KS Energy Services Ltd v BR Energy (M) Sdn Bhd

• Court: Court of Appeal (Singapore)
• Judge: Sundaresh Menon CJ
• Judgment Date: 26 February 2014
• Neutral Citation: [2014] SGCA 16
• Citation: [2014] SGCA 16
• Defendant Counsel: Philip Jeyaretnam SC, Ling Tien Wah, Koh Kia Jeng, Ng Hui Min and Germaine Tan (Rodyk & Davidson LLP)
• Published date: 07 May 2014
• Plaintiff Counsel: Alvin Yeo SC, Chan Hock Keng, Alma Yong and Benjamin Fong (WongPartnership LLP)
• Hearing Date: 25 September 2013
• Docket Number: Civil Appeal No 46 of 2013
• Date: 26 February 2014
• Subject Matter: Contract

V K Rajah JA (delivering the judgment of the court): Introduction

This is an appeal against the decision of the High Court in BR Energy (M) Sdn Bhd v KS Energy Services Ltd [2013] 2 SLR 1154 (“the Judgment”), in which the judge (“the Judge”) found the appellant, KS Energy Services Ltd (“KSE”), liable for breaching a joint venture agreement which it had entered into with the respondent, BR Energy (M) Sdn Bhd (“BRE”). Specifically, the Judge found that KSE had breached its obligation to use “all reasonable endeavours” to procure the construction and delivery of an oil rig known as a workover pulling unit (“WPU”) by a prescribed deadline (see the Judgment at [137]).

This case provides an opportunity to clarify the content of provisions which impose an obligation on a party to exercise “endeavours” in a particular regard (“‘endeavours’ clauses” or “‘endeavours’ obligations” for short). It also illustrates how a party bound by such a provision might satisfy its obligations in the face of dynamic (and often unforeseen) circumstances, unfamiliar settings and sometimes intransigent third parties. “Endeavours” clauses are often found in contracts, but infrequently considered by the courts here. To facilitate our discussion of these clauses, we shall, where appropriate in this judgment, refer to: (a) a party who is bound by such a clause as an “obligor”; (b) a party who is to receive the benefit of such a clause as an “obligee”; and (c) the outcome which the obligor is to exercise “endeavours” to procure as the “contractually-stipulated outcome”.

“Endeavours” clauses are often of considerable importance in commercial settings. As this court noted in Ng Giap Hon v Westcomb Securities Pte Ltd and others [2009] 3 SLR(R) 518, the doctrine of good faith remains a fledging doctrine in both English and Singapore contract law. Until and unless the theoretical foundations and architecture of the doctrine are settled, our courts cannot imprecisely endorse an implied duty of good faith in the local context (at [47]–[60]). Parties to a contract governed by Singapore law therefore do not ordinarily have either the burden or the benefit of a general obligation to conduct themselves in accordance with an ascertainable standard of commercial behaviour. To address this lacuna, express “endeavours” clauses are often introduced into written contracts to regulate the parties’ obligations. However, as will be seen, notwithstanding the relative prevalence of such clauses, there remains a degree of uncertainty as to what legal responsibilities they might entail. As our discussion in this judgment will illustrate, the wealth of case law from across the various common law jurisdictions provides some degree of insight, but ultimately, each case will have to be resolved on its own facts. The same “endeavours” formulation, when used in different factual matrices, does not necessarily have the same or a similar meaning or implication.

The background

The facts of this case are as follows. BRE is a Malaysian company which provides services in the oil and gas industry. On or around 11 August 2005, BRE submitted a tender to Petronas Carigali Sdn Bhd (“PCSB”) for the provision of a WPU. BRE was supported in this tender submission by an oilfield services provider known as China Oilfield Service Limited (“COSL”), for which it was the exclusive Malaysian representative. The WPU was to be based on an existing design, and was to be constructed by a rig construction company known as RG Petro-Machinery Co Ltd (“RG”). The construction of this WPU will hereafter be referred to as “the WPU project” where appropriate.

BRE’s tender submission was successful. On 21 November 2005, PCSB issued a letter of award to BRE (“the Letter of Award”), and a contract between them (“the PCSB contract”) came into existence. Under the terms of the Letter of Award, the WPU was to be delivered to PCSB in Labuan, East Malaysia, no later than 120 days from the date of award, ie, by 21 March 2006. Unbeknownst to PCSB, COSL and RG had pulled out of the WPU project sometime in October 2005 because RG would not have been able to fulfil the order. BRE was still keen on pursuing the WPU project, but needed a new partner which could arrange for a rig builder to replace RG. COSL’s Director of Marketing, Lim Hong Khun (“LHK”), sought to assist BRE in his private capacity. He contacted a business acquaintance, Tan Fuh Gih (“TFG”), an Executive Director of KSE, to seek KSE’s assistance to find a rig builder for BRE.

KSE is in the business of chartering capital equipment in the oil and gas industry. It would appear that BRE and KSE (collectively referred to hereafter as “the Parties” where appropriate) did not have a pre-existing relationship, and KSE’s involvement in the WPU project was solely the result of LHK’s introduction. The Parties searched for alternative rig builders in October and November 2005, but these efforts came to nought. There was a great demand for rigs at the time, and it was difficult to find a rig builder which could build the WPU within the time frame imposed by PCSB at a viable cost. A rig builder known as Oderco Inc (“Oderco”) was eventually identified by one of KSE’s Middle Eastern contacts sometime in late November 2005 after the Letter of Award was issued. On 29 November 2005, TFG e-mailed LHK to tell him that he had just returned from Oderco’s yard in the United Arab Emirates, and that Oderco had given a quotation with delivery in Abu Dhabi estimated at five months. Other rig builders had estimated delivery within eight to ten months.

On 30 November 2005, BRE’s Chief Executive Officer, Abdul Yazid (“Mr Yazid”), wrote to PCSB. He informed PCSB that RG was no longer involved in the WPU project and nominated Oderco as an alternative rig builder. PCSB was assured that the WPU would be constructed according to the specifications in the tender, and was also informed that construction and delivery would take six months. PCSB replied on 8 December 2005 acceding to the variation of the deadline for delivery to 180 days from 21 November 2005, ie, by 21 May 2006, effectively giving BRE five months and 13 days from 8 December 2005 to perform. For each day thereafter, liquidated damages of US$4,000 per day (up to a maximum of 30 days) were payable. Further, PCSB could terminate the PCSB contract for late delivery after 20 June 2006.

The pressure of time appears to have been a major concern for the Parties right from the outset, as the correspondence between them indicates unease by both of them about the short time frame for completing the WPU as well as the liquidated damages which PCSB was entitled to impose under the PCSB contract. Nevertheless, the Parties were committed to pursuing the WPU project and entered into a joint venture agreement (“the JVA”) on 13 December 2005. The structure of their relationship was described in the preamble to the JVA as follows:¹ Background (A) BRE has been awarded a contract by [PCSB] to provide a [WPU]. … (B) BRE and [KSE] intend to incorporate a company in Labuan, Malaysia, under the name “BR Offshore Services Limited” (JVC) and hold shares in the JVC. (C) [KSE] will arrange for the construction of the [WPU] and sell it to the JVC which will in turn charter it to BRE for BRE to fulfil the contract from [PCSB].

…

Under clause 3 of the JVA, the first order of business for the Parties was to secure the incorporation of the joint venture company mentioned in the preamble to the JVA, BR Offshore Services Ltd (“BRO”). The Parties defined the incorporation of BRO as “Completion”² in clause 1.1 of the JVA. Under clause 7, KSE was to next proceed to procure financing for BRO to acquire the WPU. Clause 6 sets out the details of the Parties’ subsequent obligations as follows:³ Procurement of WPU, Charter Agreement and [PCSB] Contract 6.1 After Completion and after the financing in clause 7.1 is available for immediate drawdown, BRE and [KSE] shall procure that a charter agreement for the WPU is executed between [BRO] and BRE. Upon the Charter Agreement being executed, [KSE] shall proceed to arrange for the construction of the WPU … on terms acceptable to [KSE]. The specifications, equipment and inventory of the WPU is as set-out in the Charter Agreement. 6.2 [KSE] shall use all reasonable endeavours to procure 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. 6.3 [KSE] shall sell the WPU to [BRO] and [BRO] shall buy the WPU from [KSE]. The price of the WPU is [KSE’s] cost of construction plus 3% which price is to be paid by [BRO] to [KSE] upon [BRO] taking delivery of the WPU. 6.4 … 6.5 BRE shall at all times comply with its obligations under the Charter Agreement and the [PCSB contract] and shall ensure the [PCSB contract] remains valid, binding and enforceable on [PCSB]. 6.6 BRE shall indemnify [KSE] against all claims, proceedings, liabilities, losses, damages, costs and expenses (including legal costs on a full indemnity basis) arising in connection with the Charter Agreement and the [PCSB contract] and their respective performance.

[emphasis added in bold italics and underlining]

It is this “all reasonable endeavours” provision in clause 6.2 of the JVA that the Parties vigorously join issue over.

On 18 December 2005, five days after the JVA was entered into, Mr Yazid signed a document (“the Authorisation Document”) authorising KSE to proceed to contract with Oderco for the construction of a WPU with “Delivery – 6 months ex works”.⁴ On 21 December 2005, KSE entered into a contract with Oderco (“the Oderco contract”). Clause B(3) of the Oderco contract provided that the time of shipment of the WPU would be “Ex-works basis within 165 days from date of Contract”,⁵ie, by 4 June 2006. This was well after the deadline of 21 May 2006 under the PCSB contract and...