Following the High Court decision in Electricity Generation Corporation v Woodside Energy Ltd  HCA, “best endeavours” and “reasonable endeavours” are, in effect, one and the same in terms of the obligation they impose upon a party.
Electricity Generation Corporation (t/as Verve) and Woodside were parties to a long term gas supply agreement (the Agreement) which obliged Woodside to:
- make available to Verve a proportionate share of a maximum daily quantity of gas;
- use “reasonable endeavours” to make available to Verve a supplemental daily quantity of gas (SMDQ); and
- in determining whether Woodside were able to supply the SMDQ, “take into account all relevant commercial, economic and operational matters…”
On 3 June 2008 an explosion occurred at a gas plant which caused a decreased supply of natural gas and an increased demand.
Woodside provided the SMDQ to Verve under a new short term arrangement which provided gas to Verve at the prevailing market price, a price far above that which Verve would have paid under the Agreement.
The primary question was whether Woodside had breached the Agreement to use reasonable endeavours to supply the SMDQ by requiring Verve to re tender and enter into a short term agreement for the SMDQ.
The Historical Position
Historically, Sheffield District Railway Company v Great Central Railway (1911) 27 TLR 451 has stood as authority for the principle that “best endeavours” equates to “leaving no stone unturned”.
The High Court held that:
- reasonable endeavours is not an absolute or unconditional obligation.1
- what is reasonable will depend on the circumstances, which can include circumstances that may affect an obligee’s business.2
- an obligation to use reasonable endeavours would not oblige the achievement of a contractual objective “to the certain ruin of the company or to the utter disregard of the interest of the shareholder”’.3
- an obligee’s freedom to act in its own business interest in matters to which the agreement relates, is not foreclosed, or sacrificed, by an obligation to use reasonable endeavours to achieve a contractual object.
- best endeavours means those which are objectively reasonable.4
The court also held that, unless a contrary intention is indicated, a court is entitled to assume that the parties intended the contract to achieve a “commercial result”.
On that basis, the High Court held that the expression “commercial, economic and operational matters” (in the Agreement) refers to matters affecting Woodside’s business interest; therefore Woodside’s ability to supply the SMDQ should be qualified in part by reference to the constraints imposed by commercial and economic considerations.
This had the effect that Woodside were not obliged to forgo or sacrifice their business interests when using reasonable endeavours to make the SMDQ available for delivery. This interpretation was consistent with surrounding circumstances known to both parties at the time of entering into the Agreement.
Take Away Points
We recommend the following factors are considered when drafting or reviewing contract terms:
- Best or reasonable endeavours clauses do not require a party to act in conflict with its own business interests, and do not require that no stone be left unturned to achieve the contractual objective or specific obligation.
- Where a contract includes a best or reasonable endeavours clause, but does not qualify the obligation, the courts will consider what is reasonable in the circumstances having regard to the specifics of the contract and the commercial circumstances in which it was made.
- When drafting contracts importing an obligation of best or reasonable endeavours, be careful to note any other internal standards or qualifications in the contract that may inform or affect the content of the obligation.
- Consider inserting specific and defined criteria to qualify the obligation of best or reasonable endeavours (for instance, a party is entitled to consider its own commercial interests), or, avoid it altogether by the use of measurable standards (e.g. industry standards).