Exploding pipes, exploding prices: High Court rules on ‘reasonable endeavours’

In the recent case of Woodside Energy Ltd v Electricity Generation Corporation, the High Court considered the construction of a contractual clause requiring a party to ‘use reasonable endeavours’ to supply supplemental gas and found that a party’s contractual obligation to use ‘reasonable endeavours’ to deliver a product under a supply agreement did not require it to forgo its own business and commercial interests.

Facts

Electricity Generation Corporation, trading as Verve, is a statutory corporation responsible for generating and supplying electricity to a large area of Western Australia.

Verve entered into a long term gas supply agreement with various gas suppliers including Woodside Energy. Under the supply agreement, Woodside was obliged to provide gas up to a maximum daily quantity and to ‘use reasonable endeavours to make available’ a supplemental maximum daily quantity of gas.

Following the explosion of a gas plant operated by another supplier, gas supply to the Western Australian market was severely disrupted, which in turn caused a significant rise in the market price of gas.

Woodside subsequently entered into a number of gas supply contracts and informed Verve that they would be unable to supply any supplemental quantity of gas under the existing agreement but could instead supply an equivalent amount of gas at an inflated price.

Under protest, Verve entered into a short term gas supply agreement under which Woodside would supply gas at the prevailing market price, without being obliged to supply any specific quantity of gas.

Parties’ positions

In March 2009, Verve commenced proceedings in the Supreme Court of Western Australia against Woodside arguing that the Woodside had breached their obligation to use ‘reasonable endeavours’ to supply supplemental gas in accordance with the supply agreement.

Woodside argued that the requirement to ’use reasonable endeavours’ was tempered by another subclause in the supply agreement providing that Woodside must take into account ‘all relevant commercial, economic and operation matters’ in deciding they were ‘able’ to supply a supplemental quantity of gas.

Verve responded that ‘able’ refers to Woodside’s capacity to supply gas, rather than whether they wished to do so.

Decision at first instance and on appeal

At trial in the Supreme Court of Western Australia, the primary judge found that Woodside had not breached its reasonable endeavours obligation by refusing to supply supplemental gas where it was more profitable to supply the gas under a short term arrangement.

However, on appeal, the Court of Appeal held that the relevant consideration was the capacity to supply supplemental gas and therefore, Woodside had breached their ‘reasonable endeavours’ obligation.

Decision of the High Court

The High Court explained that a ‘reasonable endeavours’ type obligation is not an absolute or unconditional obligation, being necessarily conditioned by the surrounding circumstances.

The High Court also added that a contractual clause can contain in its own internal standard of what is reasonable. The chief commercial object of the supply agreement was to secure minimum gas supply, with additional gas supply being a supplementary purpose.

The High Court held that Woodside was not obliged to sacrifice its business interests for the purpose of this supplementary object, and so its decision not to supply additional gas to Verve was not a breach of contract.

Lessons

The decision of the High Court in Woodside is not a departure from existing legal principles – both sides accepted that the prevailing, objective test for contractual construction was correct. However, the Court found that the objective test allows for a court to consider the reasonable business interests of each party to an arms-length commercial contract, including each party’s desire to maximise profits.

The case serves as yet another example of the fact that a ‘reasonable endeavours’ clause may not necessarily provide much protection to parties where extraordinary circumstances intervene.