In KS Energy Services Ltd v BR Energy (M) SDN BHD, the Singapore Court of Appeal (its highest court and court of final appeal) for the first time ruled on the meaning of the contractual phrase “all reasonable endeavours”. This is a contractual phrase commonly used in construction contracts and the judgment is therefore of interest to the construction industry.
The Singapore High Court had held that KS Energy, the Appellant, was liable for breaching a joint venture agreement for having failed to use “all reasonable endeavours” to procure construction and delivery of an oil rig by a prescribed deadline. However, the Court of Appeal allowed KS Energy’s appeal, finding that it had not breached its obligation to use “all reasonable endeavours”, having done all that could reasonably have been required of it. The Court of Appeal ruled as follows in relation to the meaning of such contractual phrases:-
- Various phrases such as “reasonable endeavours”, “all reasonable endeavours” and “best endeavours” are widely used in contracts to formulate non-absolute obligations. Where such phrases are used in written agreements, the court’s role is to interpret those phrases and in doing so, will ascertain the meaning which the expression would convey to a reasonable person having all the background knowledge which would have reasonably been available to the parties at the time of the contract. i.e. an objective test.
- There was little or no relevant difference between “all reasonable endeavours” and “best endeavours”. “All reasonable endeavours” was ordinarily as onerous as “best endeavours” and the test for determining whether an “all reasonable endeavours” obligation had been fulfilled should ordinarily be the same as the test for determining whether a “best endeavours” obligation has been fulfilled, i.e. whether the obligor (the person bound by such clause) had taken all reasonable steps, in good faith, which a prudent and determined man, acting in the interests of the obligee (the person to receive the benefit of the clause) and anxious to procure the contractually stipulated outcome within the time allowed, would have taken.
- The above test should ordinarily apply, even if the parties use a variation of the phrase “all reasonable endeavours” or “best endeavours” (as the case may be). However, the test may not be entirely applicable where the parties expressly stipulate the steps which are to be taken by the obligor to discharge its “all reasonable endeavours” or “best endeavours” obligation, in which case, the inquiry would be centred on whether the stipulated steps had been taken. It should also be emphasised that whether an “all reasonable endeavours” or “best endeavours” obligation had been fulfilled could only be ascertained through a fact-sensitive inquiry.
- The use of both “all reasonable endeavours” and “best endeavours” in the same contract, without specifying how the standards imposed by the two clauses differed, would not be sufficient to indicate that they were to mean different things. Without the parties specifying how these two types of “endeavours” obligations differed and what steps were required to fulfil each type, any attempt to draw a distinction between them would merely be a pointless, hair-splitting exercise. If parties wished to finely calibrate their obligations, they could do so by expressly defining or otherwise carving out the obligations.
- An “all reasonable endeavours” obligation is ordinarily more onerous than a “reasonable endeavours” obligation because the latter might require the obligor to take only one reasonable course of action and not all of them. A “reasonable endeavours” obligation is also not subject to the test referred to at (2) above. An obligor under a “reasonable endeavours” obligation merely had to act reasonably to procure the contractually-stipulated outcome.
The Court endorsed the following guidelines as applicable to the operation and extent of “all reasonable endeavours” and “best endeavours” clauses:-
- Such clauses require 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.
- If there is an insuperable obstacle to 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 the obligor should make such sacrifice.
- An obligor 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 obligee, it might have discovered that there were other steps which could reasonably have been taken.
- Once the obligee 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.
This case provides a useful summary of common law countries’ judgments in relation to the various types of “endeavours clauses” and illustrates how a party bound by such clause might satisfy their obligations under such. However, it should be remembered that ultimately, each case has to be resolved on its own facts and, as the Singapore Court of Appeal said, the same “endeavours formulation when used in different factual matrices, does not necessarily have the same or similar meaning or implication”.
The case also highlights the importance of carefully drafting “endeavours clauses” and being clear about what they mean. Parties would be well advised, where possible, to specifically define such clauses in their contracts so that there can be no doubt as to their meaning. Further, if different types of endeavours clauses are used in the same contract, with each imposing a different standard of conduct, this again should be expressly stated, where possible, with the obligations under each clause expressly defined.