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17/04/14

The High Court signals end of Jireh debate and reads "reasonable endeavors" obligation broadly

The High Court decision in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 is of interest in relation to the commercial interpretation of contracts generally and specifically the use and meaning of “reasonable endeavours” or “best endeavours (or efforts)” clauses in contracts (which are generally considered the same).

Here, the Seller was obliged under a gas supply agreement to make available to the Buyer a daily quantity of gas. The Buyer could also nominate up to a Supplemental Maximum Daily Quantity ( SMDQ ) of gas at a particular price set by the agreement. Such a nomination triggered the following other clauses:

  •  cl 3.3(a) stated that the Seller “must use reasonable endeavours to make available” gas up to the SMDQ; and
  •  cl 3.3(b) provided that “[i]n determining whether they are able to supply SMDQ on a [d]ay, the Seller… may take into account all relevant commercial, economic and operational matters…”.

An explosion at a gas plant caused a 30-35% reduction in gas supply to the market, which led to demand exceeding supply. The market price for gas rose substantially, and the Seller refused (in reliance on clause 3.3(b)) to supply any additional gas under the SMDQ provision of the agreement. 

The High Court majority (French CJ, Hayne, Crennan and Kiefel JJ) agreed with the trial judge in holding that the reasonable endeavours clause allowed the Seller to so refuse, as the Seller could take into account its own business interests (ie the potential to sell gas at a higher price to another buyer) and 3.3(b) limited 3.3(a). Gageler J dissented, preferring the interpretation adopted by the Court of Appeal that the Seller was obliged to provide and could not take advantage of the higher market price. 

Restatement of contract construction principles – an end to the Jireh debate 

The High Court summarised the objective approach to determining the rights and obligations of parties. Particularly noteworthy is the statement that the determination of the meaning of the contract 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” (para [35]). 

This appears to “put to bed” the debate as to whether ambiguity is required before a court can consider surrounding circumstances in the process of construction. The High Court special leave decision inWestern Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; 282 ALR 604 appeared to decide (on that interim basis) that the “true rule” of admission of surrounding circumstances was that ambiguity was required. While no reference is made to Jireh (or the many cases that have cited it since including the High Court decision of Public Service Association of South Australia Incorporated v Industrial Relations Commission of South Australia [2012] HCA 25 where it was cited without discussion at footnote [50])), the position now is that evidence of surrounding circumstances is admissible to assist in the process of commercial contract construction. 

A “reasonable endeavours” obligation does not necessarily sacrifice business interests 

The High Court majority also provided the following general comments about “reasonable endeavours” obligations: 

  •  an obligation to use reasonable endeavours is not an absolute or unconditional obligation; 
  •  the nature and extent of such an obligation is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that may affect an obligee’s business.  An obligee's freedom to act in its own business interests, in matters to which the agreement relates, is not necessarily foreclosed, or to be sacrificed, by an obligation to use reasonable endeavours to achieve a contractual object; the interests of the other party cannot be “paramount” in every case; and 
  •  some contracts containing an obligation to use or make reasonable endeavours to achieve a contractual object contain their own internal standard of what is reasonable, by some express reference relevant to the business interests of an obligee (at [35] and [41]-[43].

While the comments of the High Court appear to have strengthened the potential impact of business considerations on the formulation of a “reasonable endeavours” obligation, drafting will nonetheless remain imperative in any “reasonable endeavours” clause, and its application will be fact specific. The more detail provided in the contract as to the standard that constitutes “reasonable endeavours”, the more certainty the parties will have in terms of application. Parties wishing greater discretion in their performance should include clear terms to that effect in the contract.

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