Source: https://journal.iaccm.com/contracting-excellence-journal/commercially-reasonable-efforts
Timestamp: 2019-04-23 18:02:49+00:00

Document:
The Delaware Supreme Court’s holding in Williams Companies, Inc. v. Energy Transfer Equity, L.P.1 implies that contract drafters might want to specifically define “commercially reasonable efforts,” possibly as stated in this article, to reduce the risk that their clients will be caught unawares by a far-stronger commitment than they might have actually intended.
But what do clients expect?
Under the Delaware Supreme Court’s Williams Companies holding, it might be argued that the commercially reasonable efforts standard could be met only by driving 68 mph or higher.
Commercially reasonable efforts: (a)“Commercially reasonable efforts” refers to at least those efforts that people experienced in the relevant business would generally regard as sufficient to constitute reasonable efforts in the relevant circumstances. Other uses of the term “commercially reasonable” have corresponding meanings; and (b) A party does not fail to act in a commercially reasonable manner, or to take commercially reasonable action, solely because it gives preference to its own interests over those of another party.
Reasonable efforts: (a) “Reasonable efforts” refers to one or more reasonable actions reasonably calculated to achieve the stated objective; (b)Any assessment of reasonable efforts is to give due regard to the information reasonably available to the relevant person at the relevant time, for example, the likelihood of success of specific action(s), the likely cost of other actions, the parties’ other interests, the safety of individuals and property, and the public interest; (c) A requirement to make reasonable efforts: (1) does not necessarily require taking every conceivable reasonable action and (2) does not require the obligated party to put itself in a position of undue hardship; and (d) A party obligated to make reasonable efforts may consider potential cost and potential return when determining what actions it must take to satisfy that obligation.
What if it’s not possible to agree on a definition of “commercially reasonable efforts”? In that case, contract drafters can think about provisions to encourage settlement and reduce the chances of getting bogged down in litigation over the term. Such provisions might include, for example, a baseball arbitration provision,13 requesting the court in any litigation to select one of the parties’ two competing proposals, without modification.
… (b) The dispute is to be decided by “last-offer” arbitration, sometimes known as “baseball” or “pendulum” arbitration, in which: (i) each party submits no more than two proposed determinations of the particular issue; (ii) the tribunal is jointly requested (if a court) or directed (if an arbitral tribunal) to select, as its determination of the particular issue, exactly one of the parties’ proposed determinations, in its entirety, without modification; ….
Defining “commercially reasonable efforts” can help clients avoid unpleasant surprises. If an agreed-in-advance definition isn’t feasible, then provisions to help the clients reach agreement about specific proposals can advance their long-term business interests.
On October 1, 2018, the Delaware chancery court continued that state judiciary's trend of defining commercially reasonable efforts as meaning all reasonable efforts. Akorn, Inc. v. Fresenius Kabi AG, No. 2018–0300–JTL, slip op. (Del. Ch. Oct. 1, 2018). Vice-Chancellor Laster's opinion recognized the chasm between what deal practitioners think the term commercially reasonable efforts means, versus what courts have said it means. The court's decision highlights (again) the importance of defining “commercially reasonable efforts” in contracts. For more details, see the author's blog post about the case.
Williams Companies, Inc. v. Energy Transfer Equity, L.P., No. 330 , 2017 Del. LEXIS 128 (Del. March 23, 2017).
at *27 & n.45 (Strine, C.J., dissenting) (citation omitted).
Williams Companies, Inc., v. Energy Transfer Equity, L.P., No. 12168, 2016 Del. Ch. LEXIS 92 (Del. Ch. June 24, 2016) (emphasis added).
Indiana v. IBM Corp., 4 N.E.3d 696, 716 n.12 (Ind. App. 2014), aff’d, 51 N.E.3d 150 (Ind. 2016).
Atmospheric Diving Systems Inc. v. International Hard Suits Inc., 89 B.C.L.R. (2d) 356 (1994). Australian and British courts take a similar view. See, e.g., Shawn Helms, David Harding & John Phillips, Best Efforts and Endeavours—Case Analysis and Practical Guidance Under U.S. and U.K. Law, Jones Day, July 2007, http://www.jonesday.com/Best-Efforts-and-EndeavoursCase-Analysis-and-Practical-Guidance-Under-US-and-UK-Law-07-30-2007/; Janet T. Erskine, Best Efforts versus Reasonable Efforts: Canada and Australia, McCarthy Tetrault, Nov. 30, 2007, http://mccarthy.ca/article_detail.aspx?id=3779.
SeeRestatement (Second) of Agency § 13, comment a (1957), quoted in Corporate Lodging Consultants, Inc., v. Bombardier Aerospace Corp., No. 63-1467-WEB, 2005 U.S. Dist. LEXIS 9259 at *13 (D. Kan. May 11, 2005), quoting T.S.I. Holdings, Inc., v. Lawrence S. Jenkins & Roger W. Hood, M.D., 924 P.2d 1239, 1250 (Kan. 1996). See generally John Pavolotsky, Best efforts clauses—what buyers expect versus how suppliers respond, IACCM, May 29, 2015, http://www2.iaccm.com/resources/?id=8571.
Kevin M. Ehringer Enterprises, Inc., v. McData Services Corp., 646 F.3d 321, 327 (5th Cir. 2011) (reversing judgment on jury verdict; best-efforts pro-vision was “too indefinite and vague to provide a basis for enforcement”).
See Herrmann Holdings Ltd. v. Lucent Technologies Inc., 302 F.3d 552, 559-61 (5th Cir. 2002) (reversing dismissal under Rule 12(b)(6); citing cases).
CKB & Assoc., Inc. v. Moore McCormack Petroleum, Inc., 809 S.W.2d 577, 581-82 (Tex. App.—Dallas 1991);see also, e.g., Will Taylor, Laurens Wilkes, Joshua Fuchs, Basheer Ghorayeb & Roy Powell, Contracts Requiring “Best Efforts” and “Commercially Reasonable Efforts,” 2015 A.B.A. Sec. Pub. Energy Lit. at https://apps.americanbar.org/litigation/committees/energy/articles/spring2015-0515-contracts-requiring-best-efforts-commercially-reasonable-efforts.html.
Baseball arbitration is named for a procedure used in Major League Baseball to resolve salary disputes between teams and their eligible players. Importantly, the procedure “is designed to produce a settlement, not a verdict.” Thomas Gorman, The Arbitration Process: The Basics, Baseball Prospectus, Jan. 31, 2005, http://www.baseballprospectus.com/article.php?articleid=3732(emphasis added).
Justin Sievert, Breaking down the MLB salary arbitration process, SportingNews, Jan. 13, 2018, http://www.sportingnews.com/mlb/news/mlb-salary-arbitration-process-breakdown-spring-training-2016/4jkawqkczi8i17cb4rhqjxseh.
SeeHunter Atkins, George Springer bets on self, gets lucrative deal, Houston Chronicle, (Feb. 5, 2018), https://www.houstonchronicle.com/sports/astros/article/George-Springer-bets-on-self-gets-lucrative-12553722.php.
DELL CHARLES “D. C.” TOEDT III, is a member of the Texas and California bars, is an attorney and arbitrator in Houston and teaches contract drafting at the University of Houston Law Center. He was formerly a shareholder and member of the management committee at Arnold, White & Durkee, a 150-lawyer intellectual property litigation boutique. Toedt left the firm to join a client software company as vice president and general counsel, serving there until the company was acquired by the global leader in its field.
EDITOR’S NOTE Except for two italicized paragraphs, one at the beginning of this article and the other at the end that cites a recent legal case on this issue -- this article was previously published in both the Business Law News of the State Bar of California (a hard-copy magazine) and in the Texas Bar Journal (TBJ).

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