On 5 March 2014, the High Court handed down a decision in the
dispute between Verve Energy and Woodside Energy and a number of
gas suppliers which impacts on any organisation with existing
It is clear that that a seller/supplier (depending on the
drafting of the agreement) can take advantage of a commercial
opportunity, which is in its business interests even where there is
a reasonable endeavours clause. It is important both to review your
existing supply contracts to identify whether there are any
reasonable endeavours clauses that are subject to the business
interests of the supplier / seller and also to draft clauses as
clearly as possible to avoid any unintended results.
Summary of facts
The dispute arose from an explosion at the Apache gas plant at
Varanus Island, off Western Australia which resulted in a temporary
reduction in supply of natural gas to the Western Australian
market. This in turn led to demand quickly outstripping supply.
At the heart of the dispute was an argument about whether there
had been a breach of the obligation to use reasonable endeavours to
supply gas to Verve Energy under the long term gas supply agreement
that existed between the parties. Under the contract, the Sellers
were obliged to make available to Verve a maximum daily quantity of
gas, and to use "reasonable endeavours"
to make available a Supplemental Maximum Daily Quantity
(SMDQ) of gas at a fixed price. In determining
whether they were able to supply the SMDQ, the agreement relevantly
provided the Sellers could "take into account all
relevant commercial, economic and operational
After the explosion at Varanus Island, the Sellers advised Verve
that they would not supply SMDQ under the agreement for an
indefinite period. It was not in dispute that they had capacity to
do so. They did, however, offer to supply an equivalent quantity of
gas at the prevailing market price, which was a
significantly higher price than provided for under the long term
agreement. Under protest, Verve entered into short term gas supply
agreements with the Sellers for the period of the shortage but
commenced proceedings to, in effect, recover the difference between
the amount paid and the amount that would have been paid if the gas
was supplied under the long term agreement.
At first instance, Justice Le Miere held that there was no
breach of the agreement, a decision which was reversed by the WA
Court of Appeal.
Decision of the High Court
A majority of the High Court (French CJ, Hayne, Crennan and
Kiefel JJ) overturned the Court of Appeal decision. They made 3
observations about reasonable endeavours clauses:
The obligation is not an absolute or unconditional
The nature and extent of the obligation is necessarily
conditioned by what is reasonable in the circumstances, which can
include circumstances that may affect a party's business. They
accepted that an obligation to use reasonable endeavours did not
require the achievement of a contractual object "to the
certain ruin of the Company or to the utter disregard of the
interests of [its] shareholders." The freedom for a company to
act in its own business interests, in matters to which the
agreement relates, is not necessarily sacrificed by an obligation
to use reasonable endeavours to achieve a contractual object.
Some contracts containing an obligation to use or make
reasonable endeavours to achieve a contractual object contain their
own internal standard of what is reasonable, by express reference
to the business interests of the supplier.
The majority considered that, in this case, the reasonable
endeavours clause required a balancing of interests, as the
interests of the parties did not coincide in respect of supply of
the SMDQ. A "reasonable" standard of endeavours was
conditioned both by the Sellers' responsibilities to Verve in
respect of SMDQ, and by the Sellers' express entitlement to
take into account "relevant commercial, economic and
operational matters" when determining whether they are
"able" to supply SMDQ. The clause did not oblige the
Sellers to forgo or sacrifice their business interests when using
reasonable endeavours to supply SMDQ.
The High Court held the agreement did not
oblige the Sellers to supply SMDQ to Verve when the Apache incident
resulted in business conditions leading to conflict between the
Sellers' business interests and Verve's interest in
obtaining SMDQ at the price stipulated in the agreement.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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