Electricity Generation Corporation v Woodside Energy Ltd
Electricity Generation Corporation v Woodside Energy Ltd
[2014] HCA 7 (High Court of Australia)
Case details
Court
High Court of Australia
Citations
Electricity Generation Corporation v Woodside Energy Ltd
[2014] HCA 7 ➤
251 CLR 640
88 ALJR 447
306 ALR 25
7 ARLR 361
4 BPR 9568
Judges
French CJ
Hayne J
Crennan J
Kiefel J
Gageler J (dissenting)
Appeal from
Supreme Court of WA (Court of Appeal)
Electricity Generation Corporation t/as Verge Energy v Woodside Energy [2013] WASCA 36 ➤
20 February 2013
Judges
McLure P
Newnes JA
Murphy JA
Trial
Supreme Court of Western Australia
Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2011] WASC 268 ➤
30 November 2011
Trial Judge
Justice Le Miere
Issues
Terms
Construction
Overview
Facts
Electricity Generation Corporation, trading as Verve Energy, was the major generator and supplier of electricity to southwest WA, including Perth. It purchased natural gas under a long-term supply agreement (the GSA) with various gas suppliers, including Woodside (the sellers). These contracts included a requirement that the sellers use 'reasonable endeavours’ to make available to Verge a ‘supplemental maximum daily quantity of gas’ (the SMDQ). It stated:
Cl 3.3 Supplemental Maximum Daily Quantity
(a) If in accordance with Clause 9 ('Nominations') the Buyer's nomination for a Day exceeds the MDQ, the Sellers must use reasonable endeavours to make available for delivery up to an additional 30TJ/Day of Gas in excess of MDQ ('Supplemental Maximum Daily Quantity' or 'SMDQ').
(b) In determining whether they are able to supply SMDQ on a Day, the Sellers may take into account all relevant commercial, economic and operational matters and, without limiting those matters, it is acknowledged and agreed by the Buyer that nothing in paragraph (a) requires the Sellers to make available for delivery any quantity by which a nomination for a Day exceeds MDQ where any of the following circumstances exist in relation to that quantity:
(i) the Sellers form the reasonable view that there is insufficient capacity available throughout the Sellers' Facilities (having regard to all existing and likely commitments of each Seller and each Seller's obligations regarding maintenance, replacement, safety and integrity of the Sellers' Facilities) to make that quantity available for delivery;
(ii) the Sellers form the reasonable view that there has been insufficient notice of the requirement for that quantity to undertake all necessary procedures to ensure that capacity is available throughout the Sellers' Facilities to make that quantity available for delivery; or
(iii) where the Sellers have any obligation to make available for delivery quantities of Natural Gas to other customers, which obligations may conflict with the scheduling of delivery of that quantity to the Buyer.
(c) The Sellers have no obligation to supply and deliver Gas on a Day in excess of their obligations set out in Clauses 3.2 and 3.3 in respect of MDQ and SMDQ respectively."
Following an explosion at a gas plant which reduced supply of gas in WA, but which did not impact the sellers, the sellers advised Verve Energy that they would not supply the SMDQ. They instead supplied a range of other customers at higher prices than provided for in the GSA. Under protest, Verge Energy entered into short term contracts with the suppliers for supplementary gas at much higher rates than provided for in the original long-term agreement.
A dispute arose about whether the sellers had breached the requirement to ‘use reasonable endeavours’ to provide the SMDQ. [For other issues discussed see High Court blog commentary, linked below].
The claim
Verve argued that the sellers had breached their obligations under cl 3.3 to use ‘reasonable endeavours’ to deliver the SMDQ to Verge and that by offering the equivalent amount under short term supply contracts at higher prices they had exerted ‘illegitimate pressure and placed Verve under economic duress’ (HCA para 24).
In particular, Verve argued that cl 3.3(b) that referred to the Sellers taking account of ‘all relevant commercial, economic and operational matters’ was only relevant to a determination of whether the Sellers had capacity to supply the SMDQ, not whether they wished to do so (HCA para 24).
The trial judge
Justice Le Miere preferred the Seller’s construction of their obligation, observing:
In the context of cl 3.3(b) commercial matters include the sale of gas to other customers or potential customers and the profitability of such sales compared with the profitability of supplying SMDQ under the GSA. The Sellers may take such matters into consideration in determining whether they are 'able to supply SMDQ on a Day'. [trial judgment para 70]
As a result, his Honour found that the Seller’s had not breached cl 3.3 of the GSA.
Justice Le Miere also rejected Verve’s claim of duress.
On appeal to Queensland Supreme Court (Court of Appeal)
An appeal by Verve succeeded, with McLure P finding that the natural and ordinary meaning of cl 3.3 was that the Sellers were required to use reasonable endeavours to supply SMDQ to Verve when it was the subject of nomination by Verve. The word ‘able’ mean ‘capacity to supply’.
The Court of Appeal also found that the Sellers had applied illegitimate pressure to Verve which caused it to enter into the short term supply agreements, but that there was no cause of action for unjust enrichment unless and until the short term agreements were rescinded (see HCA para 32).
On appeal to High Court
The issue was whether the ‘reasonable endeavours’ clause had been breached. If the Court agreed with the Sellers’ interpretation than the issue of duress did not arise.
The High Court (by majority) accepted the construction proposed by the Sellers and upheld the appeal.
High Court of Australia
Chief Justice French and Justices Hayne, Crennan and Kiefel
18 The crucial issue of construction is the relationship between the Sellers' obligation in cl 3.3(a) to "use reasonable endeavours" to make SMDQ available for delivery to Verve, and the Sellers' entitlement under cl 3.3(b), in determining whether they "are able to supply SMDQ" on any particular day, to "take into account all relevant commercial, economic and operational matters".
…
[35] Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. 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".
…
[37] The Sellers urged that, read as a whole, cl 3.3 imposed an obligation to use reasonable endeavours to supply SMDQ, which was qualified or conditioned by the Sellers' entitlement to take into account their own commercial, economic and operational interests in relation to that supply of gas. Applying this construction, the Sellers contended that the Apache incident, and the consequential business conditions in the market, were matters which the Sellers were entitled to take into account under cl 3.3(b) in determining whether they were "able" − having regard to their capacity and business interests − to supply SMDQ nominated by Verve. Accordingly, the Sellers' actions in declining to supply Verve with nominated SMDQ in the relevant period, and in supplying gas that was available (ie above firm commitments, which included MDQ) on a fully interruptible basis and at prevailing market prices, did not constitute a breach of cl 3.3.
[38] Verve agreed that cl 3.2 contained an unconditional obligation which could be contrasted with cl 3.3, the latter of which imposed a standard of endeavours that was reasonable in the circumstances. Verve's substantive answer to the Sellers' construction thereafter was largely defensive. Verve submitted that if the Sellers' construction of cl 3.3 were correct, the obligation to use reasonable endeavours to supply SMDQ was left without practical content, leading to the submission that the Sellers' construction was "uncommercial and objectively unlikely" and inconsistent with the whole of the GSA. The nomination procedure was relied on by Verve as a complex regime supporting the proposition that the obligation to use reasonable endeavours was engaged in some unqualified way on receipt of a nomination for SMDQ. The "take or pay" obligation was described as an incentive (although not an obligation) for Verve to obtain SMDQ from the Sellers. Verve urged, as it had in the courts below, that the word "able", as it occurs in cl 3.3(b), should be construed as a reference to the Sellers' capacity to deliver SMDQ and not as a reference to their willingness to do so.
[39] In essence, Verve contended that cl 3.3, correctly interpreted, obliged the Sellers to supply nominated SMDQ to Verve, notwithstanding the circumstance that the prevailing market price of gas was significantly higher than the tranche 3 price in the GSA. In applying that interpretation, Verve characterised the Sellers' actions in the relevant period as a breach of their obligation to use reasonable endeavours to supply SMDQ.
Reasonable endeavours
[40] Contractual obligations framed in terms of "reasonable endeavours" or "best endeavours (or efforts)" are familiar. Argument proceeded on the basis that substantially similar obligations are imposed by either expression. Such obligations are not uncommon in distribution agreements, intellectual property licences, mining and resources agreements and planning and construction contracts. Such clauses are ordinarily inserted into commercial contracts between parties at arm's length who have their own independent business interests.
[41] Three general observations can be made about obligations to use reasonable endeavours to achieve a contractual object. First, an obligation expressed thus is not an absolute or unconditional obligation. Second, the nature and extent of an obligation imposed in such terms is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that may affect an obligor's business. …
[42] … an obligation to use reasonable endeavours would not oblige the achievement of a contractual object "to the certain ruin of the Company or to the utter disregard of the interests of the shareholders". An obligor'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.
[43] Third, 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 obligor.
Clause 3.3
[44] The GSA, pre-eminently a commercial contract between parties at arm's length with their own independent business interests, should be given a businesslike interpretation in accordance with the authorities and the approach described above.
[45] Broadly described, the chief commercial purpose and objects of the GSA are twofold. First, Verve obtains a secure supply of gas which the Sellers are obliged to make available for delivery up to the specified MDQ, and secondly, the Sellers have an assured price in respect of the specified AMQ, which Verve is obliged to take and pay for, or pay for if not taken. … Those provisions have the effect of insulating the parties from respective risks of fluctuations in demand and price in the context of a large domestic and commercial electricity market, at least to the extent of those quantities and the unconditional obligations imposed in respect of them.
[46] A supplementary commercial purpose or object of the GSA is the supply of SMDQ at the tranche 3 price, bearing in mind that, subject to the "take or pay" obligations for AMQ, Verve is not contractually bound to buy SMDQ from the Sellers and the Sellers are not contractually bound to reserve capacity in their plants for SMDQ. The obligation to use reasonable endeavours to supply SMDQ, provided for in cl 3.3, can be readily contrasted with the unconditional obligation to supply MDQ specified in cl 3.2. By way of contrast, the language of cl 3.3(a) is recognisably the language of qualified obligation, and cl 3.3(b) provides an internal standard of reasonableness by which the obligation to use reasonable endeavours to supply SMDQ can be measured.
[47] Taken as a whole, cl 3.3 provides for a balancing of interests if the business interests of the parties in respect of the supply of SMDQ do not entirely coincide, or if they conflict. What is a "reasonable" standard of endeavours obliged by cl 3.3(a) is conditioned both by the Sellers' responsibilities to Verve in respect of SMDQ and by the Sellers' express entitlement to take into account "relevant commercial, economic and operational matters" when determining whether they are "able" to supply SMDQ. Compendiously, the expression "commercial, economic and operational matters" refers to matters affecting the Sellers' business interests. The relevant ability to supply is thus qualified, in part, by reference to the constraints imposed by commercial and economic considerations. The non‑exhaustive examples of circumstances in which the Sellers will not breach the obligation to use reasonable endeavours to supply SMDQ, found in cl 3.3(b)(i), (ii) and (iii), are not confined to "capacity" (or capacity constraints). The effect of cl 3.3(b) is that the Sellers are not obliged to forgo or sacrifice their business interests when using reasonable endeavours to make SMDQ available for delivery. Verve's submission that "able" should be construed narrowly, so as to refer only to the Sellers' capacity to supply, fails to give full effect to the entire text of cl 3.3(b) and must be rejected. The word "able" in cl 3.3(b) relates to the Sellers' ability, having regard to their capacity and their business interests, to supply SMDQ. This is the interpretation which should be given to cl 3.3.
[48] The construction which has been accepted is consistent with surrounding circumstances known to both parties at the time of entering the GSA, which include the circumstances that the Sellers sell and supply gas to customers and buyers in the market other than Verve, some essential services depend on gas supply, and the prevailing market price of gas at any particular time may be greater (or less) than the tranche 3 price in the GSA.
[49] … cl 3.3 did not oblige the Sellers to supply SMDQ to Verve notwithstanding conflict with their own business interests. …
[emphasis added; footnotes omitted]
Justice Gageler (dissenting)
…
[53] Commercial parties contracting at arm's length are free to agree on terms each considers to be to its own commercial advantage. The terms of their agreement, however, are construed by a court to mean what reasonable commercial parties in their position can be taken together to have meant.
…
[54] Clause 3.3 imposes an additional obligation on the Sellers which operates against the background of the Buyer having a continuing obligation under cl 9.1 to nominate to the Sellers, in advance of each day, the quantity of gas the Buyer requires under the GSA for the following seven days. …
[56] Clause 3.3(a) provides that, if the Buyer's nomination for a day exceeds MDQ, the Sellers "must use reasonable endeavours" to make gas available for delivery in excess of MDQ up to an additional daily quantity specified as the supplemental maximum daily quantity ("SMDQ"). There is now no dispute between the parties that the reference in cl 3.3(a) to "reasonable endeavours" is to endeavours which are objectively reasonable. There is also now no dispute between the parties that cl 3.3(b), in entitling the Sellers to "take into account all relevant commercial, economic and operational matters" in "determining whether they are able to supply SMDQ on a [d]ay", is concerned with the Sellers' use of endeavours which are objectively reasonable in accordance with cl 3.3(a).
…
[58] The fundamental difficulty that I have with the construction of cl 3.3(b) of the GSA now advanced by the Sellers is that I am unable to see how reasonable commercial parties in the position of the Sellers and the Buyer, having agreed in cl 6.1(d) on a fixed price for such gas as may be delivered daily by the Sellers in excess of MDQ and having agreed in cl 3.3(a) that the Sellers must use reasonable endeavours to make gas nominated by the Buyer available for delivery up to SMDQ, can be taken to have meant by cl 3.3(b) to give the Sellers a discretion not to make gas available for delivery up to SMDQ merely because market circumstances present an opportunity for the Sellers to demand a substantially higher price for that gas than the price fixed by cl 6.1(d).
[59] The Sellers' construction is one which renders the obligation to use reasonable endeavours imposed on the Sellers by cl 3.3(a) of the GSA elusive, if not illusory, and which renders the price fixed by cl 6.1(d) of the GSA a price which is meaningful only if and when the Sellers consider it to their commercial advantage to accept it. The construction would, in commercial terms, eliminate the distinction carefully drawn in cl 3.3 between delivery of nominated gas in excess of MDQ up to SMDQ, in respect of which the Sellers are subjected to an obligation by cl 3.3(a), and the delivery of gas in excess of MDQ and SMDQ, in respect of which cl 3.3(c) makes clear that the Sellers are subjected to no obligation.
…
[60] The better construction of cl 3.3(b) is that advanced by the Buyer and unanimously accepted in the Court of Appeal of the Supreme Court of Western Australia. In allowing the Sellers to "take into account all relevant commercial, economic and operational matters" in "determining whether they are able to supply SMDQ on a [d]ay", cl 3.3(b) is directed to the ability or capacity of the Sellers to make gas nominated by the Buyer available for delivery in the performance of their obligation under cl 3.3(a) to use reasonable endeavours to make gas nominated by the Buyer available for delivery up to SMDQ. The reference in cl 3.3(b) to the Sellers being "able" to supply SMDQ on a day is to objective ability or capacity in the same way as the reference in cl 3.3(a) to "reasonable endeavours" is to objectively reasonable endeavours.
[61] Clause 3.3(b) operates on that construction to ensure that if the Sellers are objectively unable (as distinct from being subjectively unwilling) to supply SMDQ on a day by reason of "relevant commercial, economic and operational matters", they will not be required to make gas available to the Buyer under cl 3.3(a). …
[66] The wholly understandable desire of the Sellers to maximise their profits throughout the period of the GSA might well be described as a "commercial" or "economic" matter. But their desire to maximise their profits by withholding gas from delivery to the Buyer under the GSA so as to be able to sell that gas at a higher price would not be "relevant" to "whether they are able to supply SMDQ on a [d]ay" within the meaning of cl 3.3(b). Their desire would not be "relevant" because it would not bear objectively on their ability or capacity to make gas nominated by the Buyer available for delivery up to SMDQ. …
[68] Accepting the Buyer's construction of cl 3.3(b) of the GSA, I would therefore dismiss the Sellers' appeal, leaving the award of damages by the Court of Appeal intact. …