Many commercial contracts contain provisions to the effect that one party must use their reasonable endeavors, best efforts or best endeavors to fulfill some promise to another party.
In the recent case of Electricity Generation Corporation v Woodside Energy, the High Court of Australia examined exactly what an obligation to use reasonable endeavors involved.
Woodside Energy (Woodside) and another business called Apache Energy (Apache), were the two main suppliers of natural gas in Western Australia. Electricity Generation Corporation (EGC) was a statutory body that supplied electricity to Western Australia and relied on natural gas from both Woodside and Apache to power its electricity stations.
EGC had entered a long term contract to buy natural gas from Woodside at a certain price (the initial market price). There were two relevant clauses in the contract, stated, essentially as follows:
Clause 3.2 Woodside will make available to EGC a guaranteed daily quantity of gas (GDQ);
Clause 3.3 In addition to the GDQ, Woodside will ‘use reasonable endeavors, taking into account all commercial, economic and operational matters’ to make available to EGC a supplemental daily quantity of gas (SDQ), should it be requested by EGC;
In June 2008 an explosion occurred at an Apache gas plant and stopped the plant’s production. As a result there was an undersupply of gas in the Western Australian market, driving up gas prices.
Shortly after the explosion, Apache and others, entered agreements to buy gas from Woodside above the initial market price. Woodside, now able to receive a higher price for their gas elsewhere, informed EGC that they would no longer make the SDQ available to EGC at the initial market price.
These facts gave rise to a dispute about whether Woodside had breached their obligations to use reasonable endeavors to supply the SDQ to EGC, by refusing to supply the gas to EGC at the lower price.
By a majority of four judges to one, the High Court sided with Woodside. Applying commercial considerations and having regard to the wording of clause 3.3, the court said that the contract did not oblige the Woodside to forgo or sacrifice their own business interests when applying their reasonable endeavors to supply the SDQ.
So, as it turns out, when it comes to exercising your reasonable endeavors in business, the above case seems to suggest that you don’t need to be very reasonable at all.
If you are engaged in any type of commercial dispute, contact Everingham Solomons, because Helping You is Our Business.
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