In Western Australia at the time, it was big news. Amazing pictures flashed across our television screens - huge flames leaping into the air, clouds of choking black smoke.This was the result of a gas explosion at a plant North West of WA.
What was obvious, was that this disaster and the consequences that flowed from it, would eventually end up in litigation. What wasn't obvious, was that the High Court would clarify and reaffirm, amongst other things, the meaning of the term "reasonable endeavours".
In a nutshell, Woodside and Apache supply gas in WA, and Verve Energy (now Synergy) buys it. In 2008, an explosion ripped through Apache's gas plant, knocking out its operations for a time.
Woodside had an agreement with Verve to supply a guaranteed amount of gas on a daily basis and to use "reasonable endeavours" to make available to Verve extra gas (Supplemental Maximum Daily Quantity of Gas or SMDQ) if it needed it.
During the time Apache was off line, Verve needed SMDQ, but Woodside informed it that to get extra gas, Verve would have to tender for it – which it did successfully. Gas was in hot demand at that time.
The question was therefore, did Woodside breach its obligation under an Agreement to use reasonable endeavours to supply SMDQ to Verve during the time Apache was off line?
Woodside had the capacity during that time to supply SMDQ to Verve.
The Agreement
It is common in commercial contracts between parties with independent business interest, to include clauses framed in terms of "reasonable endeavours". In the Agreement between Woodside and Verve, clause 3.3(a) stipulated that Woodside must use reasonable endeavours to make available the SMDQ however, 3.3(b) conditioned that clause, by entitling Woodside to take into account its own commercial, economic and operational interests in relation to the suppliers of SMDQ.
In examining the conditioning clause (3.3(b)) and the Agreement as a whole, the High Court reaffirmed its prior judgments and approach to the interpretation of commercial contracts, meaning that these contracts should be given a business like interpretation.
In doing so, the court found that contractual obligations framed in terms of "reasonable endeavours" do not oblige a party to forego or sacrifice its business interests. The majority referred to Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1884) 156 CLR 41), where it was held that the interests of the opposing party, "could not be paramount in every case".
Terrel v Mabie Todd & Co Ltd (1952) 69 RPC 234 was also referred to in the judgment, where it was held that reasonable endeavours would not require the achievement of a contractual objective to the "certain ruin of the company or with utter disregard of the interests of the shareholders."
In addressing "reasonable endeavours", the High Court in this matter set out three general observations about obligations to use reasonable endeavours to achieve a contractual objective:
- The obligation is not absolute or unconditional.
- The extent of the obligation is conditioned by what is reasonable in the circumstances, which can include circumstances that may affect the obligee's business.
- Some contracts containing an obligation to use or make reasonable endeavours to achieve a contractual objective contain their own internal standard of what is reasonable, by some express reference relevant to the business interest of an obligee.
Thus, it held that Woodside was not obliged to forego or sacrifice its business interest when using reasonable endeavours to supply SMDQ available for delivery, and did not breach its obligation under the Agreement.
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