A successful High Court appeal by Woodside and other gas sellers reiterates the importance of drafting commercial contracts to ensure that ‘reasonable endeavours’ obligations are clearly defined.
The Sellers were successful in the case originally brought by Verve Energy following a temporary disruption of the supply of gas as a result of an explosion at the Varanus Island gas plant in Western Australia in 2008.
Long term gas supply agreements are critical for the supply of gas for domestic and industrial use. However, the High Court’s decision in Verve is significant for all types of commercial contracts and provides further guidance on the interpretation of “reasonable endeavours” clauses.
THE VERVE DECISION
The High Court reiterated the correct approach to construing the terms of a commercial contract.The meaning of the terms is to be determined by what a reasonable business person understands the terms to mean. This will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose to be secured by the contract.
The High Court also made general observations about obligations to use “reasonable endeavours”.Such obligations are not absolute or unconditional, and the nature and extent of the obligations are conditioned by what is reasonable in the circumstances. Contracts can also contain their own internal standard of what is reasonable. (Read more on the details of the decision in High Court’s commercial approach to reasonable endeavours obligation)
REASONABLE VS BEST ENDEAVOURS - IS THERE A DIFFERENCE?
While a lot of time can often be spent negotiating the inclusion of endeavours clauses in contracts, Australian court decisions indicate this may not be time well spent. There appears to be no substantial difference between the obligation of “reasonable endeavours” and that of “best endeavours”.
Regardless of the phrasing, parties are usually obliged to do all that is reasonable in the circumstances to achieve the obligation, having regard to the nature, capacity, qualifications and responsibilities of the parties. The obligation does not involve going beyond the bounds of reason.
The Verve case emphasises that a party is not obliged to act against its own commercial interests – this is the required standard in Australia regardless of whether the contract requires the party to use “best” or “reasonable” or “all reasonable” endeavours.
AN INTERNATIONAL VIEW
Of course, these principles only apply to Australian contracts. It is important to keep in mind jurisdictional differences in the interpretation of “reasonable endeavours” and “best endeavours” when negotiating contracts with parties from other countries.
In the United Kingdom “all reasonable endeavours” clauses carry the same obligations as “best endeavours” clauses but “best endeavours” clauses, while still interpreted according to reasonableness, are more onerous than those worded as “reasonable endeavours”.
Similarly, Singaporean courts have recently found there is no practical difference between “best endeavours” and “all reasonable endeavours” yet “all reasonable endeavours” are, in turn, more onerous than “reasonable endeavours". The court reasoned that the latter may require a party to take only one reasonable course of action, not all of them.
The United States’ position is far less clear. While US courts appear to have found no meaningful distinction between “best efforts” and “reasonable efforts”, the terms more commonly used in US contracts, US lawyers seem to remain of the view that “best efforts” is a more onerous requirement.
INTERNAL STANDARDS OF REASONABLENESS
The Verve case clarifies that contracts can contain their own internal standard of what is reasonable when determining a “reasonable endeavours” obligation.
In Verve, clause 3.3(a) of the contract required the Sellers to use “reasonable endeavours” to supply supplementary gas (SMDQ). Clause 3.3(b) stated that “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 challenge was that the reference to “able to supply” did not expressly refer to the “reasonable endeavours” obligation.
The High Court found that the language of clause 3.3(a) was the language of qualified obligation, and clause 3.3(b) provided an internal standard of reasonableness against which the obligation to use “reasonable endeavours” could be measured. It was critical that under the contract, the Sellers were obliged to supply a minimum daily amount of gas in return for Verve paying an assured price for that gas. The obligation to use “reasonable endeavours” to supply the supplementary SMDQ could be contrasted with the unconditional obligation to supply the minimum daily gas requirement.
IMPLICATIONS FOR DRAFTING
If an endeavours clause is to be included in a contract, parties should consider whether to include specific and defined criteria to qualify the obligation. This can assist in interpreting the contract, minimising ambiguity and giving effect to the parties’ intentions.
This internal definition can include time limitations, expenses incurred and the performance of specific activities. Where possible, obligations should be measurable, for example by an industry standard. Parties should also consider whether the contract should allow for significant changes in market conditions or parties’ own commercial interests. The clearer the drafting of endeavours clauses, the better. Consistency is also crucial and parties should ensure that only one standard of endeavours is used throughout the contract.
If a contract includes a “reasonable endeavours” requirement 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.