In an attempt to provide a pragmatic and commercial judgment the High Court has explained what it means when a party promises to "use reasonable endeavours" in performing a contract.We are all familiar with the reasonable or best endeavours clause. It pops up in all kinds of contracts.
This time the clause was in a Gas Supply Agreement (GSA) between Verve (the trading name of Electricity Generation Corp) and Woodside Energy and other sellers (Woodside).
A Fire in the West
In 2008 a massive fire caused the shutdown of a major gas plant in WA resulting in demand for gas exceeding supply. Woodside sought to take advantage of their position and told Verve that they couldn't deliver the supplemental quantities noted in the "reasonable endeavours" clause contained in the GSA. Instead, what they would do was provide those amounts under another agreement, at a much higher price. Sound reasonable?
Verve thought not. But they were stuck, so they accepted the terms of the new agreement 'under protest'. They then marched to the Supreme Court of WA, and all the way the High Court, arguing that Woodside had breached its obligation to use "reasonable endeavours" to supply the supplemental amounts under the GSA.
What the High Court said
The High Court said that Woodside was not in breach because:
- “reasonable endeavours” doesn’t mean that a company has to do everything in its powers;
- the nature of an obligation imposed depends on what is reasonable in the circumstances and you don’t have to act against your own commercial interests;
- contracts may include their own internal standard of reasonableness, such as here where Woodside was expressly allowed to take into account ‘relevant commercial, economic and operational matters’.
The Court held that Woodside was not obliged to supply the supplemental gas to Verve.
We think that the likely effect of this case is that everyone will start drafting long definitions of what “reasonable endeavours” means for each contract. Hardly likely to result in short, plainly written contracts. Still, if you consider the three points above and tailor the ‘reasonableness’ to suit your company hopefully it will be interpreted in a way that makes common sense.