A promisor in an agreement is often required to use “reasonable endeavours” to comply with an obligation, but what does that term really mean?
The key principles in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 remain relevant
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 remains the most relevant High Court case in determining the standard of “reasonable endeavours” in a commercial contract.
Facts
Woodside Energy Ltd and others (the sellers) agreed to supply natural gas to the Electricity Generation Corporation (the buyer) under a long-term contract (GSA).
Under the GSA, the buyer may nominate the sellers to supply additional gas and the sellers are required to use “reasonable endeavours” to make the additional gas available at a set price.
The sellers, in determining whether they are able to supply the additional gas, were expressly permitted under the GSA to take into account all relevant commercial, economic and operational matters.
The following circumstances (non-exhaustive) that entitled the sellers not to supply the additional gas to the buyer were also expressly set out in the GSA:
- the sellers form the reasonable view that there is insufficient capacity available throughout the sellers’ facilities to make that quantity available for delivery;
- the sellers form the reasonable view that there has been insufficient notice of the requirement for that quantity to undertake all necessary procedures to ensure that capacity is available throughout the sellers’ facilities to make that quantity available for delivery; or
- where the sellers have any obligation to make available for delivery quantities of gas to other customers, which obligations may conflict with the scheduling of delivery of that quantity to the buyer.
There was a temporary shortage of gas supply in Western Australia due to a third-party gas plant explosion. The market price for the supply of gas during that time was, as a result, far exceeding the set price in the GSA.
Since the explosion, the sellers refused to provide additional gas to the buyer at the set price in the GSA. Instead, the sellers sold additional gas to the buyer under a separate agreement at prevailing market price.
The sellers were alleged to have repudiated the GSA.
The key principles
The High Court made the following key observations:
- the terms of a commercial contract must be determined by what a reasonable businessperson would have understood those terms to mean;
- contractual obligations framed in terms of “reasonable endeavours” or “best endeavours (or efforts)” are similar;
- an obligation to use “reasonable endeavours” is not an absolute or unconditional obligation;
- the nature and extent of the obligation to use “reasonable endeavours” are conditioned by what is reasonable in the circumstances, which can include circumstances that may affect an obligor’s business. For example, an obligation to use reasonable endeavours would not oblige the achievement of a contractual object “to the certain ruin of the company or to the utter disregard of the interests of the shareholders”; and
- contracts containing an obligation to use or make reasonable endeavours to achieve a contractual object may contain their own internal standard of what is reasonable, by some express reference relevant to the business interests of an obligor.
Decision of the High Court
The majority of the High Court allowed the appeal from the sellers based on the following:
- the “reasonable” standard of endeavours in the GSA is conditioned by both the sellers’ responsibility to the buyer but also by the sellers’ express entitlement to take into account “relevant commercial, economic and operational matters” when determining whether they are “able” to supply the additional gas;
- the expression “relevant commercial, economic and operational matters” refers to matters affecting the business interests of the sellers;
- the word “able” relates to the seller’s ability, having regard to their capacity and their business interest, to supply the additional gas, and should not be confined to “capacity”; and
- the GSA did not oblige the sellers to supply the additional gas to the buyer notwithstanding conflict with their own business interests.
The minority of the High Court, on the other hand, dismissed the sellers’ appeal on the basis that word “able” should be directed to the ability or capacity of the sellers to make the additional gas available – the GSA should operate on that construction to ensure that if the sellers are objectively unable (as distinct from being subjectively unwillingly) to supply the additional gas by reason of “relevant commercial, economic and operational matters”.
What does that mean to you?
The standard of “reasonable endeavours” is generally dependent on the contractual context and commercial objectives of the parties.
The degree of flexibility renders it difficult to understand whether a party has sufficiently discharged its obligation to use “reasonable endeavours” to achieve a contractual object.
To limit the scope of uncertainty, the following is recommended when preparing and negotiating contracts:
- clear and consistent wording must be used. That is, if a party is required to use “reasonable endeavours” then the words “reasonable endeavours” should be used throughout the contract. A party should assume that “reasonable endeavours”, “best endeavours” or words to that effect do not have substantial difference until the Australian courts determine otherwise;
- set out specifically and in detail what is required and not required to satisfy the “reasonable endeavours” standard; and
- where necessary, set time limits and caps in amounts to limit risks of non-compliance.
If you would like to discuss this article with us, please contact Yanlie Leung, Senior Associate on (02) 9261 5900.