In March 2014, the High Court handed down its judgment in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, which gives parties further clarity on the meaning of 'reasonable endeavours' in the context of a gas supply contract.

Background

Woodside Energy (Woodside) and Electricity Generation Corporation (Verve) were parties to a Gas Sale Agreement (GSA). Under the GSA, Woodside was required to supply Verve with gas up to a maximum daily quantity, and use 'reasonable endeavours' to make available an additional amount of gas up to a supplemental maximum daily quantity.

Following the Varanus Island explosion in June 2008, the supply of gas to the Western Australian market was disrupted for several months and the demand for gas (and its price) rose dramatically.

Woodside informed Verve that it would no longer provide it with the supplemental quantities of gas under the relevant provisions of the GSA. Instead, it offered to supply the supplemental gas to Verve under separate, short-term agreements, and at a significantly higher price.

Verve subsequently brought proceedings against Woodside in the Supreme Court of Western Australia, in which it claimed that Woodside's conduct amounted to a breach of its obligation under the GSA to use 'reasonable endeavours' to supply the supplemental gas (among other things).  

Verve was unsuccessful in that claim at first instance, but succeeded on appeal to the Court of Appeal of the Supreme Court of Western Australia. Woodside subsequently appealed the Court of Appeal's decision to the High Court.

High Court Decision

The High Court (by a 4:1 majority) reversed the decision made by the Court of Appeal in relation to the 'reasonable endeavours' aspect of the claim. The majority took the view that the GSA did not oblige Woodside to supply the supplemental gas to Verve in conflict with its own commercial interests.

The Court held that the obligation on Woodside under the GSA to employ ‘reasonable endeavours’ to supply the supplemental gas was not absolute or unconditional. The nature and extent of the obligations were necessarily conditioned by what was reasonable in the circumstances, including circumstances that might impact Woodside's business. 

It was also noted that some contracts containing ‘reasonable endeavours’ provisions contain their own internal standard of what is reasonable, by some express reference relevant to the business interests of the parties. Importantly, the obligation on Woodside to use its 'reasonable endeavours' to supply the supplemental gas was qualified by a provision in the GSA, which entitled Woodside to take into account "all relevant commercial, economic and operational matters" in that regard. The market conditions following the Varanus Island explosion were circumstances that could be taken into account.

The obligation in the GSA for Woodside to use 'reasonable endeavours' to supply the supplemental gas to Verve could be contrasted with the unconditional obligation to supply minimum daily quantities. The language of the 'reasonable endeavours' provision was the language of a qualified obligation and the clause provided an internal standard of reasonableness by which the obligation to use 'reasonable endeavours' could be measured.

What have we learnt?

The decision provides some clarity as to the interpretation of 'reasonable endeavours' in an agreement between commercial parties, particularly where that obligation is qualified in some way by the language of the agreement (as was the case here). 

It would be advisable for parties negotiating agreements containing 'reasonable endeavours' obligations to consider whether any qualifications of the type contained in the GSA should also be made, in the interests of further clarity.