In brief
Best efforts clauses are a common feature in an array of commercial contracts, spanning across different industries and jurisdictions. These clauses typically require one or both party/parties to engage its/their best efforts to bring a certain stipulated outcome to fruition. Often, such clauses are regarded as preferable to clauses that guarantee a certain outcome, since it is not uncommon in commercial contracts for a desired outcome to be dependent on acts to be taken by a third party. However, what is often unclear is how much effort one is required to put in to not fall afoul of the obligation imposed by such a clause.
The Singapore Court of Appeal (SGCA) in Carlsberg Breweries A/S v. CSAPL (Singapore) Holdings Pte Ltd [2022] SGCA(I) 2 addressed these issues in a case involving a best efforts clause in a loan arrangement between the parties. This decision provides helpful guidance on the content of best efforts clauses, and sheds light on how much effort is needed to fulfil one’s contractual obligations under such a clause.
Contents
1. Key takeaways
2. Background
a. The 26 April meeting
b. The 1 July meeting
3. Decision of the SGCA
a. Duty to do everything reasonable in good faith to procure the stipulated outcome
b. CSAPLH breached its obligations under the BE clause
4. Conclusion
Key takeaways
- A high threshold is required to satisfy an obligation to use best efforts to procure a contractually stipulated outcome. The obligor has to do everything reasonable that a ‘prudent and determined’ party, acting in the interests of the obligee and ‘anxious to procure the contractually stipulated outcome within the available time’, would have done.
- Commercial parties should be mindful that it does not matter if they subjectively think they have done their best as the test is an objective one. As such, an obligor cannot just sit back and say it could not reasonably have done more where, if it had just asked the obligee, it would have discovered that there were other steps it could have taken.
- If a commercial party is unable to procure a contractually stipulated outcome, it would be advisable to convey the obstacles or other difficulties in procuring the stipulated outcome to the obligee. Once the obligee points to certain steps that the obligor could have taken to procure the stipulated outcome, the burden would ordinarily shift to the obligor to show that (1) it took those steps; or (2) that those steps were not reasonably required; or (3) that those steps would have been bound to fail.
- Even if parties are dealing with each other against the backdrop of open hostilities (e.g., concurrent arbitration/litigation proceedings), the obligor(s) is/are still required to fulfil its/their obligations under the best efforts clause. Commercial parties cannot simply point to the fact of acrimony in the business relationship to excuse the fact that they did not exert best efforts or that they could not have done more.
Background
The appellant, Carlsberg Breweries A/S (“Carlsberg“), extended USD 40 million in 2010 to the respondent, CSAPL (Singapore) Holdings Pte Ltd (CSAPLH). The loan was meant to fund CSAPLH’s purchase of a 40% stake in a joint venture company (JVC), which in turn owned 90% of the shares in a Nepali subsidiary (GBPL). Most of the remaining 10% of the shares in GBPL was owned by a Nepali businessman (RKK). The loan arrangement, through a variety of independent agreements, contained the following salient terms:
a. There would be up to six directors on the board of GBPL (“Board“). Of this six, up to four could be nominated by Carlsberg, one would be nominated by CSAPLH, and one would be nominated by RKK.
b. A majority of the Board must be present in person, of which a minimum of one director must have been nominated by RKK, for the Board to pass resolutions at meetings.
c. CSAPLH would use its best efforts to ensure that the director appointed by RKK to the Board of GBPL attends all meetings of the Board of GBPL (“BE clause“).
RKK nominated his cousin (PPK) as a director of GBPL. By virtue of the arrangement (see term b. above), PPK thus effectively had a veto over Board resolutions, since he could deprive the Board of quorum by choosing to not attend Board meetings. Moreover, it was revealed during the proceedings that it had been RKK’s brother (CPK) who, at all material times, dealt with Carlsberg in relation to GBPL. CPK would also often convey his wishes to the Board via PPK.
As it transpired, in April 2018, an IPO was envisaged by the parties as a means of raising money. However, sometime in late 2018 to early 2019, CSAPLH took issue with a number of matters relating to the pace and progress of the envisaged IPO, as well as other shareholder matters relating to the JVC. Following these issues, PPK stopped attending Board meetings, thereby depriving the Board of quorum.
The dispute before the Singapore Courts centred, in particular, around four Board meetings that PPK failed to attend (namely, on 26 February, 25 March, 26 April and 1 July 2019). For present purposes, the third and fourth meetings are especially relevant (“26 April meeting” and “1 July meeting“, respectively):
The 26 April meeeting
On 9 April 2019, there was a brief meeting between PPK and the CSAPLH-nominated director in GBPL (“Jagetia“). During this meeting, according to Jagetia, PPK said that he would not let the Carlsberg-nominated directors make decisions by majority vote on the topics of concern that he (i.e., PPK) raised, which related broadly to issues regarding GBPL’s sales and marketing strategy, and other company matters.
Subsequently, on 25 April 2019, in response to an email from a Carlsberg-nominated director enquiring on PPK’s intentions to attend the 26 April meeting, PPK replied that he was concerned with the way that GBPL was being run and that he would not be attending the 26 April meeting. This was followed up by emails from both a Carlsberg-nominated director and CPK, asking PPK to attend the meeting. Ultimately, PPK did not attend the meeting for the reasons he had explained in his 25 April email. During court proceedings, PPK recalled that he had made the decision not to attend the 26 April meeting on 25 April 2019 (i.e., when he had replied to the email from the Carlsberg-nominated director).
The July 1 meeting
According to CPK, had told PPK to attend the 1 July meeting more than 10 times between May and June 2019. Jagetia also met with PPK and asked him to attend the meeting. However, on 28 June, PPK sent the other Board directors an email saying that he was unable to attend the 1 July meeting since his earlier concerns had not been addressed.
It is against this backdrop that the dispute arrived before the Singapore courts. Among other claims, Carlsberg claimed for the loan monies on the basis that CSAPLH breached its obligations under the BE clause, because it failed to engage its best efforts to ensure PPK’s attendance at the 26 April and 1 July 2019 meetings.
The Singapore High Court (SGHC) dismissed Carlsberg’s claim in this regard. Carlsberg then appealed against the SGHC’s decision.
Decision of the SGCA
Duty to do everything reasonable in good faith to procure the stipulated outcome
The SGCA affirmed its earlier decision in KS Energy Services Ltd v. BR Energy (M) Sdn Bhd [2014] 2 SLR 905 on the contents of a BE clause. In summary, the SGCA listed the following principles:
- 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 that a “prudent and determined” person, acting in the interests of the obligee and anxious to procure the contractually stipulated outcome within the available time, would have taken. 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”.
- The test for determining whether a best efforts obligation has been fulfilled is an objective test and a fact-specific inquiry. 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.
- In fulfilling its obligation, the obligor can take into account its own interests. However, while the obligor is not always required to sacrifice its own commercial interests in satisfaction of its obligations, 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.
- 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 that might have been resolved. The obligor only needs to do that which has a significant or real prospect of success in procuring the contractually stipulated outcome.
- 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 that could reasonably have been taken. Once the obligee points to certain steps that 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.
CSAPLH breached its obligations under the BE clause
In dismissing Carlsberg’s claim on this issue, the SGHC found that any steps CSAPLH took would have been futile, since PPK’s absence from the meetings was fundamentally motivated by PPK’s disagreement over certain matters with the Carlsberg-nominated Board members. However, the SGCA reversed the SGHC’s finding in this regard, and instead found that there was insufficient evidence in CSAPLH’s case (or otherwise) that PPK had been fundamentally concerned with these matters or that these concerns were behind his absence from the Board meetings.
The SGCA held that Carlsberg had to establish three premises:
a. First, Jagetia (for CSAPLH) must have known on 9 April 2019, or at the very least had reason to suspect, that PPK does not intend to attend the 26 April meeting.
b. Second, Carlsberg must be able to demonstrate that reasonable steps could have been undertaken, and that the steps sought would have had at least a significant or real prospect of success.
c. Third, and closely linked to the second requirement, the actions that CSAPLH ought to have taken cannot have been futile.
The SGCA found that the first premise was made out on both the evidence of Jagetia and PPK. In particular, the court found that Jagetia was a canny businessman of a major company, and would understand PPK’s statement that “he would not let the Carlsberg-nominated directors make the decisions through majority vote on the topics which he had raised”, as constituting a reasonably clear indication on PPK’s part that he intended to exercise a de facto veto by not attending Board meetings.
On the second premise, Carlsberg pointed out that there were at least three steps that CSAPLH could have taken, but did not:
- CSAPLH could have attempted to talk to and persuade PPK between 9 and 25 April 2019.
- CSAPLH could have informed Carlsberg of its discovery or suspicions that PPK might not attend the 26 April meeting, and could have asked Carlsberg to aid in the efforts to persuade PPK to attend the meeting.
- CSAPLH could have informed CPK about PPK’s intentions, which would have given an opportunity for CPK to speak to PPK and seek to persuade him in the period between 9 and 25 April 2019.
Furthermore, the SGCA considered that there were three other steps that could have been taken, but were not:
- CSAPLH could have discussed PPK’s concerns with PPK.
- CSAPLH could have informed Carlsberg of PPK’s concerns and worked on a unified approach to PPK’s concerns.
- CSAPLH could have kept CPK apprised so that he could offer his input on how to persuade PPK.
On the third premise, the SGCA accepted the SGHC’s finding that PPK decided not to attend the 26 April meeting only one day before (i.e., 25 April 2019). The SGCA deemed this to be the ‘cut-off point’, and considered that any steps taken after that point would have been futile. Moreover, counsel for CSAPLH clarified at the hearing of the appeal that CSAPLH was not taking the position that it believed PPK to be unpersuadable. In the circumstances, the SGCA found that all of the steps listed by Carlsberg and the further steps proposed by the court could not have been regarded as futile for the period between 9 and 25 April 2019.
Having found that all three premises had been established, the SGCA went on to consider CSAPLH’s arguments that the steps listed were unreasonable. The SGCA rejected CSAPLH’s arguments, finding that CSAPLH “did not do anything to persuade PPK between 9 and 25 April 2019 despite learning his intention to not attend the 26 April board meeting [emphasis in original]”. In particular, while the SGCA acknowledged the fact that there were open hostilities between the parties after CSAPLH commenced arbitration against Carlsberg in April 2019 (on separate claims), this did not detract from CSAPLH’s obligations under the BE clause.
Thus, the SGCA found CSAPLH to be in breach of the BE clause, and in turn liable for the repayment of the loan monies.
Conclusion
The SGCA’s ruling and observations provide important guidance to parties who have entered into, or intend to enter into, contracts with a best efforts or best endeavours clause. The ruling demonstrates the high threshold required of parties who are bound by such a clause, and serves as a reminder to parties to communicate and seek input from obligees when there are obstacles to fulfilling the contractually stipulated outcome.
