Electricity Generation Corporation trading as Verve Energy v Woodside Energy Ltd & Ors; 
Woodside Energy & Ors v Electricity Generation Corporation trading as Verve Energy [2014] HCA 7

Overview

Yesterday, the High Court handed down its decision in Electricity Generation Corporation v Woodside Energy Ltd, an appeal against the Court of Appeal’s decision relating to a gas supply contract.

The sellers of gas (Woodside) appealed the Court of Appeal’s decision that the sellers had breached their obligation to use “reasonable endeavours” to supply additional quantities of gas to the buyer, Verve (Electricity Generation Corporation). Verve sought to make out its previously unsuccessful claim for unjust enrichment for economic duress.

A 4:1 majority of the High Court allowed the seller’s appeal.

The decision has overturned the Court of Appeal’s finding that the word “able” within the supplemental supply clause of the contract (In determining whether they are able to supply SMDQ on a Day), referred to the sellers capacity to supply the additional gas, such that the increase in the market price of gas did not absolve the sellers of its reasonable endeavours obligations. The decision confirms that “reasonable endeavours” does not extend to the requirement to do so to the extent that such endeavours conflict with a party’s own business interests. Additionally, the scope of the requirement to use “reasonable endeavours” may be qualified by reference to matters affecting that party’s business interests (i.e. commercial or operational matters) in the use of those endeavours.

Background

The sellers and Verve (the buyer) were parties to a Gas Sale Agreement (GSA) for the supply of gas up to a Maximum Daily Quantity and were required to “use reasonable endeavours to make available” to Verve an additional amount of gas up to a Supplemental Maximum Daily Quantity (SMDQ).

Due to an explosion at a gas production facility owned by a third party, Apache, the demand and market price for gas rose significantly. Following this explosion, the sellers informed 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 many multiples higher than that under the GSA.

A dispute subsequently arose over whether or not the sellers had breached their obligation under the Verve agreement to use “reasonable endeavours” to supply Verve the SMDQ between June and September 2008, rather than requiring Verve to tender for gas at market price, exceeding that of the SMDQ under the Verve agreement.

The Decision

Verve’s position was that the provision for consideration of these relevant matters was only applicable in determining whether the sellers had capacity to supply SMDQ, and not whether they wished to do so. The seller’s position was that the supplemental gas supply clause of the agreement operated to entitle them to determine their ability to supply to Verve after taking such commercial, economic and operational matters into account, as relevant to the sellers.

The High Court upheld the seller’s construction of the obligation to use “reasonable endeavours”. The seller’s entitlement to take into account their own commercial, economic and operational interests in using “reasonable endeavours” meant that market conditions following the Apache incident were able to be taken into account in considering the sellers capacity to supply SMDQ to Verve. Accordingly, the decision not to supply Verve with SMDQ during the period in question did not constitute a breach.

The majority determined that the agreement did not oblige the sellers to supply to Verve notwithstanding conflict with their own commercial interests, and opted for a construction of the supplemental gas supply clause which was “consistent with the surrounding circumstances known to the parties at the time of entering into the GSA”. These circumstances included the fact that the sellers sold and supplied to numerous buyers in addition to Verve and that the market price of gas at any given time may exceed the price in the GSA, depending on supply and demand (as was the case following the explosion at the Apache plant).

Reasonable endeavours

On the use of “reasonable endeavours”, the majority made the following points:

  • an obligation expressed as such is not an absolute obligation;
  • the nature and extent of an obligation is conditioned by what is reasonable in the circumstances including one which may affect an obligee’s business; and 
  • some contracts containing the obligation to use “reasonable endeavours” contain their own standard of what is reasonable.

The language used to express the obligation to supply MDQ was readily contrasted to the obligation to supply SMDQ – indicating an internal standard of reasonableness by which the obligation to supply the SMDQ could be measured.

Consequence of the decision

In overturning the Court of Appeal’s decision, the High Court has opened the door for a widened scope of operational and economic aspects to be considered in the context of the use of endeavours. Additionally, where contractual language is deemed to differ between core obligations those which require use of “reasonable endeavours”, reference to consideration of these operational and commercial aspects can act as a qualification on the use of those “reasonable endeavours”.

This decision should provide further clarity regarding the interpretation of “reasonable endeavours”. Despite this, it is still recommended that when imposing “reasonable endeavours” obligations, the parties to a contract should consider, and address, the extent to which (if any) this obligation will apply where there is a substantial shift in market conditions.

Our firm’s alert on the Court of Appeal case can be found here.

A summary of yesterday’s judgment can be found here.