Case¹ Note: Reasonable endeavours – the High Court speaks, 5 March 2014

On 5 March 2014 the High Court held by majority (4:1) that the North West Shelf Joint Venture (NWS) parties were not in breach of their obligation to use reasonable endeavours to make certain gas available (SMDQ) to Verve Energy under a long term contract.  In reaching that decision, the High Court overturned the decision of the Court of Appeal of Western Australia and reinstated the judgment of the trial judge.

In June 2008 there was an explosion at a gas plant operated by Apache in Western Australia.  The consequence was a significant reduction in the available supply of gas to the Western Australian market.  This resulted in an increase in demand for gas supplied by the NWS participants, in excess of their capacity to meet that demand. 

As a result, the NWS participants declined to supply SMDQ gas to Verve Energy under its contract but agreed to supply to it gas under a separate short term contract.  Verve Energy complained that the NWS parties had breached their obligations of reasonable endeavours to supply the SMDQ gas to Verve Energy under the long term contract.

The majority of the High Court examined what was meant by the expression “reasonable endeavours” in a commercial contract and reaffirmed that in a commercial contract a Court is entitled to give a businesslike interpretation on the assumption that the parties intended to produce a commercial result in their contract.  As such they reaffirmed that a commercial contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience.

Against that background the majority recognised that the terms “reasonable endeavours” or “best endeavours” are familiar clauses in commercial contracts and that by use of those terms:

  • an obligation expressed is not an absolute or unconditional term;

  • the nature and extent of the obligation imposed on such terms is conditioned by what is reasonable in the circumstances, which can include circumstances which may affect an obligee’s business; and

  • some contracts containing an obligation to use or make reasonable endeavours to achieve a contractual object, contain their own internal standard of what is reasonable, by some express reference relevant to the business interests of an obligee.

Against that background, an obligee’s freedom to act in its own best interest is not necessarily foreclosed, or to be sacrificed, by an obligation to use reasonable endeavours to achieve a contractual object.

By reference to the clause in issue, and by reading the clause as a whole, the majority construed the obligation, by particular reference to the express entitlement of the clause of the NWS participants to take into account “relevant commercial, economic and operational matters” when determining when they are “able” to supply SMDQ gas.  Compendiously, that expression was recognised as affecting the NWS participants’ business interests and their relevant ability to supply was qualified in part by reference to the constraints imposed by commercial and economic considerations.

The majority was not prepared to accept that “able” should be construed narrowly so as to refer only to capacity to supply.  The word “able” also related to the business interests of the NWS participants to supply SMDQ gas.

Accordingly, the clause did not oblige the NWS participants to supply SMDQ gas to Verve Energy notwithstanding the conflict with their own business interests, namely that they could supply gas at a higher price.

Lavan Legal acted for the NWS participants.

¹ Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7