Electricity Generation Corporation v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation

Woodside and other gas sellers refused Verve extra contract-priced gas after a supply disruption, offering costlier gas instead. The High Court held that a commercial contract means what a reasonable businessperson would understand its terms to mean, and that a 'reasonable endeavours' obligation is conditioned by any internal standard of reasonableness the contract supplies, here the Sellers' own commercial and business interests. The Sellers did not breach the GSA.

Verve is a statutory corporation that generates and supplies most of the electricity in the southwest of Western Australia. It bought gas for its power stations under a long term gas supply agreement, the GSA, with Woodside and other sellers. The GSA required the Sellers to make available a maximum daily quantity of gas, MDQ, on an unconditional basis, and to use "reasonable endeavours" to make available a further quantity above that, the supplemental maximum daily quantity or SMDQ. In deciding whether they were "able" to supply SMDQ, the Sellers could "take into account all relevant commercial, economic and operational matters".

On 3 June 2008 an explosion at Apache's gas plant on Varanus Island cut gas supply to the Western Australian market by 30 to 35 per cent, so demand exceeded supply. The Sellers told Verve they would not supply SMDQ for an indefinite period, offering gas at a much higher, prevailing market price under short term agreements instead. Verve entered those agreements under protest and paid the higher prices from 4 June until 30 September 2008, even though the Sellers had the capacity to supply the SMDQ Verve had nominated throughout that period.

The main issue was how to construe cl 3.3 of the GSA. Did the word "able" in cl 3.3(b) let the Sellers refuse to supply SMDQ for their own commercial reasons, even though they had the physical capacity to supply it, or was it limited to their capacity alone. If the Sellers had not breached cl 3.3, a further question was whether Verve's separate claim to recover the higher prices it paid, based on economic duress, still needed to be decided.

The majority held that the Sellers had not breached the GSA. The Sellers' appeal was allowed and Verve's appeal was dismissed.

A commercial contract is construed objectively. The Court said "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", read in light of the language used, the surrounding circumstances and the commercial purpose of the contract. An obligation to use "reasonable endeavours" is not absolute. Its content can be shaped by an internal standard of reasonableness that the contract itself supplies, including the obligor's own business interests.

Clause 3.3(b) supplied exactly that standard. The Sellers were entitled to weigh "relevant commercial, economic and operational matters" in deciding whether they were "able" to supply SMDQ, and this was not confined to physical capacity. The Court held that "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". Because the Apache explosion created a conflict between the Sellers' business interests and Verve's wish for gas at the contract price, the Sellers did not breach cl 3.3 by declining to supply SMDQ at that price. As there was no breach, the further questions about duress and restitution did not need to be decided.

Gageler J agreed that "reasonable endeavours" in cl 3.3(a) meant objectively reasonable endeavours, but read "able" in cl 3.3(b) as confined to the Sellers' objective capacity, not their wish for a better price. He reasoned that the Sellers' construction would render the reasonable endeavours obligation "elusive, if not illusory", since it would let the Sellers withhold gas whenever the market offered more money elsewhere. On this view the Sellers had breached cl 3.3(a), and Gageler J would have dismissed the Sellers' appeal, leaving the Court of Appeal's damages award intact. He agreed Verve's own appeal should fail, but only because cl 22.7(c) capped the Sellers' liability, including for any claim in restitution.