Imagine a few months after your company has signed a highly lucrative deal, something unexpected happens that causes the transaction to come to a halt. There is great confusion, finger pointing, and the possibility of significant financial loss if the matter is not resolved. Including an ‘endeavours clause’ in agreements may act as a protective gear for similar situations. This week, You Legal’s senior commercial lawyer Sheena Jackson discusses what an ‘endeavours clause’ is and what you may be obliged to do if they are present in a contract.
Reasonable Endeavours – what are you obliged to do?
An endeavours clause lays the responsibility on contracting parties to make every effort to achieve a particular result. Common terms include ‘best endeavours’, ‘reasonable endeavours’ and ‘all reasonable endeavours’. Normally the result of the clause is the mission to make best, reasonable or all reasonable efforts to follow the agreed upon target and make sure it is achieved.
While the implications of having such a clause may sound onerous, the good news is that a party’s financial interests may not necessarily need to be sacrificed at the cost of accomplishing the common goal but will need to be assessed in the circumstances. The more critical matter is whether the ‘spirit and terms’ of the contract are such that they direct the parties to consider making a financial sacrifice and we recommend that, where possible, parties should clearly identify specific steps that must, or must not, be taken when complying with this type of contractual obligation.
The Singapore Approach
In early 2014, the Singapore Court of Appeal considered an appeal in the matter of KS Energy Services Ltd v BR Energy (M) Sdn Bhd which led it to analyse how endeavour clauses are dealt with in common law jurisdictions, specifically Singapore and Australia. In this case, the contract between the two parties specified that KS Energy had to utilise “all reasonable” endeavours to construct an oil rig and prepare it for delivery in the span of 6 months. KS Energy contracted with a third party to make sure this work was completed. The third party was Oderco, which experienced delays. As a result, the oil rig was not completed and was not delivered on time. The original lawsuit filed by BR Energy cited breach of obligations by KS Energy.
The Singapore Court of Appeal decided that the required test for satisfying the “all reasonable endeavours” should be the same as that for the “best endeavour”. The court held that everything that is within the party’s power, within reason, should be done, to the point until all efforts have been exhausted to achieve the agreed goal. At the same time, the efforts should be such that there is a substantial or material chance of realisation behind such efforts. The Court ultimately decided that KS Energy did not breach it’s obligations and had taken all the sensible steps in ensuring that the oil rig was delivered on time.
The Australian Approach
Meanwhile, in March 2014, the Australian High Court considered Electricity Generation Corporation v Woodside Energy Ltd. The Court had to decide whether the required use of “reasonable endeavours” by the sellers to supply an additional amount of gas on a daily basis had been breached, being an amount over and above the primary obligation in the contract which was strictly related to the supply and payment of a daily supply of gas. At the time the agreement was concluded, another gas supplier suffered an explosion at its gas plant and the market price of gas went up by approximately 30 – 35%. As a result, the sellers offered the additional amount of gas in the same quantities, but now at the increased market price.
The High Court decided, that the seller, in making the additional supply of gas using “reasonable endeavours” can consider its own commercial interests on any given day “to take account all relevant commercial, economic and operational matters”, as well its interests in providing the product. In this case gas, to a different supplier for a higher price, being the increased market rate during a specific period. It is important to note that there were no specific obligations on the seller in respect of the supply of additional amounts of gas to reserve any daily amounts on behalf of the purchaser and no restraint on selling to third parties. The purchaser was also free to purchase gas from other suppliers.
To avoid the confusion addressed in these cases, we would like to advise our readers to ensure that prior to executing any contracts, the parties agree what would be “reasonable” or “best” endeavours and where possible, it is recommended that parties should clearly identify specific steps that must, or must not, be taken when complying with these types of clauses.
As always, our lawyers are available to help you in drafting or reviewing your contracts and to answer any further question you might have on this or any other topics we discuss in our blogs.
What Should I Do Next?
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.