Case Note
| Citation | (2015) 27 SAcLJ 250 |
| Author | TAN Tian Yi BA (Oxford) (Hons), LLM (Harvard). |
| Date | 01 December 2015 |
| Published date | 01 December 2015 |
THE INTERPRETATION OF ENDEAVOURS CLAUSES
KS Energy Services Ltd v BR Energy (M) Sdn Bhd
Electricity Generation Corp v Woodside Energy Ltd
Jet2.com Ltd v Blackpool Airport Ltd
Contractual clauses to use “best endeavours”, “all reasonable endeavours” and “reasonable endeavours” have never received much academic attention, even though they are commercially important as flexible alternatives to absolute contractual obligations. The Singapore Court of Appeal recently considered the interpretation of endeavours clauses in the case of KS Energy Services Ltd v BR Energy (M) Sdn Bhd[2014] 2 SLR 905 (“KS Energy Services”). This case note discusses the significance and implications of KS Energy Services, in the light of two related judicial decisions from the High Court of Australia and the English Court of Appeal.
1 The interpretation of contractual clauses to use “best endeavours”, “all reasonable endeavours” and “reasonable endeavours” has come to the forefront of judicial analyses lately with the recent Singapore Court of Appeal judgment of KS Energy Services Ltd v BR Energy (M) Sdn Bhd1 (“KS Energy Services”). Though endeavours clauses have never received significant academic attention, being a specific instance of contractual interpretation, they are of considerable commercial importance in Singapore and other common law jurisdictions. Endeavours clauses are common features in international loan contracts,2 distributorship agreements,3 employment contracts and
construction contracts, as they can be interpreted flexibly to adapt to various commercial situations. It has been suggested that the popularity of such clauses can be attributed to the absence of a common law duty to negotiate in good faith, and a “contracting party's aversion towards absolute contractual duties and potential liability, where the contractually-stipulated outcome[s] are not entirely within his control”.42 The High Court of Australia and the English Court of Appeal have also recently discussed the interpretation of endeavours clauses in Electricity Generation Corp v Woodside Energy Ltd5 (“Electricity Generation Corp”) and Jet2.com Ltd v Blackpool Airport Ltd6 (“Jet2.com Ltd”), respectively. This case note will focus on the reasoning and implications of the Singapore Court of Appeal's judgment in KS Energy Services, in light of the Australian and English approaches to interpretation espoused in Electricity Generation Corp and Jet2.com Ltd.
3 In KS Energy Services, KS Energy Services Ltd (“KSE”) contracted with BR Energy (M) Sdn Bhd (“BRE”), under cl 6.2 of a joint venture agreement, to use “all reasonable endeavours” to procure the construction and delivery of an oil rig within six months after a charter agreement was executed. KSE subsequently engaged a third-party rig builder, Oderco Inc (“Oderco”), to complete the work. Oderco ultimately failed to deliver the oil rig on the stipulated deadline despite the fact that the deadline had been revised a number of times. The joint venture agreement between KSE and BRE was later terminated.
4 BRE alleged that KSE breached cl 6.2 of the agreement, and that KSE had failed to take reasonable steps to ensure the timely completion of the project. The Singapore Court of Appeal held that KSE did not breach cl 6.2, since it had monitored the goings-on at Oderco and, amongst other things, deployed its own employee to Oderco's yard to supervise the project, assisted in the procurement of pieces of critical
equipment, and paid salaries of Oderco's staff. The court held that these sufficed to discharge the “all reasonable endeavours” obligation.5 In its judgment, the Singapore Court of Appeal provided helpful clarification on the interpretation of endeavours clauses. First, it held that there was little or no relevant difference between the standard of conduct constituted by the formulation “all reasonable endeavours” and that constituted by the formulation “best endeavours”, but that “all reasonable endeavours” clauses were ordinarily more onerous than “reasonable endeavours” clauses. Second, it held that “all reasonable endeavours” and “best endeavours” clauses required the obligor to take “all those reasonable steps which a prudent and determined man, acting in the interests of the obligee and anxious to procure the contractually-stipulated outcome within the available time, would have taken” [emphasis in original],7 though it was not necessary for the obligor to disregard his own commercial interests. This case note will discuss these observations in turn.
A. No distinction between “all reasonable endeavours” and “best endeavours ”
6 In KS Energy Services, the Singapore Court of Appeal clarified that there was no meaningful difference between an obligation to use “all reasonable endeavours” and “best endeavours”. The court noted that UK case law was inconclusive on the issue, before going on to hold that, “any attempt to draw a distinction between them would merely be a pointless hair-splitting exercise”8 if the parties did not expressly specify the differences between the two types of endeavours obligations. The competing approach, set out in the English cases of UBH (Mechanical Services) Ltd v Standard Life Assurance Co9 and Jolley v Carmel Ltd,10 is that the terms “reasonable endeavours”, “all reasonable endeavours” and “best endeavours” represent a spectrum of obligations, with “best endeavours” being the most onerous and “reasonable endeavours” being the least onerous. Under this approach, there would be a marked difference between an obligation to use “all reasonable endeavours” and “best endeavours”.
7 It is submitted that the approach taken by the Singapore Court of Appeal is more desirable in this instance as it embodies the contextual approach towards contractual interpretation set out in Sembcorp Marine Ltd v PPL Holdings Pte Ltd11 (“Sembcorp Marine”) and Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd.12 In Sembcorp Marine, the Singapore Court of Appeal noted that Singapore courts had adopted the “contextual approach” to interpretation. Under the contextual or purposive approach to interpretation, a judge seeks to determine the common intention of the parties from the commercial context. The gist of this is that the interpretation of any particular contractual term must accord with business common sense;13 the literal or ordinary meaning of words, though starting points for analyses, are no longer of paramount importance.
8 By contrast, the English cases which draw categorical distinctions between the different types of endeavours clauses seem to adopt the traditional view of contractual interpretation, under which a relatively strict or formal approach to language is adopted. Under the traditional approach to contractual interpretation, the common intentions of the parties are to be discerned from the “‘plain’ or ‘natural and ordinary meaning’ of the language which [the parties] have employed”.14 It is submitted that the contextual approach is more appropriate for endeavours clauses, which evolved in response to a need for commercial flexibility in the first place. Businessmen may not consciously intend any difference between “best endeavours” and “all reasonable endeavours”, and an overly literal approach towards contractual interpretation is inappropriate.
9 In essence, the Singapore Court of Appeal's position is that “all reasonable endeavours” and “best endeavours” will be construed in a similar fashion unless contracting parties expressly describe the differences between the content of those obligations. This is in line with the contextual approach to interpretation. Further, the Singapore Court of Appeal noted that contracting parties “would be well advised to specify the objective to which all reasonable endeavours are to be directed and the criteria by which the endeavours are to be judged, even if the ‘endeavours’ clause in question is enforceable in the absence of such specifications”.15 This approach incentivises contracting parties to
draft their contracts in more specific terms, enhancing legal certainty whilst retaining commercial flexibility.B. Distinction between “all reasonable endeavours” and “reasonable endeavours ”
10 Even though the Singapore Court of Appeal declined the proposition that there was a difference between “best endeavours” clauses and “all reasonable endeavours”, it acknowledged that there was a distinction between an obligation to use “all reasonable endeavours” and “reasonable endeavours”,16 the former being more onerous than the latter.
11 In Electricity Generation Corp, the High Court of Australia went further, drawing no distinction between “reasonable endeavours” and “best endeavours” clauses, even though this was somewhat the result of the litigants' failure to argue that the clauses ought to be interpreted differently. The High Court of Australia noted that:17
Contractual obligations framed in terms of ‘reasonable endeavours’ or ‘best endeavours (or efforts)’ are familiar. Argument proceeded on the basis that substantially similar obligations are imposed by either expression. [emphasis added]
12 If one accepts, as the Singapore Court of Appeal did, that there is no material difference between “all reasonable endeavours” and “best endeavours”, the High Court of Australia's obiter dicta in Electricity Generation Corp implies that there is no difference between “all reasonable endeavours” and “reasonable endeavours” either. The same can be said of the view articulated by the Hong Kong Court of First Instance in Tin Shui Wai...
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