Most Read Contributor in New Zealand, September 2016
A contractual obligation to use "reasonable
endeavours" to supply gives the seller significant wriggle
room, according to a recent decision in Australia's highest
court1 which we expect will be used as a precedent in
Purchasers wanting an obligation to supply that is less
than absolute but provides some certainty may be best advised to
adopt alternative wording – "all reasonable
endeavours" or "best endeavours", or clearly-defined
required steps – and avoid giving suppliers the benefit of
subjective performance criteria.
The dispute concerned a long term gas supply agreement (GSA)
between Electricity Generation Corporation, trading as Verve, and
various gas suppliers in Western Australia.
The GSA required each supplier:
to provide a proportionate share of a Maximum Daily Quantity
(MDQ) of gas to Verve, and
to use "reasonable endeavours" to supply a
supplemental maximum daily quantity (SMDQ) but being able to take
into account "all relevant commercial, economic and
The litigation arose when an explosion at a gas plant reduced
supply of natural gas to Western Australia by around a third, so
that the market could no longer be fully supplied.
Verve was informed that it would not receive the nominated SMDQ
during that time and would have to enter a competitive tender
process under two short term supply contracts to receive any
additional gas above MDQ (invariably at a higher price than in the
Verve entered these contracts "without prejudice" to
its rights under the GSA. At issue was whether the suppliers had
breached the "reasonable endeavours" obligation in the
GSA and, depending on the answer to that question, whether Verve
was entitled to restitution for economic duress.
The majority of the High Court of Australia (4:1), reversing the
Western Australian Court of Appeal, found that the contract should
be given a "business-like interpretation". Verve was not
contractually bound to buy SMDQ from the Sellers and the Sellers
were not contractually bound to reserve capacity in their plants in
order to supply the SMDQ.
The majority concluded that the purpose of the wording, taken as
a whole, was to provide for a balancing of interests of the parties
in relation to SMDQ where those interests did not entirely coincide
"What is a reasonable
standard of endeavours ... is conditioned both by the Sellers'
express responsibilities to Verve in respect of SMQD and by the
Sellers' express entitlement to take into account relevant
commercial, economic and operational matters".
Applied to the facts, the GSA did not oblige the suppliers to
supply SMDQ to Verve when the gas plant explosion occasioned
business conditions leading to conflict between the supplier's
business interests (in obtaining the higher price on offer) and
Verve's interest in obtaining nominated SMDQ at the GSA
Gageler J disagreed, saying that the majority's construction
of the contract rendered the obligation to use reasonable
endeavours "elusive, if not illusory" and meant that the
price fixed by the GSA for SMDQ was "meaningful only if and
when the Sellers consider it to their commercial advantage to
Chapman Tripp comments
The decision, although it may be able to be confined to the
facts (in particular, by the express reference to the suppliers
being able to take into account "commercial and economic"
matters in determining whether to supply) is likely to become a
leading case for suppliers wanting to weaken the obligation imposed
by a "reasonable endeavours" clause.
To avoid the practical outcomes identified by Gageler J,
purchasers wishing to give teeth to a less than absolute obligation
to supply might consider alternative wording – such as
"best endeavours" or "all reasonable
endeavours" – and avoid the supplier having the benefit
of subjective criteria to determine whether it performs or not.
These phrases have been held by the Courts, most recently by the
Singapore Court of Appeal2, to impose higher burdens on
suppliers, including an obligation to act against their own
commercial interests where the nature and terms of the contract
indicate that this is an intended outcome.
Another approach would be to specify certain steps which have to
be taken in order to satisfy the reasonable endeavours obligation,
particularly if those steps may require one party to sacrifice its
Our thanks to Tim Smith and Bridgette Martin for
writing this Brief Counsel.
1Electricity Generation Corporation v
Woodside Energy Ltd, Woodside Energy Ltd v Electricity Generation
Corporation  HCA 7
2KS Energy Services Ltd v BR Energy (M)
Sdn Bhd  SGCA 16, at . The Court of Appeal's
judgment contains an extensive summary of the interpretation of
"best endeavours" and "all reasonable
endeavours" clauses in the United Kingdom, Australia and
3See for instance, Rhodia International
Holdings Ltd v Huntsman International LLC  EWHC 292
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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