Electricity Generation Corporation v Woodside Energy Ltd
High Court of Australia · 2014
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640
After a gas plant explosion pushed market prices far above the price in a long-term contract, the sellers declined to supply extra gas at that price. Had they broken a promise to use "reasonable endeavours"?
What happened?
Electricity Generation Corporation, trading as Verve Energy ("Verve"), a statutory corporation that was the major generator and supplier of electricity to a large area of the south-west of Western Australia including Perth, bought gas for its power stations under a long-term gas supply agreement with several suppliers, including Woodside Energy Ltd (together "the Sellers") ([1]-[2]). The agreement obliged the Sellers to make a maximum daily quantity of gas available (cl 3.2) and to "use reasonable endeavours" to make available an additional supplemental daily quantity, "SMDQ" (cl 3.3(a)). Clause 3.3(b) said that, in determining whether they were able to supply SMDQ on a day, the Sellers "may take into account all relevant commercial, economic and operational matters" ([17]).
On 3 June 2008 an explosion at a gas plant operated by Apache Energy Limited on Varanus Island cut supply to the Western Australian market by 30 to 35 per cent ([5]). On 4 June the Sellers told Verve they would not supply SMDQ for an indefinite period and offered an equivalent quantity of gas at a price above the agreement's SMDQ price. Under protest, Verve entered a "fully interruptible" short term agreement at the prevailing market price ([7]), and later, again under protest, a second one for the period to the end of September 2008 ([9]). It was common ground that the Sellers had the capacity to supply the nominated SMDQ in that period ([9]). Verve claimed that the Sellers had breached cl 3.3 and, further, that they had exerted illegitimate pressure and placed it under economic duress ([23]).
Le Miere J, the primary judge, preferred the Sellers' construction of cl 3.3 and found no breach ([25]-[26]). The Court of Appeal of the Supreme Court of Western Australia (McLure P, Newnes and Murphy JJA) resolved the construction issue against the Sellers ([30]). Special leave was granted in each appeal ([33]).
What did the Court decide?
By a majority of four to one, the Court accepted the Sellers' construction of cl 3.3. French CJ, Hayne, Crennan and Kiefel JJ ordered that Verve's appeal (P47/2013) be dismissed and that the Sellers' appeal (P48/2013) be allowed, set aside paragraphs 1 to 4 of the Court of Appeal's orders, and ordered in their place that the appeal to that Court be dismissed, with costs ([34], [51]). Because the Sellers had not breached the agreement, the duress and restitution questions did not arise ([4]), and the Court found it unnecessary to consider the construction of cl 22.7, which capped the Sellers' liability ([50]).
Gageler J dissented. He would have dismissed the Sellers' appeal and left the Court of Appeal's award of damages intact ([68]), and he would also have dismissed Verve's appeal, on the footing that cl 22.7(c) applied to its restitution claim ([69]-[73]).
Proposition
What is the principle?
The meaning of the terms of a commercial contract is determined objectively, by what a reasonable businessperson would have understood those terms to mean. That requires consideration of the language the parties used, the surrounding circumstances known to them and the commercial purpose or objects the contract is to secure, and, unless a contrary intention is indicated, a commercial contract is construed to avoid making commercial nonsense or working commercial inconvenience. French CJ, Hayne, Crennan and Kiefel JJ stated this as the approach this Court has reaffirmed ([35]); Gageler J put the question in objective terms too: terms are construed to mean what reasonable commercial parties in their position can be taken together to have meant ([53]).
An obligation to use reasonable endeavours to achieve a contractual object is not an absolute or unconditional obligation; its nature and extent are conditioned by what is reasonable in the circumstances, which can include circumstances that may affect the obligor's business ([41]). Applying a businesslike interpretation to a long-term gas supply agreement between arm's-length parties, French CJ, Hayne, Crennan and Kiefel JJ held that cl 3.3(b) entitled the Sellers to take their own business interests into account in deciding whether they were "able" to supply the supplemental quantity, so that cl 3.3 did not oblige them to supply it when conflict with those interests arose ([47], [49]). Gageler J dissented on the construction of cl 3.3(b) ([59]-[62]).
Why does this case matter?
Students who learn a test from this case tend to recite it and stop, when the marks lie in the next step: working the wording and structure of the particular clause through that test. The case is a good measure of that step because the Justices divided over the answer on one clause of one contract, so the decision shows that a shared method does not carry a shared result.
Exam and application relevance
Where a question asks what a commercial contract term means, state the objective question in the Court's words, identify the language, the circumstances known to both parties at the time of contracting and the commercial purpose, and apply each to the clause in dispute. The joint reasons at [45]-[48] show the working: the commercial purposes of the agreement are identified, the clause is read against its neighbours, and the construction is checked against circumstances known to both parties.
Where the clause is an endeavours obligation, say what the endeavours are measured against in that contract, because the joint reasons at [43] and [46] distinguish contracts that supply their own internal standard of reasonableness. The case was decided on the construction of this agreement, and Gageler J's different reading of the same clause ([62]-[66]) shows the issue was contestable.
The joint reasons do not discuss whether ambiguity must be shown before surrounding circumstances are considered, so this case is not authority on that debate in either direction.
Check your understanding
1. In Woodside, how did the joint reasons ([35]) and Gageler J ([53]) each describe the question a court asks when construing the terms of a commercial contract, and which of them reached the construction the Sellers advanced? 2. The Sellers had the capacity to supply the nominated gas ([9]). How did the joint reasons ([47]) and Gageler J ([62], [66]) differ on whether that mattered to the meaning of "able" in cl 3.3(b)? 3. Why did the Court not decide Verve's economic duress claim ([4], [50])?