The Singapore Court of Appeal considers the meaning of the phrase "all reasonable endeavours" for the first time

In KS Energy Services Ltd v BR Energy Sdn Bhd [2014] SGCA 16, the Singapore Court of Appeal considered whether the Respondent had breached its obligation to use "all reasonable endeavours" to procure the construction and delivery of an oil rig by a certain date.  In a judgment which draws from many English and Australian authorities on this issue, the Court concluded that, in the particular circumstances, the Respondent had not breached this obligation.  In doing so, the Court clarified the scope of the "all reasonable endeavours" obligation, as well as its interaction with its peers, the "best endeavours" and "reasonable efforts/endeavours" obligations. In this post, Alastair Henderson and Elizabeth Kantor take a detailed look at how the Singapore Court will approach clauses that include a "best endeavours" or "all reasonable endeavours" obligation and provide some tips on dealing with such clauses in practice.

Background

BRE, a Malaysian company, obtained a tender to provide Petronas (the "Petronas Contract") with an oil rig known as a workover pulling unit (a "WPU").  Pursuant to the terms of the Petronas Contract, the WPU was to be delivered to Labuan in East Malaysia by a specific deadline.

After BRE's original rig builder pulled out of the project, BRE was introduced to KS Energy Services Ltd ("KSE"), who agreed to assist BRE in identifying an alternative rig-builder.  Once KSE had identified a builder, BRE and KSE entered into a Joint Venture Agreement (the "JVA") whereby it was agreed that once the WPU had been built, KSE would sell it to a joint venture company who would then charter it to BRE. 

Pursuant to clause 6.2 of the JVA, KSE was under an obligation to use "all reasonable endeavours" to procure the construction and delivery of the WPU from the builder within six months of the execution of the charter agreement. 

The builder proved to be an unreliable partner. The project was fraught with delays and difficulties and, as a result, the WPU was not ready by the contractually-stipulated deadline.  Petronas eventually terminated its contract with BRE.

BRE's claim

BRE alleged that KSE had breached its obligation under clause 6.2 of the JVA, which had the knock-on effect of putting BRE in breach of its own obligations under the Petronas Contract.  In particular, BRE argued that KSE should have acted more expeditiously to forestall problems and that its failure to deploy its own personnel at the builder's yard from the outset constituted a breach of contract.

KSE denied breaching the JVA and brought a counterclaim for, amongst other things, wrongful termination of the JVA.  KSE pointed to the following steps that it had taken to satisfy its obligation to use "all reasonable endeavours":

• It had put continuous pressure on the builder to perform via correspondence;
• It had deployed representatives to the builder's yard to monitor the construction of the WPU, initially once a month but later deploying a permanent representative there; and
• Upon learning that the builder was experiencing cash-flow problems, it had paid the builder's suppliers directly, airfreighting critical equipment to the construction site and had also lent money to the builder to procure certification of the WPU's sea-worthiness.

KSE also argued that once it became obvious that the builder was unlikely to be able to deliver the WPU on schedule, it would not have been possible within the timeframe to engage another rig builder. 

Standard set by the "all reasonable endeavours" obligation

Although the Singapore Court of Appeal had previously ruled on the interpretation of a "best endeavours" obligation, this was the first time that it had considered an "all reasonable endeavours obligation".  However, in the absence of express provisions clarifying what steps are required to fulfill each obligation or distinguishing between the two, the Court considered that there is little or no relevant difference between the two standards.  It therefore applied the "best endeavours" standard handed down in the case of Travista Development Pte Ltd v Tan Kim Swee Augustine and others [2008] 2 SLR(R) 474.  The Court also clarified that, where both formulations are used in the same contract without specifying how they might differ, this would be insufficient to indicate an intention to depart from the test in Travista.  Pursuant to that test, KSE was obliged to behave as "a prudent and determined man, acting in the interests of the beneficiary of the obligation and anxious to procure the contractually-stipulated outcome within the time allowed".

In the circumstances, the Court determined that KSE had discharged its obligation, and accordingly that BRE had wrongfully terminated the JVA.  In reaching this judgment, the Court handed down the following guidance on the operation and extent of both "all reasonable endeavours" and "best endeavours" clauses, which it drew from an analysis of English, Australian and Singaporean case law:

• Such clauses require the party bound by the obligation (the "obligor") to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted;
• The obligor need only do that which has a significant or real prospect of success in procuring the contractually-stipulated outcome.  However, such obligations are continuing, even if a contractually-stipulated deadline is missed: an obligor cannot suddenly "down-tools";
• If there is an insuperable obstacle to procuring the outcome, the obligor is not required to do anything more to overcome other obstacles which it might be possible to resolve;
• Importantly, the obligor is not always required to sacrifice its own commercial interests in satisfaction of its obligations.  However, it may be required to do so where the nature and terms of the contract indicate that it is in the parties' contemplation that the obligor should make such a sacrifice; and
• It may be reasonable in the circumstances for the obligor to inform the beneficiary that it is encountering difficulties in procuring the stipulated outcome, and this may be a factor that the court takes into account when determining whether the obligor has complied with its obligation.

In terms of the burden of proof, it was held that once the party receiving the benefit of the clause points to certain steps which the obligor could have taken to procure the contractually-stipulated outcome, the burden ordinarily shifts to the obligor 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 Court also confirmed that it considered an "all reasonable endeavours" obligation ordinarily to be more onerous than a "reasonable endeavours" obligation.  In relation to the latter, less onerous, obligation, the Court held that the obligor merely has to act reasonably to procure the contractually-stipulated outcome.

Comment

Although the scope of and standard set by any "endeavours" obligation will ultimately depend on the particular factual and contractual context, this detailed judgment provides welcome clarification as to how the Singapore Court will approach these clauses.

Whilst "endeavours" clauses are a useful means of qualifying a party's obligations (either because the obligation necessitates the procurement of something from a third party, or because a party is unwilling to commit to undertake an absolute obligation) this decision serves as a helpful reminder that the drafting of such obligations must be considered carefully.  In particular, and to the extent possible, it is advisable for parties to expressly stipulate the scope of such an obligation in the contract itself, especially if the obligation requires the obligor to sacrifice its own interests, for example by incurring significant expense.  Moreover, if, during the life of a contract, an obligor is concerned about whether it is satisfying its obligation, it would be well-advised to keep its counterparty informed of its progress and where necessary to seek advice as to how it can ensure it meets its contractual obligations.

For further information, please contact Alastair Henderson or Elizabeth Kantor.