The High Court’s decision in Woodside Energy Ltd v Electricity Generation Corporation [2014] HCA 7 (Woodside) was significant for the interpretation of reasonable endeavours clauses in commercial contracts. The Woodside decision expanded the extent to which persons subject to reasonable endeavour obligations can have regard to their own commercial interests in deciding what is “reasonable”.

This article considers the significance of Woodside for reasonable endeavours clauses, and how it has been subsequently applied almost 2 years on, most notably in the recent case of Wang v Kaymet Corporation Pty Ltd [2015] NSWSC 1459.

Facts in Woodside

Woodside involved an agreement to buy and sell a regular amount of gas each month (the Agreement). The Agreement provided that if the buyer wanted to purchase additional gas in a given month, the sellers had to use their “reasonable endeavours” to supply that additional gas taking into account, inter alia, “all relevant commercial, economic and operational matters”. The price of the additional gas was fixed under the Agreement.

In 2008, a gas plant explosion reduced the supply of natural gas in Western Australia, causing a temporary spike in market price. As a result, the sellers ceased to supply additional gas to the buyer under the terms of the Agreement and instead forced the buyers to enter into new short term agreements to purchase additional gas for three times the price.  

The buyer subsequently sued the sellers for damages for breach of the Agreement.

High Court decision in Woodside

The High Court made three key observations regarding the nature of reasonable endeavours clauses:

  1. the obligation is not an absolute or unconditional obligation;
  2. the nature and extent of the obligation is conditioned by what is reasonable in the circumstances, including circumstances which affect the obligor’s business. The High Court emphasised that a party is not required to sacrifice its own business interests in order to fulfil its obligations to use reasonable endeavours; and
  3. some contracts may contain their own internal standard as to what is reasonable, by some express reference relevant to the business interests of the obligor. 

Importantly, the High Court commented that the sellers’ entitlement to take into account “commercial, economic and operational matters” constituted an “internal standard” which conditioned the standard of reasonable endeavours in this particular case.

The High Court concluded that the reasonable endeavours clause in the Agreement did not require the sellers to provide additional gas to the buyers, in circumstances where doing so conflicted with the sellers’ business interests to sell the gas at a higher market price.

Application in Kaymet Corporation

The NSW Supreme Court in Wang v Kaymet Corporation Pty Ltd [2015] NSWSC 1459 (6 October 2015) has recently applied and affirmed the formulation of reasonable endeavours espoused in Woodside.

In Kaymet Corporation, the plaintiffs had purchased a number of residential apartments off-the-plan from the defendant developers. Relevantly, each contract contained a condition that the defendants must use their “reasonable endeavours” to register draft strata documents by a specified date for registration (Sunset Date).

The contracts further provided that if “for any reason” the draft strata documents were not registered by the Sunset Date, either party could rescind the contract.  The defendants did not register the strata documents by the Sunset Date, or at all. The defendants then purported to rescind the contracts. 

The plaintiffs argued that the defendants failed to use their reasonable endeavours to register the strata documents by the Sunset Date and, as a result, had breached the contracts.

One ground raised by the plaintiffs in support of this contention was that the defendants constructed balustrades which failed to comply with the relevant development consent. The defendants applied to the Council to change the requirements of the development consent, rather than incurring around $50,000 to construct compliant balustrades. The plaintiffs argued that to exercise reasonable endeavours, the defendants should have paid to construct compliant balustrades, rather than seeking to persuade Council to change the development consent, since the latter option caused further delay.

The Supreme Court (Stevenson J) did not agree. The Court cited Woodside and commented that the defendants were entitled to have regard to their own business interests. Since the balustrades were already installed, and by making the application the defendants saved around $50,000, the defendants’ conduct did not constitute a failure to take reasonable endeavours.  Interestingly, the Court had regard to the defendants’ commercial interests even in the absence of any express “internal standards” as were present in the contract in Woodside.

The Court concluded that the plaintiffs had failed to establish breach, and that the defendants were entitled to rescind the contracts.

Drafting considerations

Reasonable endeavours clauses are often useful to balance the interests of parties in the event that such interests do not entirely coincide, or if they are in conflict.  

To achieve an appropriate balance when drafting reasonable endeavours clauses, it is important to consider including a list of “internal standards” in the contract to ensure that you or your client’s commercial interests will be taken into account in determining what is reasonable.