Legal Update – Reasonable Endeavours Obligations

21 MAY 2014

In our Kinneally Miley Law Update in January 2013, we explained the purpose and effect of the obligation to use “reasonable endeavours” to achieve a specific contractual objective. In a recent case, the High Court was asked to revisit this type of obligation and in doing so made some comments to assist contracting parties to further understand this obligation.

The High Court case concerned a gas supply agreement between Woodside Energy Ltd (“Seller”) and Verve Energy (“Buyer”) which contained a clause requiring the Seller to use reasonable endeavours to supply an additional amount of gas if required by the Buyer. The agreement provided further that in determining whether to supply the additional gas, the Seller could take into account “all relevant commercial, economic and operational matters”. As it happened, an explosion occurred at a third party gas plant resulting in a reduction in the supply of gas and increase in the cost. The Seller reacted to this by offering the additional gas at a price higher than that set out in the agreement. The Buyer commenced legal proceedings arguing that the Seller had breached its obligation to use reasonable endeavours to supply additional gas in accordance with the agreement.

The Buyer’s position was that the only relevant consideration under this clause was whether the Seller had the “capacity” to supply the additional gas and not whether it wished to do so. The Seller’s position was that the clause entitled it to take into account the impact of the supply on its own commercial, economic and operational interests. In principle, the High Court agreed with the Seller and made the following points about the “reasonable endeavours” obligation:

1.  it is not an absolute obligation;

2.  the nature and extent of the obligation imposed is conditioned by what is reasonable in the circumstances, including circumstances that affect the business of the party under the obligation; and

3.  contracts with this obligation may contain their own internal standard of reasonableness.

While the High Court decision does not necessarily depart from established general principles, the third point in particular highlights the practical steps that parties can take to obtain further certainty about the scope of their responsibilities under this type of obligation. For example, in the High Court case, to reduce uncertainty about the meaning of the clause and possibly avoid the high costs associated with conducting litigation to the High Court, the parties could have considered identifying in the contract the circumstances in which the Seller would not be obliged to supply the additional gas at the contract rate, including due to specific changes in market conditions. In other circumstances, contracting parties may agree that the party under the obligation is not required to spend more than a certain amount of money to achieve the contractual objective. The more standards of reasonableness identified in the contract the less uncertainty there is likely to be.

If you require advice in relation to your obligations under these types of clauses in specific agreements, we would be pleased to assist you.

Contact Partner: Michael Coe
Direct Telephone : 07 3210 5709
Mobile Telephone : 0408 983 876
michael.coe@kinneallymiley.com.au

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