In an earlier article in this series we reviewed the judicial interpretation of the phrase “best endeavours”. The following article updates this through a review of the High Court’s recent decision in Electricity Generation Corporation v Woodside Energy Limited  251 CLR 640 (Verve Energy case), in which the Court analysed the meaning of the term “reasonable endeavours” in the context of a contract.
Undertakings by parties to use their best or reasonable endeavours are often included in commercial contracts.1 Usually this reflects the fact that an absolute obligation or commitment is unacceptable and, by way of compromise, the parties agree to introduce some balance or qualification into the commitment through a standard of reasonableness.
In the Verve Energy case, the High Court analysed the extent to which a party with a contractual obligation to use reasonable endeavours may have regard to its own commercial interests in determining the scope of what it is required to do.
Briefly stated, the facts of the case were as follows. Electricity Generation Corporation, a Western Australian statutory electricity generator trading as Verve Energy, (the Buyer), entered into a long term gas supply agreement (GSA) to buy gas from various gas suppliers, including Woodside Energy Limited (the Sellers). Provisions of the GSA required the Sellers to supply a maximum daily quantity of gas (MDQ) and to use their reasonable endeavours to make a further quantity of gas available (the Supplemental Maximum Daily Quantity or SMDQ). The prices payable for the MDQ and SMDQ were calculated in accordance with provisions of the GSA. On 3 June 2008, an explosion at one of the supplying gas plants caused a reduction of approximately 35% in the supply of natural gas to Western Australian users. On 4 June 2008, the Sellers informed the Buyer that they would not supply the SMDQ under the GSA for an indefinite period but, as an alternative, offered to supply the Buyer with an equivalent quantity of gas at the prevailing market price. In essence, this meant that the Sellers supplied the MDQ under the GSA but treated the Buyer like other customers in respect of further volumes of gas. The Buyer claimed that, by refusing to supply the SMDQ under the GSA, the Sellers had breached their reasonable endeavours obligation.
That obligation was set out in clause 3.3 of the GSA as follows:
“(a) If in accordance with Clause 9 (“Nominations’) the Buyer’s nomination for a Day exceeds the MDQ, the Sellers must use reasonable endeavours to make available for delivery up to an additional 30TJ/Day of Gas in excess of MDQ (‘Supplemental Maximum Daily Quantity’ or ‘SMDQ’).
(b) In determining whether they are able to supply SMDQ on a Day, the Sellers may take into account all relevant commercial, economic and operational matters ….”
The majority of the High Court (French CJ, Hayne, Crennan and Kiefel JJ) made the following observations about obligations to use reasonable endeavours to achieve a contractual object.2
- The obligation is not absolute or unconditional.
- The nature and extent of the obligation is conditioned by what is reasonable in the circumstances, and this can include circumstances that may affect the obligor’s business.
- Some contracts include their own express provisions which identify an internal standard of what is reasonable.
The High Court noted that the second point above was confirmed in earlier cases in which the Court held a party with a contractual obligation to its use best endeavours to promote sales of a product was not necessarily prohibited from selling competing products. However, while it may not be appropriate to imply an absolute restraint on selling competing products in those circumstances, a person who has given this style of best endeavours commitment cannot act in a way that imposes a detriment on the party for whose benefit the commitment was given. In other words, it is a matter of determining what is reasonable in the circumstances.3 In the Verve Energy case, the parties expressly provided that in determining whether the Sellers were in the position to supply the additional quantity of gas comprising the SMDQ, they were entitled to “take into account all relevant commercial, economic and operational matters”. The majority of the High Court held that this wording entitled the Sellers to take account of their own business interests including not just their capacity to supply gas but also other commercial considerations, such as pricing. Accordingly, the Sellers’ reasonable endeavours obligation to supply the SMDQ did not require them to do so if it conflicted with their own business interests.4 Gageler, J dissented on the basis that the parties could not have intended to give the Sellers a discretion, within their reasonable endeavours obligation, not to supply the SMDQ merely because market circumstances presented an opportunity for the Sellers to demand a substantially higher price for the gas than was provided under the GSA. His Honour observed:
“The Sellers’ construction is one which renders the obligation to use reasonable endeavours imposed on the Sellers by clause 3.3(a) of the GSA elusive, if not illusory, and which renders the price fixed by clause 6.1(d) of the GSA a price which is meaningful only if and when the Sellers consider it in their commercial advantage to accept it.”5
In his Honour’s view, the Sellers’ right to “take into account all relevant commercial, economic and operational matters” in “determining whether they are able to supply SMDQ” is directed to the ability or capacity of the Sellers to make the gas available for delivery, rather than their own pricing interests.6
The difference in the interpretation of these additional words, highlights the more general principle that the meaning and scope of any best endeavours or reasonable endeavours obligation in a contract depends on the particular wording used and the commercial purpose or objects to be achieved by the contract.
The Verve Energy case confirms that a party with an obligation to use its reasonable or best endeavours is not required to ignore its own business interests in determining what it is required to do. This derives from the fact that the obligation is not absolute and the term itself imports a qualification of reasonableness. However this principle needs to be applied with care as, unless a contract includes an express definition of what is reasonable, an objective test of reasonableness will be applied and the party with the obligation is required to do all that it reasonably can in the circumstances.7
If the parties agree to minimise the uncertainty about what reasonable endeavours requires by setting out, in the contract itself, an internal standard of what is “reasonable”, the requirements of a reasonable endeavours obligation will be modified accordingly. As the High Court’s decision in the Verve Energy case illustrates, appropriate additional provisions can qualify a reasonable endeavours obligation significantly. Conversely, it also seems likely that, had the GSA not included the additional provisions defining the broader range of matters that could be considered in determining what is reasonable, a different decision would have been reached in the Verve Energy case on the basis that the Sellers would not have been entitled to take their own pricing interests into account in determining the scope of their reasonable endeavours obligation.