On 5 March 2014, the High Court held in Electricity Generation Corporation v Woodside Energy Ltd and Ors that Woodside Energy Ltd and other gas suppliers (“Sellers”) did not breach their “reasonable endeavours” supply obligation to provide supplemental gas to Electricity Generation Corporation trading as Verve Energy (“Verve”).
Under the Gas Supply Agreement (“GSA”), the Sellers were obliged to use reasonable endeavours to provide supplemental gas to Verve. In fulfilling this obligation, the Sellers could determine their ability to supply supplemental gas by reference to commercial, economic and operational matters relevant to the Sellers.
After an explosion at a Varanus Island processing facility, the Sellers refused to supply supplemental gas, instead offering Verve supplemental gas at a higher price under a new contract. Verve commenced legal proceedings seeking damages for not receiving the supplemental gas under the GSA at the lower price.
The High Court determined that the obligation to “use reasonable endeavours to supply supplemental gas” was not absolute or unconditional, but rather contingent on what was reasonable in the circumstances. In interpreting what was reasonable, the Court applied the reasonable business person test highlighting the importance of considering the language, the transaction, the surrounding circumstances, the commercial purposes and the objects to be secured by the contract. The Court also held that what was reasonable in the circumstances was contingent on the Sellers’ responsibilities in respect of the supplemental gas, qualified by the internal contractual standards (including the Sellers’ ability to consider commercial, economic and operational matters).
Accordingly, the Court found that the increased gas price following the Varanus Island explosion amounted to a relevant matter which influenced whether it was reasonable for the Sellers to fulfil their contract. The Court held that the GSA did not force Woodside to provide supplemental gas to Verve in conflict with its own interests.
This decision aids in interpreting reasonable endeavours obligations in commercial agreements and highlights the significance of internal contractual standards when drafting reasonable endeavours obligations.