The High Court recently handed down a decision which illustrates the dangers of generic clauses such as “reasonable efforts” or “good faith”.

The case of Electricity Generation Corporation v Woodside Energy Ltd v Electricity Generation Corporation [2014] HCA 7 involved a long term gas supply agreement (GSA) between Electricity Generation Corporation, trading as Verve Energy (Verve) and various gas suppliers including Woodside Energy Ltd (the Sellers).

Separate contracts between Verve and each of the Sellers are contained in the GSA. Under the GSA each seller was obliged to make available for delivery to Verve a proportionate share of a maximum daily quantity of gas and to use “reasonable endeavours” to make available to Verve a supplemental maximum daily quantity of gas (SMDQ). The GSA also provides that in deciding whether they are able to supply SMDQ, the Sellers may take into account all “relevant commercial, economic and operational matters”. Both these matters are contained in clause 3.3 of the GSA.

A key issue for the High Court to consider was whether the Sellers had breached this “reasonable endeavours” obligation.

In June 2008 there was a shortage of supply of natural gas in the Western Australian market, which resulted in the Sellers offering to supply gas to other customers. As a result the Sellers informed Verve that they would not receive the SMDQ for an indefinite period but did offer to supply Verve with the gas at a price higher than that in the GSA. Verve commenced proceedings arguing the Sellers has breached clause 3.3 by failing to use “reasonable endeavours” to deliver the SMDQ.

The trial judge held that the sale of gas to other customers came under ‘commercial matters’ and decided that the Sellers did not breach clause 3.3. This was reversed on appeal. This was then appealed again to the High Court.

The High Court decided that the clause 3.3 did not oblige the Sellers to supply SMDW to Verve notwithstanding conflict with their own business interests.

What is considered “reasonable was conditioned by not only the Sellers’ responsibilities to Verve but also their entitlement to take into account all relevant commercial, economic and operational matters”. The effect of the latter was that the Sellers were not obliged to sacrifice business interests whilst using reasonable endeavours to deliver SMDQ.

The lesson to take away from this case is that if you wish certainty around clauses which use terms such as “reasonable endeavours”, or “good faith’, ‘best endeavours’ or ‘acting reasonably’ some thought needs to be given to identifying and incorporating what that phrase means in the context in which it is being used.