This case provides some guidance on how a court will interpret “reasonable endeavours” obligations and limitation clauses and is an example of a contract being found voidable where it was entered into under economic duress.
A number of key lessons can be drawn from this case:
- In imposing “reasonable endeavours” obligations, the parties to a contract should consider the extent to which (if any) this obligation will apply where there is a substantial shift in market conditions.
- In drafting limitation of liability (and exclusion) clauses, the parties should careful consider the types of liability to which the clause applies, including the particular causes of action (or particular breaches of contract) that will trigger the clause.
- Parties should be mindful that inducing a party to enter into a new contract by threatening to breach or actually breaching an existing contract can make the new contract voidable under the doctrine of economic duress.
Woodside Energy (Woodside) was a party to a Gas Sale Agreement (GSA) under which it was obligated to both supply Electricity Generation Corporation (Verve Energy) with gas up to a Maximum Daily Quantity and “use reasonable endeavours to make available” to Verve an additional amount of gas up to a Supplemental Maximum Daily Quantity (SMDQ). Due to an explosion at a gas production facility owned by Apache (the other principal supplier of gas into the Western Australian market), the demand for gas — and hence the market price — rose dramatically. Woodside took advantage of this situation by informing Verve that Woodside could no longer supply Verve with SMDQ gas under the GSA but could, instead, supply an equivalent quantity of gas under a short term gas sale agreement (STGSA) at prices many multiples higher than that under the GSA.
Woodside argued that its obligation under clause 3.3(a) of the GSA to “use reasonable endeavours to make available” SMDQ gas was subject to the separate condition of clause 3.3(b), which provided that, “[i]n determining whether [Woodside is] able to supply SMDQ on a Day, [Woodside] may take into account all relevant commercial, economic and operation matters”. Woodside also argued that the words “all relevant commercial, economic and operation matters” informed the words “able” to the effect that Woodside had not breached its reasonable endeavours obligation by refusing to supply the SMDQ gas where it was more profitable to sell the gas under STGSAs. The trial judge accepted Woodside’s argument on this point.
The Western Australian Supreme Court of Appeal (Court), however, found that the trial judge erred and that the word “able” referred to Woodside’s capacity to supply the SMDQ gas, such that the increase in the market price of gas did not absolve Woodside of its reasonable endeavours obligations. If it were otherwise, the price set for SMDQ gas under the GSA would operate merely as a floor price. Since both parties accepted that if Verve’s construction was correct then Woodside had breached its reasonable endeavours obligation, the Court did not need to consider the precise limits of this obligation.
On a separate ground of appeal, the Court considered the argument that the STGSAs were voidable under the doctrine of economic duress. The doctrine of economic duress is a feature of the law of contract under which a contract can be declared voidable where illegitimate pressure has been applied to a party and that illegitimate pressure has induced the party to enter into a contract.
The Court accepted Verve’s argument that the illegitimate pressure imposed by Woodside in refusing to supply the SMDQ gas was sufficient to render the STGSAs voidable under this doctrine. Significantly, it did not matter that Woodside acted under a genuine belief that it was entitled to refuse to supply SMDQ gas under the GSA. Nor did it matter that Woodside never threatened or demanded Verve enter into the STGSAs — it was enough that Woodside knew that the consequence of its refusal to supply SMDQ gas under the GSA was to leave Verve with no choice but to accept the terms of the STGSAs.
Nonetheless, despite accepting that the doctrine of economic duress applied to make the contracts voidable, the Court rejected Verve’s unjust enrichment claim for economic duress on the basis that Verve had not taken the next step of rescinding the STGSAs so as to render them void.
Limitation of liability
The Court also considered a limitation of liability clause that limited “the liability of [Woodside] in respect of a failure to use reasonable endeavours” to supply SMDQ gas. The Court found, firstly, that the word “failure” applied not just to unsuccessful attempts to satisfy the reasonable endeavours obligation to supply SMDQ gas but, more broadly, to any non-performance of its reasonable endeavours obligation. Secondly, in obiter, the Court found that the words “in respect of” were not wide enough to capture liability for unjust enrichment based on economic duress, as this liability stemmed from the pressure imposed upon Verve, not from the breach of the reasonable endeavours obligation in clause 3.3(a) the GSA. However, as Verve was unsuccessful in establishing the unjust enrichment claim, the limitation of liability clause in the GSA applied.
To see the full judgment in this case, please click here.