The phrase "reasonable endeavours" is widely used in commercial contracts and, due to the subjective nature of what each party considers reasonable, is often the cause of disputes.
In the recent case of Woodside Energy Ltd & Ors v Electricity Generation Corporation t/as Verve Energy, the High Court examined the meaning of this phrase in a long term gas supply agreement and reinforced the need to take a commercial approach to interpreting contracts. The case also highlights the difficulty in interpreting this phrase. Despite all judges taking a "commercial approach to construction", the High Court, by majority, overturned the unanimous decision of the Court of Appeal, which had previously overturned the trial judge's decision.
Woodside Energy (Woodside) and Electricity Generation Corporation (Verve) were parties to a Gas Sale Agreement (GSA) under which, Woodside was required to:
- supply Verve with gas up to a maximum daily quantity, and
- "use reasonable endeavours to make available" an additional amount of gas up to a supplemental maximum daily quantity (the additional gas).
Due to an explosion at a gas production facility owned by Apache (the other main supplier of gas in the market), the available supply dropped and the market price spiked.
Woodside informed Verve that it would no longer supply it with the additional gas under the GSA, but rather would supply an equivalent quantity of gas under short-term gas sale agreements at a much higher price.
The issue – what are reasonable endeavours?
The GSA required Woodside to "use reasonable endeavours to make available" the additional gas. However, there was a separate condition in the GSA stating that, "[i]n determining whether [Woodside is] able to supply SMDQ on a day, [Woodside] may take into account all relevant commercial, economic and operation matters". The condition also set out a number of examples where Woodside would not be obligated to supply SMDQ.
Woodside argued that the words "all relevant commercial, economic and operation matters" qualified the word "able" in the reasonable endeavours obligation, which meant that it had not breached its obligation by refusing to supply the additional gas in circumstances where it was more profitable to sell the gas under short-term gas sale agreements.
Verve argued that the word "able" referred to Woodside's capacity to supply the gas rather than their willingness to do so.
Court of Appeal
The Court of Appeal agreed with Verve's interpretation and held that the word "able" referred to Woodside's capacity to supply the additional gas, and the increase in the market price of gas did not alter Woodside's reasonable endeavours obligation (see our article Economic duress: be careful how you act when you hold all the power under a contract).
The High Court split 4:1, holding that the word "able" does not refer to Woodside's capacity to supply the additional gas.
The majority based their decision on the following reasons:
- The two commercial purposes of the GSA were:
- Verve obtaining a secure supply of gas, which Woodside was required to deliver, and
- the supply of the additional gas at a set price. However, unlike the secure supply, Verve was not contractually bound to buy it and Woodside was not contractually bound to reserve capacity for it.
- The "reasonable" standard of endeavours under the GSA is qualified by both:
- Woodside's responsibilities to Verve for the supply of the additional gas, and
- Woodside's express entitlement to take into account "relevant commercial, economic and operational matters" when determining whether it is "able" to supply the additional gas.
- The expression "commercial, economic and operational matters" refers to matters affecting Woodside's business interests. The relevant ability to supply is therefore qualified, in part, by the constraints imposed by commercial and economic considerations.
- The non-exhaustive list of circumstances where Woodside would not breach the obligation to use reasonable endeavours was not confined to "capacity" (or capacity constraints).
Accordingly, the majority held that the word "able" relates to Woodside's ability, having regard to its capacity and business interests, to supply the additional gas. This meant that Woodside was not required to sacrifice its business interests when using reasonable endeavours to make SMDQ available for delivery.
Justice Gageler (in dissent) stated that this interpretation renders the obligation to use reasonable endeavours effectively meaningless, and meant that the price fixed by the GSA for the additional gas would only be meaningful if Woodside considered it to its commercial advantage to accept it. That is, it would operate as a floor price and, if this was correct, there is no apparent reason to have included the clause at all.
In Justice Gageler's view, this construction would also eliminate the deliberate distinction between the regimes for the delivery of the:
- specified amounts of additional gas (subject to a fixed price), which was subject to the reasonable endeavours obligation, and
- gas in excess of that specified amount, for which it was clear under the GSA that Woodside was not subject to any obligations.
The term "all reasonable endeavours", or variations of it, is often introduced into contracts to water down an absolute obligation. In many cases this is an appropriate manner of dealing with an unknown future and the myriad of possible situations that may be encountered.
However, as this case highlights, the interpretation of the clause will depend on the context of the overall contract, and this is an area where reasonable minds often differ. Accordingly, if you have a specific situation and you want it dealt with in a particular manner, it is always better to explicitly deal with it in the contract, rather than rely on a term that is subject to multiple interpretations.
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.