In our April update we highlighted the key lessons from this Western Australia Court of Appeal case, concerning, amongst various issues, the scope of a contractual obligation to use “reasonable endeavours”.The High Court, by a 4-1 majority, has now overturned the decision of the Court of Appeal.
The key points
When drafting “reasonable endeavours” clauses, parties should bear in mind:
- Such clauses do not impose unconditional obligations on the parties.
- What is “reasonable” is to be assessed objectively, taking into account various circumstances, including the effect on a party’s business if the “endeavours” were performed. A party’s freedom to act in its own interests is not necessarily restricted by an obligation to use reasonable endeavours.
- Contracts which contain an express reference which is relevant to the business interests of an obligee may set their own standard of what is “reasonable”.
However, the structure of the “reasonable endeavours” clause in the contract, and in particular some specific wording used by the parties, means that the High Court’s decision may only have limited application in cases concerning more generic “reasonable endeavours” clauses.
The facts and the Court of Appeal
To briefly recap, Woodside Energy and other gas suppliers in Western Australia (the Sellers) were party to a Gas Sale Agreement (GSA) under which they were obliged to supply Electricity Generation Corporation (Verve) with gas up to a Maximum Daily Quantity, and to “use reasonable endeavours to make available” to Verve an additional amount of gas up to a Supplemental Maximum Daily Quantity (SMDQ) if Verve requested it.
The GSA provided that “[i]n determining whether the Sellers are able to supply SMDQ on a Day, the Sellers may take into account all relevant commercial, economic and operational matters.”
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. The Sellers took advantage of this situation by informing Verve that they 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 much higher than the SMDQ price.
The Court of Appeal held that, by failing to supply the SMDQ but instead offering the equivalent amount of gas under the STGSA, the Sellers breached their “reasonable endeavours” obligation. In considering whether the Sellers were “able” to supply the SMDQ, the Court of Appeal held that “able” was equivalent to “having capacity”, but keeping in mind the specific matters which the Sellers were entitled to take into account.
The High Court
The High Court confirmed that the modern Australian approach to the interpretation of commercial contracts is to objectively determine what a reasonable businessperson would have understood the terms to mean, in light of the language used by the parties, the surrounding circumstances known to the parties and the commercial purpose or objects to be secured by the contract.
Applying this approach, the majority held that the contract, when read as a whole, set its own standards with respect to the reasonable endeavours obligation, by its reference to the Sellers taking into account “relevant commercial, economic and operational matters”. A narrow reading of the word “able” (in the context of the Sellers being “able” to supply the SMDQ) was inappropriate, because that word had to be read in light of the Sellers taking into account commercial, economic and operational matters.
In dissent, Gageler J held that the Sellers’ construction effectively rendered the reasonable obligations clause illusory, as the Sellers, assessing their commercial interests, would only ever supply the SMDQ whenever the price for gas was high enough to be in their interests. In Gageler J’s view, this was inconsistent with the overall purpose of the GSA, which was to fix prices for the supply of gas. Accordingly, he held that the assessment of “relevant commercial, economic and operational matters” was to be made in the context of determining the Sellers’ capacity to supply the SMDQ.
Further issues considered
While this update has focussed on the reasonable endeavours point raised in the appeal, it is worth briefly noting that the Sellers also raised issues concerning a limitation of liability clause in respect of the reasonable endeavours obligation. Because the Court held that the reasonable endeavours clause had not been breached, they did not decide this point.
A copy of the reasons for judgment can be found here.