Commercial contracts regularly include clauses that require a party to “use reasonable endeavours”, or alternatively “use best endeavours”, in the performance of some obligation.

On 5 March 2014, the High Court of Australia gave judgment  in the case of Electricity Generation Corporation T/as Verve Energy v Woodside Energy Ltd & Ors [2014] HCA 7[1], which dealt with such a clause in the context of a gas supply agreement in Western Australia.

In summary, Verve contracted with Woodside and other gas sellers to provide gas to its electricity generation plants which supplied electricity to a large area of south-west of Western Australia. Verve had a "take or pay" arrangement at one price for a guaranteed amount, but could then request an additional amount of gas from the Sellers for a different, higher, price.

The Sellers' obligations, in respect to the additional gas, was to "use reasonable endeavours" to make the extra gas available. The next sub-clause in the supply agreement then said that "in determining whether [the Sellers] are able to supply [extra gas] on a day, the Sellers may take into account all relevant commercial, economic and operational matters". 

In 2008 there was a gas plant explosion.  This led to a shortage of gas and a spike in the spot market price for gas. Verve called upon the Sellers to provide extra gas under the supply agreement. The Sellers refused to do so. They relied on the sub-clause to say that, for commercial and economic reasons, they were unable to supply the extra gas under the supply agreement. Instead, they offered to Verve (and Verve had no choice but to accept) a series of temporary supply contracts for the supply of gas at the much higher spot market price.

The majority in the High Court judgment[2] said that the sub-clause allowed the Sellers to refuse to supply the extra gas in these circumstances. In essence, the majority decided that in this case the requirement to “use reasonable endeavours” in the provision of extra gas took into account the Sellers’ subjective “commercial, economic and operational matters”, even if that caused detriment to Verve. In addition, the majority said that the word “able” used in the sub-clause was not, when the contract was looked at as a whole, confined to mere “capacity constraints” – that is, the physical ability to supply. Rather, the sub-clause allowed “commercial capacity” to be taken into account, including the fact that the spot price on the market that the Sellers might otherwise sell the gas was much greater than the price they would receive for the extra gas under the supply agreement.

In his dissenting judgment, Gageler J held that the sub-clause did not allow the Sellers to refuse to supply the extra gas under the supply agreement. Justice Gageler said that he was unable to see that reasonable commercial parties in the position of the Sellers and Verve, having agreed on a price to be paid for the supply of extra gas under the supply agreement, could then be taken to have also agreed that the Sellers could avoid the obligation to supply extra gas because the spot price was higher.  His Honour’s view was that the Seller’s construction of the sub-clause in the supply agreement was “elusive, if not illusory” and rendered the price fixed in the supply agreement for the extra gas “meaningful only if and when the Sellers consider it to their commercial advantage to accept it”.

On the one hand this decision is very specific to the terms of the contract in question. On the other hand, the decision demonstrates that courts will be more willing to allow a party to take into account their own commercial interests, even if it is to the detriment of the other party, provided that the obligation to use “best endeavours” sufficiently allows for those subject commercial interests to be taken into account.