KEY POINTS

  • High Court has provided some guidance as to the meaning of ‘reasonable endeavours’.
  • A supplier’s contractual obligation to use ‘reasonable endeavours’ to supply a product under a supply agreement does not require it to forego its own commercial and business interests.
  • An obligation to use ‘reasonable endeavours’ to achieve a contractual object is not an absolute or unconditional obligation.
  • The nature and extent of such a ‘reasonable endeavours’ obligation depends on what is reasonable in the  circumstances.
  • Some contracts containing a ‘reasonable endeavours’ obligation contain their own standard of reasonableness.

Background

In the recent High Court case of Electricity Generation Corporation v Woodside Energy Ltd, it was found  that if a supplier enters a long term agreement to use “reasonable endeavours” to make a product available for supply at a certain price, it will not breach this obligation by demanding a higher price while there is a temporary reduction in the supply of that product in the market.

Facts

  • Woodside Energy Ltd and other gas suppliers (Sellers) entered into a long term gas supply agreement (Agreement) with Electricity Generation Corporation trading as Verve Energy (Verve) for the supply of natural gas.
  • The Agreement required the Sellers to make available to Verve a maximum daily quantity of gas and to use ‘reasonable endeavours’ to supply additional gas up to a maximum additional quantity if required by Verve.
  • Pursuant to the Agreement, the Sellers were entitled to take into account “all relevant commercial, economic and operational matters” in determining whether the Sellers were able to supply the additional gas.
  • Following an explosion at a gas plant operated by a competing supplier, there was a temporary shortfall in the supply of natural gas to the market, causing demand in excess of the available supply. Consequently, Verve asked the Sellers to provide additional gas.
  • The Sellers declined to supply additional gas under the Agreement but offered to supply Verve with an equivalent quantity of gas at a higher market price, rather than the price given under the Agreement.
  • Verve commenced legal proceedings against the Sellers arguing that the Sellers had breached their obligation to use ‘reasonable endeavours’ to supply additional gas pursuant to the Agreement.

Submissions

  • Verve submitted that:
    • whether or not the Sellers were able to supply additional gas should be confined to the question of whether or not the Sellers had the capacity to do so
    • the Agreement operated to impose on the Sellers an absolute obligation to supply the additional gas if it was within their capacity to do so.
  • The Sellers submitted that:
    • when determining whether or not they were able to supply additional gas, they were entitled to take into account their own commercial, economic and operational interests
    • they were forced and entitled to take into account matters such as the gas explosion and the consequential impact on its business to determine whether they were able to supply the additional gas
    • they were entitled to decline to supply the additional gas pursuant to the Agreement.

High Court’s Decision

  • The High Court held that the meaning of “reasonable” standard of endeavours was conditioned by:
    • the Sellers’ responsibilities to Verve to supply additional gas
    • the Sellers’ express right to take into account relevant commercial, economic and operational matters affecting their business.
  • The Court found that when using ‘reasonable endeavours’ to supply additional gas pursuant to the Agreement, the Sellers were not obliged to forego their own commercial and business interests to make available the additional supply of gas pursuant to the Agreement.
  • In reaching its decision, the High Court interpreted the Agreement in a businesslike manner and recognised that the commercial objects of the Agreement were that:
    • Verve obtained a supply of gas which the Sellers were required to deliver up to an agreed amount
    • the Sellers had an assured price for a minimum amount of gas.

The supply of additional gas was found to be a supplementary commercial purpose.

Note: it is not known what the High Court would have decided if not for the Sellers’ right to take into account relevant commercial, economic and operational matters affecting their business.

Practical Issues

When reviewing or drafting clauses requiring a party to use ‘reasonable endeavours’, it may be prudent to:

  • include a standard of what is reasonable
  • state whether a party’s commercial interests may be taken into account
  • state whether ‘reasonable endeavours’ require a party to achieve the contractual object where the party is able to do so, although it would involve foregoing its own commercial interests (e.g. making a loss)
  • provide examples of circumstances where a party may breach its obligation to use ‘reasonable endeavours’.