In an attempt to provide guidance, the High Court has explained what it means when a party promises to “use reasonable endeavours” in performing under a contract.
We are all familiar with the reasonable or best endeavours clause. It is a common term in all kinds of contracts.
In this recent case, 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).
In 2008, a fire caused the shutdown of a major gas plant in Western Australia resulting in demand for gas exceeding what could be supplied. Woodside sought to take advantage of their position and told Verve that they could not deliver the supplemental quantities noted in the “reasonable endeavours” clause in the GSA. Instead, what they would do was provide those amounts under another agreement, at a much higher price.
Verve did not agree but required gas to meet demand so accepted the terms of the new agreement ‘under protest’. Verve took the matter to the Supreme Court of WA, and to the High Court, arguing that Woodside had breached its obligations to use “reasonable endeavours” to supply the supplemental amounts under the GSA.
The High Court said that Woodside was not in breach because:
1. “reasonable endeavours” does not mean that that company has to do everything in its powers;
2. the nature of an obligation imposed depends on what is reasonable in the circumstances and you are not required to act against your own commercial interests;
3. contracts may include their own internal standard reasonableness, such as in this case 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.
The likely effect of this decision will provide an opportunity for everyone to draft long definitions of what “reasonable endeavours” means for each contract. This will result in difficulty for parties to enter into “simple” contracts or remove the use of the remove the use of the term “reasonable endeavours” entirely.
If you have any further queries, please contact Sheena Vinden, Senior Partner, on 9411 4466.