Most Read Contributor in Australia, September 2016
In a decision handed down by the High Court on Wednesday 5 March
2014 the Court found that a party subject to an obligation to use
its "reasonable endeavours" to supply additional amounts
of natural gas under a minimum supply agreement, was entitled to
take its own commercial interests into account when performing the
obligations that were subject to the "reasonable
The decision broadly confirms that a "reasonable
endeavours" obligation in a commercial context does not give
any significant degree of protection to a party seeking to obtain
some benefit from such a provision.
The majority judgment in this High Court decision confirms the
applicability of well established principles of contract
interpretation in the context of commercial contracts that contain
an obligation for a party to use its' "reasonable
The Court held that the provisions of commercial contracts are
to be construed objectively: "Unless a contrary intention
is indicated, a court is entitled to approach the task of giving a
commercial contract a business like interpretation on the
assumption 'that the parties ... intended to produce a
commercial result.' A commercial contract is to be construed so
as to avoid it 'making commercial nonsense or working
commercial inconvenience.' "
A "reasonable endeavours" provision must be read
subject to these principles, and what is reasonable depends on what
is reasonable in the circumstances. The Court also held that a
contract may itself contain an internal standard of what is
reasonable by some express reference to the business interests of
the party obliged to use "reasonable endeavours".
The Court's decision was in favour of the party subject to
the obligation to use reasonable endeavours. That party was
entitled to take into account its commercial interests when
discharging obligations to exercise reasonable endeavours.
In his minority judgment Justice Gageler also confirmed the
applicability of the objective approach to what are
"reasonable endeavours" applying established principles
of contract interpretation, but His Honour took a different view of
their application to the provisions contract in issue.
The contract in issue was a long term gas supply agreement (GSA)
in Western Australia entered into by the Electricity Generation
Corporation trading as Verve Energy (Verve) and a number of gas
suppliers including Woodside Energy Limited (Woodside).
The contract made provision for Woodside to supply to Verve on
an Annual Maximum Quantity (AMQ) of gas
a Maximum Daily Quantity (MDQ) of gas, and
a Supplemental Maximum Daily Quantity (SMDQ) of gas.
The parties agreed that, under the provisions of the GSA,
Woodside was unconditionally obliged to supply gas the MDQ to
Verve. The obligation to supply SMDQ however, was not unconditional
and was supply of SMQD by Woodside to Verve was subject to a
"reasonable endeavours" provision.
An explosion took place in one of the gas suppliers'
generation plants which had the effect of reducing the amount of
gas available in the market to approximately 30% of usual available
supply in the market. The price of gas increased dramatically.
Woodside chose not to supply gas as SMQD under the GSA to Verve.
Woodside relied on the "reasonable endeavours" provision
in the GSA, arguing that the changed market conditions caused by
the reduced gas supply was a commercial matter relevant to whether
Woodside was "able to supply SMDQ". Woodside's only
obligation was to use reasonable endeavours to make SMDQ available
for delivery, taking into account "all relevant commercial,
economic and operational matters". The majority High Court
Justices agreed that Woodside was entitled to take into account its
commercial interests in the circumstances and that the obligation
to use reasonable endeavours did not constrain Woodside from
declining to supply SMDQ to Verve.
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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