, the meaning of “reasonable endeavours” has been found to imply a much lower level of obligation. An obligor is allowed to balance the weight of that contractual obligation against all relevant commercial considerations in determining the particular course of action it is required to take. In Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292 (Comm), the English High Court suggested, in relation to “reasonable endeavours”, that an obligor is required to take only one reasonable course of action to achieve the result (which need not be exhaustive of every course available to the obligor), bearing in mind its own commercial interests and the likelihood of success.
The English courts importantly remind parties that it is ultimately the clause in the context of the whole contract which will be examined to determine the extent of the endeavours obligation and that the resulting fact-specific nature of many of these types of decisions means that previous cases have limited precedent value.
Drafting Recommendations
In light of this uncertainty and the fact that agreements governed by a system of common law outside England or Singapore could be interpreted by judges or arbitrators who lean towards either the English or the Singaporean approach or who favour something slightly different, parties should consider whether it is wise to use endeavours clauses in their agreements. If they are to be included, the best approach, if practicable, is to identify in the drafting, with as much clarity as possible, the role of the obligor, the objective to be achieved and the extent of the obligor’s responsibility to achieve it. To avoid ambiguity as to whether the obligor has fulfilled its obligations, parties should consider providing specific examples, including appropriate measurements where relevant, of what the parties intend the obligor to do or not to do. This internal definition can include time limitations, expenses incurred and the performance of specific activities.
Finally, if, during the life of a contract, an obligor is concerned about whether it is satisfying its endeavours obligation, the obligor’s most prudent means of ensuring it has discharged its obligation is to keep its counterparty informed of its progress and to record evidence of the steps it is taking to fulfil it.
Alex Wong, Partner, Hogan Lovells
Jared Raleigh, Hogan Lovells
Hogan Lovells Resolution Practice Profile in Singapore
International (with Local Law Capabilities) Dispute Resolution Law Firms in Singapore