In a decision handed down by the High Court on Wednesday 5 March 2014 the Court found that a party subject to an obligation to use its “reasonable endeavours” to supply additional amounts of natural gas under a minimum supply agreement, was entitled to take its own commercial interests into account when performing the obligations that were subject to the “reasonable endeavours” requirement.
The decision broadly confirms that a “reasonable endeavours” obligation in a commercial context does not give any significant degree of protection to a party seeking to obtain some benefit from such a provision.
The majority judgment in this High Court decision confirms the applicability of well established principles of contract interpretation in the context of commercial contracts that contain an obligation for a party to use its’ “reasonable endeavours”.
The Court held that the provisions of commercial contracts are to be construed objectively: “Unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a business like interpretation on the assumption ‘that the parties … intended to produce a commercial result.’ A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience.’ ”
A “reasonable endeavours” provision must be read subject to these principles, and what is reasonable depends on what is reasonable in the circumstances. The Court also held that a contract may itself contain an internal standard of what is reasonable by some express reference to the business interests of the party obliged to use “reasonable endeavours”.
The Court’s decision was in favour of the party subject to the obligation to use reasonable endeavours. That party was entitled to take into account its commercial interests when discharging obligations to exercise reasonable endeavours.
In his minority judgment Justice Gageler also confirmed the applicability of the objective approach to what are “reasonable endeavours” applying established principles of contract interpretation, but His Honour took a different view of their application to the provisions contract in issue.
The contract in issue was a long term gas supply agreement (GSA) in Western Australia entered into by the Electricity Generation Corporation trading as Verve Energy (Verve) and a number of gas suppliers including Woodside Energy Limited (Woodside).
The contract made provision for Woodside to supply to Verve on certain terms:
- an Annual Maximum Quantity (AMQ) of gas
- a Maximum Daily Quantity (MDQ) of gas, and
- a Supplemental Maximum Daily Quantity (SMDQ) of gas.
The parties agreed that, under the provisions of the GSA, Woodside was unconditionally obliged to supply gas the MDQ to Verve. The obligation to supply SMDQ however, was not unconditional and was supply of SMQD by Woodside to Verve was subject to a “reasonable endeavours” provision.
An explosion took place in one of the gas suppliers’ generation plants which had the effect of reducing the amount of gas available in the market to approximately 30% of usual available supply in the market. The price of gas increased dramatically.
Woodside chose not to supply gas as SMQD under the GSA to Verve. Woodside relied on the “reasonable endeavours” provision in the GSA, arguing that the changed market conditions caused by the reduced gas supply was a commercial matter relevant to whether Woodside was “able to supply SMDQ”. Woodside’s only obligation was to use reasonable endeavours to make SMDQ available for delivery, taking into account “all relevant commercial, economic and operational matters”. The majority High Court Justices agreed that Woodside was entitled to take into account its commercial interests in the circumstances and that the obligation to use reasonable endeavours did not constrain Woodside from declining to supply SMDQ to Verve.
Author: Kate Reid
Chris Edquist, Partner
T: +61 3 9321 9919
Troy Lewis, Partner
T: +61 7 3135 0614
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