Contract law – what is a reasonable endeavour?
The High Court of Australia has recently explained the definition of “use reasonable endeavours” in the performance of a contract. In the case of Electricity Generation Corporation trading as Verve v Woodside Energy, a substantial fire led to the shutting down of a gas plant in Western Australia. When demand exceeded supply, Woodside Energy sought to capitalise financially by claiming they could not deliver the quantities noted in their existing gas supply agreement with Verve, but instead they would provide the amounts sought under a new agreement, albeit at a much higher price. Verve sued Woodside, arguing that it had breached a clause in their contract which obliged Woodside to use “reasonable endeavours” to supply the supplemental amounts under the Gas Sale Agreement (GSA).
The High Court held Woodside was not in breach because 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.’
The High Court held a reasonable endeavours provision must be read subject to the above principles, and what is reasonable depends on the individual circumstances in each case. A contract can also contain an internal standard of what is reasonable, by an express reference to the business interests of the party obliged to use reasonable endeavours. The High Court ruled that a party subject to the obligation to use reasonable endeavours is entitled to consider its commercial interests in discharging its obligations to exercise reasonable endeavours.
The Court ruled that “reasonable endeavours” requires a balancing of interests, given the parties’ interests in this case were in conflict. In the Court’s opinion, the clause did not oblige Woodside to forgo or sacrifice their business interests when using reasonable endeavours to supply gas. In plain English, the reasonable endeavours clause could not contractually obligate them to sell gas at a loss. The Court held the Apache gas explosion incident resulted in a change in business conditions, leading to conflict between the Sellers’ business interests and Verve’s interest in obtaining gas at the price stipulated in the Agreement.