Using 'reasonable endeavours' - the importance of internal contractual standards

In brief

The High Court has recently highlighted the significance of internal contractual standards when interpreting an obligation to use 'reasonable endeavours'. Partner Nick Rudge and Lawyers Goran Gelic and Timothy Leschke report on this development and its implications.  

Background

Electricity Generation Corporation trading as Verve Energy (Verve) and various sellers (including Woodside Energy Ltd) (the sellers) were parties to a long-term gas supply agreement (GSA).

Under the GSA, the sellers were required to use 'reasonable endeavours' to make available to Verve a daily quantity of gas. Importantly, in determining whether the sellers were able to supply the required quantities, the GSA specified that the sellers may take into account all relevant commercial, economic and operational matters.

Following an explosion at a gas production facility at a major supplier's plant, the demand and market price for gas substantially increased. From 4 June 2008 until 30 September 2008, the sellers did not supply the gas to Verve in accordance with the GSA, despite having the capacity to do so. Instead, the sellers supplied gas to Verve under new separate agreements at the prevailing market price (a substantially higher price than under the GSA).

Verve considered that, from 4 June 2008 to 30 September 2008, the sellers had breached their obligation to use 'reasonable endeavours' to supply the gas in accordance with the requirements of the GSA.

The decision

Consistent with the decision of the court at first instance (but contrary to the decision of the Court of Appeal), the High Court (by 4:1 majority) held that the sellers were not in breach of their obligation to use 'reasonable endeavours'.

Importantly, on the use of 'reasonable endeavours', the High Court made the following points:

• the obligation is not absolute or unconditional;
• the nature and extent of the obligation is necessarily conditioned by what is reasonable in the circumstances, which may include the parties' business interests; and
• contracts may contain their own internal standard of what is reasonable, including by some express reference relevant to business interests.

The High Court stated that the obligation to use 'reasonable endeavours' to supply the gas was conditional with internal standards. The parties had set their own internal standards in using 'reasonable endeavours' by allowing the sellers to take into account all 'commercial, economic and operational matters' in determining whether it was able to supply the gas. This was contrasted with other absolute obligations to supply lesser quantities of gas under the GSA.

The High Court confirmed that, when the gas plant explosion occurred, the sellers were not obliged to supply the gas under the GSA (at the lower than market price) in conflict with their own business interests.

Commentary

The High Court's decision indicates that courts will consider other provisions in the contract to help interpret what are 'reasonable endeavours'. It affirms the parties' ability to define and limit an obligation to use 'reasonable endeavours' in the contract (for example, by reference to economic, commercial and operational factors).

Industry participants will need to be conscious of the impact that other provisions in the contract may have on the obligation to use 'reasonable endeavours'. Consistent with the High Court's decision, internal contractual provisions may trigger performance that is potentially less (or more) onerous than appears on the face of the clause containing the 'reasonable endeavours' obligation.

For the industry, if 'reasonable endeavours' is used, it may be prudent to clearly set out in the contract what is expected of the party the subject of the obligation (for example, setting out a list of steps that should be taken). It is also important to impose some parameters (time limits or a sunset clause, for example) on the obligation in order to avoid a never-ending obligation (a concern previously highlighted by the Supreme Court in New South Wales. For more information on this decision see our Focus: 'All resonable endeavours' – endeavour forever?).

The industry should also not assume, at least in Australia, that alternative wording such as 'all reasonable endeavours' or 'best endeavours' will provide more protection. In Australia, the present judicial approach to 'best endeavours', 'all reasonable endeavours' and 'reasonable endeavours' is materially the same (although UK cases involving this issue have much better delineated the differences between these obligations).

For now, in Australia, it appears that parties will need to carefully consider the effect of other provisions in the contract before simply inserting an obligation to use 'reasonable endeavours', 'all reasonable endeavours' or 'best endeavours'. Industry participants should ensure that their contracts are properly drafted to avoid any ambiguity on the issue.