Posted on March 16, 2014 by Stuart Simington

More on ‘best’ or ‘reasonable’ endeavours clauses

We previously blogged on a case which discussed what ‘best’ or  ‘reasonable’ endeavours means in a commercial contract in a development context: here. A new High Court decision provides further guidance about how these obligations are to be construed.

Facts

In Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 (5 March 2014)) a seller was required to use reasonable endeavours to make available for delivery a certain amount of  gas nominated by the buyer. However another clause qualified that obligation by providing that in  determining whether it was ‘able to supply the buyer‘, the seller could ‘take into account all relevant commercial, economic and operational matters’.

Decision

In construing the contract, the majority of the Hight Court firstly provided a handy reminder about the general principles governing interpretation of commercial contracts:

[35] … The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean... That approach is not unfamiliar…. As reaffirmed, 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…. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”…. As Arden LJ observed in Re Golden Key Ltd…, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience….

The Court then focused on  the nature and extent of the obligation for the seller to use ‘reasonable endeavours’ to supply.

The Court confirmed that what was ‘reasonable’ in the circumstances could relate to circumstances that affect the seller’s business. In that context, the Court confirmed that  the freedom to act in a party’s own business interests is not necessarily foreclosed, or to be sacrificed, by an obligation to use reasonable endeavours.

Of particular interest, the Court held that the contract itself may contain its own internal standard of what is reasonable. That was the case here.

The effect of allowing the buyer to take the specified matters into account in determining whether ‘it was able to‘ supply the gas requested,  enabled the seller to have regard to both its ‘capacity to supply’ and also its ‘business interests’.

The decision illustrates why best and reasonable endeavours clauses need to be  carefully tailored to meet the precise intentions of the parties. It also  confirms that such clauses will not necessarily require a party to sacrifice business interests to comply with their obligation to use best or reasonable endeavours.