Case Study: Meaning of "Best Endeavours". Court of Appeal sets out guidelines (by Spore M&A Lawyer)
Absolute Duty & Best Endeavours Duties: What is the Difference?
When a buyer buys a company, the buyer would often want the seller to do certain things.
For example, the company already makes (A) computer chips and the buyer wants to buy over the company and continue making computer chips.
At the same time, the buyer is thinking of going into (B) thumb drives sometime in the future and it would be nice if the buyer could do this on the company's premises.
Here,
(1) the buyer may insist that the seller gets the landlord's consent for the premises to be used to make (A) computer chips; and
(2) the buyer may like the seller to get the landlord's consent for the premises to be used to make (B) thumb drives.
Thus, there is a difference between:
(1) the buyer insisting that the seller has the ABSOLUTE duty to get the landlord's consent for (A) computer chips.
(In other words, the seller MUST get the landlord's consent for (A) computer chips before the buyer would go ahead to buy the company.); but
(2) the buyer may NOT insist that the seller has the ABSOLUTE duty to get the landlord's consent for (B) thumb drives.
Instead, the buyer may allow the seller to use his (or her) BEST ENDEAVOURS to get the landlord's consent for (A) computer chips.
Court of Appeal Case
The highest Court in Singapore, the Court of Appeal, in a recent case (Lim Sze Eng v Lin Choo Mee [2018] SGCA 84, Decision Date: 30 Nov 2018) gave some important guidance on what BEST ENDEAVOURS actually mean.
Earlier, LSE and LCM had a dispute and they went to court.
The Court of Appeal suggested that they attend mediation to try to resolve their differences.
The mediation was successful and resulted in a Settlement Agreement.
Under the Settlement Agreement, LCM should get an amount of money but that amount could only be determined once the sale price of a shop unit had been determined. (paragraph 3)
However, despite the facts that
(i) at multiple auctions of the shop unit at the reserve price of S$2.1m, there were no bids; and
(ii) Colliers recommended a reserve price of S$1.6m,
LSE refused to reduce the reserve price and
because of this, LCM remain unpaid.
Thus, the parties ended up in court again.
The Reasonable Endeavours Term
When the case came to court, the parties' pleadings (key, binding documents) said that Settlement Agreement contained an implied term that:
the parties “shall take reasonable endeavours and/or do all that may be necessary to give effect to the spirit and intent of the Settlement Agreement and to implement the terms of the Settlement Agreement”, and
the “parties would cooperate to enable the sale of the (shop unit) and/or not to prevent performance of the sale of the (shop unit) by their acts and/or omissions”,
(both the above were together, referred to as “the Reasonable Endeavours Term”).
(paragraph 23)
Issue
At the heart of the dispute was:
whether LSE's refusal to reduce the reserve price below S$2.1m despite
(i) at multiple auctions of the shop unit at the reserve price of S$2.1m, there were no bids; and
(ii) Colliers recommended a reserve price of S$1.6m,
was a breach of the Reasonable Endeavours Term. (paragraph 52(b))
Guidelines
The Court of Appeal endorsed the following guidelines:
(a) The obligor has a duty to do everything reasonable in good faith with a view to procuring the contractually-stipulated outcome within the time allowed. This involves taking 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.
(b) The test for determining whether a ‘best endeavours’ obligation has been fulfilled is an objective test.
(c) In fulfilling its obligation, the obligor can take into account its own interests.
(d) A ‘best endeavours’ obligation is not a warranty to procure the contractually-stipulated outcome.
(e) The amount or extent of ‘endeavours’ required of the obligor is determined with reference to the available time for procuring the contractually-stipulated outcome; the obligor is not required to drop everything and attend to the matter at once.
(f) Where breach of a ‘best endeavours’ obligation is alleged, a fact-intensive inquiry will have to be carried out.
[emphasis in original]
(paragraph 73)
Further Guidelines
The Court of Appeal also set out further guidelines that apply to both “all reasonable endeavours” and “best endeavours” clauses:
(a) Such clauses require the obligor ‘to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted’ ... or ‘to do all that it reasonably could’….
(b) The obligor need only do that which has a significant ... or real prospect of success ... in procuring the contractually-stipulated outcome.
(c) If there is an insuperable obstacle to procuring the contractually-stipulated outcome, the obligor is not required to do anything more to overcome other problems which also stood in the way of procuring that outcome but which might have been resolved ....
(d) The obligor is not always required to sacrifice its own commercial interests in satisfaction of its obligations ..., but it may be required to do so where the nature and terms of the contract indicate that it is in the parties’ contemplation that the obligor should make such sacrifice ....
(e) An obligor cannot just sit back and say that it could not reasonably have done more to procure the contractually-stipulated outcome in cases where, if it had asked the obligee, it might have discovered that there were other steps which could reasonably have been taken ....
(f) Once the obligee points to certain steps which the obligor could have taken to procure the contractually-stipulated outcome, the burden ordinarily shifts to the obligor 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 ....
(paragraph 74)
Court of Appeal Decision
The Court of Appeal said that the foregoing guidelines should apply to guide the interpretation of the Reasonable Endeavours Term in the case between LSE and LCM.
Although the Reasonable Endeavours Term does not expressly state that
the parties are to take all reasonable endeavours or
take their best endeavours to sell the shop unit,
it does specifically require the parties to
“do all that may be necessary to ... implement the terms of the Settlement Agreement”.
The Reasonable Endeavours Term should thus be construed to
impose on the parties an obligation to take all reasonable endeavours or
take their best endeavours to sell the shop unit.
(paragraph 75)
Applying the guidelines to the case, the Court of Appeal found that
LSE had breached the Reasonable Endeavours Term
by failing to agree to lower the reserve price of the shop unit.
LSE had failed to “do everything reasonable in good faith with a view to procuring the contractually-stipulated outcome within the time allowed”, given that
he certainly did not 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”.
Summary
“All reasonable endeavours” and “best endeavours” clauses may include the following:
B shall take his (or her) best endeavours to do XYZ.
C shall take all reasonable endeavours to do XYZ.
D shall do all that may be necessary to implement the terms of the agreement.
The Guidelines and the Further Guidelines (see above) apply to
“all reasonable endeavours” clauses and
“best endeavours” clauses.
Action
The above is not legal advice and should not be considered legal advice.
If you have any questions about the “all reasonable endeavours” and “best endeavours” clauses or other issues,
