In KS Energy Services Ltd v BR Energy (M) Sdn Bhd [2014] SGCA 16, the Singapore Court of Appeal has laid down important guidelines concerning the construction of ‘endeavours’ clauses that are frequently encountered in commercial contracts.

BR Energy (M) Sdn Bhd (BRE) was awarded a tender by Petronas Carigali Sdn Bhd for the provision of a rig known as a workover pulling unit or WPU (the Project). BRE in turn contracted with other companies for the construction of the rig. Those other companies subsequently decided not to proceed with the venture and KS Energy Services Ltd (KSE) agreed to take their place. Six months before the Project deadline, KSE nominated Oderco as the rig builder for the Project on the basis that Oderco agreed to deliver the rig within five months, whereas other rig builders who had been approached had estimated an eight- to ten-month delivery time-frame.

KSE and BRE then entered into a joint venture agreement (JVA). That agreement required a joint venture company to be incorporated and to acquire the WPU from Oderco once constructed. KSE’s principal obligation was reflected in clause 6.2 of the JVA:

“6.2 [KSE] shall use all reasonable endeavours to procure that 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.”

After obtaining authorisation from BRE, KSE contracted with Oderco for the construction of the WPU and sale to the joint venture company. As events unfolded, Oderco failed to construct the WPU despite efforts by KSE to remind and demand Oderco to do so. Relations between KSE and BRE soured and BRE ultimately claimed against KSE for its failure to undertake “all reasonable endeavours” to procure construction and delivery of the WPU.

At trial, BRE succeeded in arguing that KSE had failed to use all reasonable endeavours. The Court of Appeal has now reversed this decision, finding that KSE had discharged its obligation. The Court accorded significant weight to the testimony of BRE’s chief executive officer who stated that BRE was never dissatisfied with KSE’s efforts to procure the timely construction of the WPU. This was consistent with the contemporaneous evidence, which revealed no trace of disgruntlement from BRE over the course of action taken by KSE or demands that KSE take a different course.

In its judgment, the Court set out some practical guidelines in relation to ‘endeavours’ clauses. Three points of drafting and practical importance emerge from this discussion.

First, the ‘endeavours’ clause itself is to be construed in the context of the contract as a whole. The ambit of such clauses will vary between contracts, ultimately turning on the context and terms of the agreement in question. Importantly, such a clause is not a warranty to procure a particular state of affairs. In practice, the obligation to undertake “all reasonable endeavours” is no less onerous than “best endeavours”, and any difference between them is semantic (even if both phrases are used in the same contract). Although each case will turn on its own facts, the court made some general observations about “all reasonable endeavours”. For instance, it was held that the obligor need only take steps that have a real prospect of procuring the contractually stipulated outcome. It need not sacrifice its own commercial interests in pursuit of satisfying the ‘endeavours’ obligation save where the nature and terms of the contract indicate that it was in the parties’ contemplation that the obligor should make that sacrifice. In addition, where the obligee identifies certain steps for the obligor to undertake in discharging its ‘endeavours’ obligations, the burden will shift to the obligor to show either that it took those steps, or that those steps were not reasonably required, or that those steps were bound to have failed.

Accordingly, careful drafting can provide greater clarity as to each party’s obligations under such an ‘endeavours’ clause. In the context of joint venture agreements, it would be prudent for the parties to detail the nature of their co-operation, including whether any party claims to supply specialist expertise and/or places special reliance on that of the other party, and whether the parties intend jointly to oversee all aspects of the venture or whether they intend for each party to be separately and principally responsible for particular tasks. Second, the subject matter of the ‘endeavours’ clause may be determinative of its scope. Thus, the Court drew a distinction between an obligation to procure a third party to carry out an act and an obligation to perform that act. The court suggested that the former may be a less onerous obligation since the relationship between the obligor and the third party would affect the scope of the obligor’s duties. Where the obligor is not in a position to influence the third party, its obligations would be less onerous. By extension, where the obligor is able to influence or has had past dealings with the third party whose assistance it is procuring, the obligor may be held to a higher standard of responsibility. In the present case, KSE had limited influence over Oderco’s ability to construct the WPU in time and, accordingly, was not required to take more onerous steps such as commencing proceedings against Oderco or demanding on-site supervision of the WPU’s construction.

Third, it would appear that the obligor’s most prudent means of ensuring it has discharged its responsibilities under an ‘endeavours’ clause is to maintain an active channel of communication with the obligee in relation to the reasonable courses of action available. This is significant in two respects. First, an obligor who relies solely on its unilateral survey of the reasonable courses of action available to it does so at its own peril, as the court held that the obligor is duty bound to take steps that it would have discovered had it consulted with the obligee. Second, and on a more practical note, regular consultation with the obligee and the obtaining of its affirmation on the obligor’s chosen course of action would make it difficult for the obligee to assert at a later date that the obligor should have done something more or differently.