The High Court Considers "Reasonable Endeavours" in a Long Term Gas Sales Agreement

by K&L Gates LLP
Contact

On 5 March 2014, the High Court held, by majority, that Woodside Energy Ltd and other gas suppliers (Sellers) did not breach their obligation to use "reasonable endeavours", to make a certain quantity of gas available to Electricity Generation Corporation, trading as Verve Energy (Buyer) under a long-term Gas Sale Agreement (GSA) (Electricity Generation Corporation v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation [2014] HCA 7).
While this judgment essentially construes the specific clauses of the GSA, it is instructive to observe the High Court's approach to construing "reasonable endeavours" clauses, including its general observations that:

  • a reasonable endeavours obligation is not absolute or unconditional
  • the nature and extent of such an obligation is necessarily conditioned by what is reasonable in the circumstances, including business considerations
  • some contracts contain their own internal standard of what is reasonable.

Background

The Sellers had an obligation to supply up to the maximum daily quantity of gas (MDQ) nominated by the Buyer pursuant to the GSA. The Buyer was also entitled to seek an additional amount of gas in excess of the MDQ, defined as "the supplemental maximum daily quantity" (SMDQ) (clause 3.3 (a)). The Sellers were required to use "reasonable endeavours" to make the SMDQ available. In determining whether they were 'able' to make the SMDQ available, clause 3.3 (b) provided that the Sellers may take into account "all relevant commercial, economic and operational matters…".

In June 2008, an explosion occurred at gas production facilities on Varanus Island, which caused a temporary reduction in the supply of natural gas. As a consequence, the Sellers found themselves with an increased demand for gas from other electricity generators.

After the explosion, the Buyer sought and the Sellers refused to supply SMDQ. However, the Sellers offered to supply additional gas to the Buyer at a price that was higher than the GSA price for SMDQ. Under protest, the Buyer entered into short term agreements for the supply of additional gas.

The Buyer brought an action in the Supreme Court of Western Australia alleging that, among other things, the Sellers had breached their obligations to use reasonable endeavours to supply SMDQ. At the centre of the dispute was the correct construction of the Sellers' delivery obligations under the GSA and specifically the inter-relationship between clauses 3.3(a) and (b).

The trial judge found that the Sellers had not breached their obligations to use "reasonable endeavours" and that "commercial matters", which the Sellers were entitled to take into account under clause 3.3 (b), included the sale of gas to other customers and the profitability of such sales compared with the profitability of supplying SMDQ under the GSA. The Buyer appealed the trial judge's decision.

The Court of Appeal's Decision

The Court of Appeal found that the trial judge had erred in the construction of the "reasonable endeavours" clause and that the word "able" referred to the Sellers' capability or capacity to supply the gas. The increase in gas prices did not absolve the Sellers of their reasonable endeavours obligations.

The High Court's Decision

The High Court overturned the Court of Appeal's decision and reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract, noting that "it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract". The High Court confirmed that the GSA should be given a businesslike interpretation.
The majority of the High Court found that the reasonable endeavours clause did not oblige the Sellers to supply SMDQ to the Buyer when the explosion on Varanus Island "occasioned business conditions leading to conflict between the Sellers' business interests and [the Buyer's] interests in obtaining nominated SMDQ at the tranche 3 price".

In reaching that conclusion, the High Court considered:

  1. The purpose and objects of the GSA.
  2. The language of the reasonable endeavours clause, which imposed a qualified obligation on the Sellers to supply the SMDQ, in contrast to the language of clause 3.2, which imposed an unconditional obligation on the Sellers to supply MDQ.
  3. Clause 3.3(b), which provided an "internal standard of reasonableness by which the obligation to use reasonable endeavours to supply SMDQ can be measured". The internal standard referred to "all relevant commercial, economic and operational matters" and included matters affecting the Sellers' business interests so that the relevant obligation to supply SMDQ was qualified, in part, by those commercial and economic considerations.

The majority concluded that the effect of the 'internal standard clause' was that the Sellers were not obliged to forego, or sacrifice, their business interests when using reasonable endeavours to make the SMDQ available for delivery.

In a dissenting judgment, Justice Gageler agreed with the approach of the Court of Appeal. His Honour was unable to see how reasonable commercial parties could have intended to give the Sellers discretion not to make gas available for delivery up to SMDQ "merely because market circumstances present an opportunity for the sellers to demand a substantially higher price for that gas…".

His Honour accepted that the understandable desire of the Sellers to maximise profits might be described as a 'commercial' or 'economic' matter. However, this desire could not be relevant to whether the Sellers were 'able' to supply SMDQ "because it would not bear objectively on [the Sellers'] ability or capacity to make gas nominated by the Buyer available…".

Written by:

K&L Gates LLP
Contact
more
less

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.