We have previously commented on the use of the term “reasonable endeavours” and “best endeavours”.
The decision of the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 is another important decision on this issue.
This case:
The facts
Woodside Energy Ltd and other gas suppliers in Western Australia as part of a joint venture (Sellers) and Electricity Generation Corporation trading as Verve Energy (Verve) were parties to a long-term gas supply agreement (GSA) for the supply of natural gas for use in Verve’s power stations.
Under the GSA, the Sellers were required to make available to Verve the amount of gas nominated for each day up to a maximum daily quantity. The GSA also required the Sellers to use reasonable endeavours to supply additional gas up to a maximum additional quantity if required by Verve.
In determining whether the Sellers were able to supply the additional gas, the GSA allowed the Sellers to take into account “all relevant commercial, economic and operational matters”.
On 3 June 2008 an explosion occurred at a gas production facility operated by a major supplier’s plant. The explosion caused a significant reduction in the available supply of natural gas to the Western Australian market. This resulted in an increase in demand for gas in excess of the available supply.
The Sellers informed Verve that they would not supply any additional gas to Verve on the terms of the GSA between June and September 2008. Instead, the Sellers offered to supply gas to Verve under a series of short term agreements at the prevailing market price (a substantially higher price than under the GSA).
Verve commenced proceedings in the Supreme Court of Western Australia against the Sellers arguing that, from 4 June 2008 to 30 September 2008, the Sellers had breached their obligation to use “reasonable endeavours” to supply additional gas to Verve in accordance with the requirements of the GSA.
The decision
The High Court (by 4:1 majority) held that the Sellers were not in breach of their obligation to use “reasonable endeavours”.
In reaching its decision, the High Court examined what was meant by the expression “reasonable endeavours” in a commercial contract. The High Court 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 the High Court 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”, “best endeavours” and “all reasonable endeavours” are familiar clauses in commercial contracts and that by use of those terms:
The High Court stated that the obligation to use “reasonable endeavours” to supply the gas was conditional with internal standards. The parties had set their own internal standards in using “reasonable endeavours” by allowing the Sellers to take into account all “relevant commercial, economic and operation matters” when determining when they are “able” to supply the gas. This was contrasted with other absolute obligations to supply lesser quantities of gas under the GSA.
That expression was recognised as affecting the Sellers’ 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 Sellers to supply the gas.
The High Court confirmed that the clause did not oblige the Sellers to supply the gas to Verve notwithstanding the conflict with their own business interests, namely that they could supply gas at a higher price.
Does this decision change the approach to a “reasonable endeavours” clause?
The express entitlement of the Sellers to take into account “all relevant commercial, economic and operational matters” was critical to the Sellers’ being able to make a commercial decision not to supply Verve with additional gas at the price stipulated under the GSA without breaching its obligation to use reasonable endeavours to supply the additional gas.
While the decision does not depart from established principles of contractual interpretation, the decision serves to reinforce the importance of including express contractual qualifications on the scope of a party’s obligations to use reasonable endeavours so as to ensure that those qualifications may be taken into account in determining what is reasonable in the circumstances.
Application of this decision to contract negotiations and implications for drafting
The implications from this case include:
If a contract includes a “reasonable endeavours” requirement but does not qualify the obligation, the courts will consider what is reasonable in the circumstances, having regard to the specifics of the contract and the commercial circumstances in which it was made.
Additionally, industry participants should not assume that alternative wording such as “best endeavours” or “all reasonable endeavours” provides a stronger requirement than “reasonable endeavours”. In Australia, the present judicial interpretations of “best endeavours”, “all reasonable endeavours” and “reasonable endeavours” in a commercial context appear to be indistinguishable.
The lessons from this case have application to the property sector as well as the oil and gas sectors. In short, serious thought has to be given as to what is meant by the use of a term such as “reasonable endeavours” or “best endeavours” in each contract. In particular, the contract needs to set out what is required of a party if it is required to use “best endeavours” to do something. Each contract is unique and will have its own particular requirements. If this is not done, the courts may well impose a standard that is different from that intended by a party to the contract.
