All reasonable endeavours: what are you obliged to do?

“Endeavours” provisions impose an obligation on contracting parties to endeavour to achieve a certain result, commonly in the form of an undertaking to use either ‘best’, ‘reasonable’ or ‘all reasonable’ endeavours to pursue the agreed goal, which may remain outside the control of one or more of the parties. The use of these provisions in the commercial context has become increasingly widespread. Despite this, uncertainty remains as to their legal effect. 

In the July 2013 edition of the Dispute Resolution Bulletin, Associate Adam Richardson reviewed the Singapore High Court’s decision in BR Energy (M) Sdn Bhd v KS Energy Services Ltd (20 March 2013). Earlier this year, the High Court decision was appealed to the Singapore Court of Appeal (KS Energy Services Ltd v BR Energy (M) Sdn Bhd [2014] SGCA 16), and the Court of Appeal took the opportunity to undertake a large-scale comparative study of the law relating to endeavours provisions in various common law jurisdictions, including England, Singapore and Australia, making its decision an important one. The judgment does not set out precise standards and duties, but it does provide valuable guidance and clarification. 

Background

In an agreement between the parties, KS Energy (KSE) was obliged to use ‘all reasonable endeavours’ to ensure that an oil rig was constructed and ready for delivery within six months. To fulfill that obligation, KSE contracted with a third party, Oderco, to construct the rig. Delays ensued and a completed rig was never delivered to BRE. BRE sued KSE for breach of its obligations. 

Decision

The Singapore Court of Appeal held that the test for determining whether an ‘all reasonable endeavours’ obligation has been satisfied should ordinarily be the same as the test for a ‘best endeavours’ obligation. A party must do all it reasonably can, or go on using endeavours until the point is reached when all reasonable endeavours have been exhausted. However, a party need only do what has a significant or real prospect of success in procuring the desired outcome. 

A party need not always sacrifice its financial interests in fulfilling its obligations. The test is whether the nature and terms of the contract in question indicate that it is in the parties’ contemplation that it should make such a sacrifice.

The party alleging breach bears the burden of proof at the outset of a claim, but once it has identified steps which the other party could have taken to procure the contractually-stipulated outcome, the burden usually shifts to that 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 Singapore Court endorsed the view that it may well be part of an ‘all reasonable endeavours’ obligation for the relevant party to inform its counterparty of any difficulties it encounters, so as to ascertain whether the counterparty has a possible solution. This is not an ironclad rule but the court may take it into consideration in determining whether the relevant party has satisfied its ‘all reasonable endeavours’ obligation.

Applying the above principles and overturning the lower court’s ruling, the Singapore Court of Appeal found that KSE was not in breach of its ‘all reasonable endeavours’ obligations. KSE’s behaviour bore all the hallmarks of a prudent and determined company acting in BRE’s interests and anxious to procure the construction and delivery of the oil rig within the time allowed.

The approach taken by the Singapore Court of Appeal is that endeavours clauses will be construed as placing a meaningful requirement on the relevant party, which may be required to sacrifice its own financial interests, but which will be relieved from completing performance of the obligation where it has done what it may reasonably be expected to do in the circumstances. 

The Singapore approach contrasted vcan be with the Australian approach. In Electricity Generation Corporation v Woodside Energy Ltd (5 March 2014), the High Court of Australia was called upon to decide whether a clause requiring sellers to use ‘reasonable endeavours’ to supply a supplemental amount of gas was breached. The sellers were found to have required the buyers to accept gas at higher prices and reduced quantities to that set out in the contract because of a disruption caused by another gas supplier’s plant explosion which had decreased supply and increased the market price. The sellers’ obligation to supply the supplemental gas at the original price and quantities was qualified in the contract by allowing it to take into account “all relevant commercial, economic and operational matters”. The Australian High Court decided that sellers had not breached their endeavours obligation, in part because of the qualification set out in the contract. 

Conclusion

Written agreements should give certainty to what parties have agreed and endeavours obligations inevitably involve an element of uncertainty. The Singapore Court of Appeal’s decision gives helpful guidance on how to understand the obligations imposed by these clauses. A degree of certainty may be injected by including in the contract clear steps to demonstrate what the parties agree constitutes ‘reasonable’ or ‘best’ endeavours.