Commercially Reasonable Efforts: a Recent Delaware Supreme Court Holding Might Motivate Contract Drafters to Define the Term for Themselves

• Publication year: 2017
• Citation: Vol. 2017 No. 2
• Author: D. C. Toedt III

Commercially Reasonable Efforts: A Recent Delaware Supreme Court Holding Might Motivate Contract Drafters to Define the Term for Themselves

D. C. Toedt III

Dell Charles "D. C." Toedt III, a former co-chair of the Commercial Transactions Committee, is an attorney and arbitrator in Houston and a part-time law professor at the University of Houston Law Center, where he teaches contract drafting. He was formerly vice president and general counsel of BindView Corporation, a 500-employee, publicly-traded software company— which as outside counsel he had helped the founders start—until the company's successful "exit" when it was acquired by Symantec Corporation.

Contract drafters often use the term commercially reasonable efforts in lieu of stating more precise standards of performance. Many clients are drawn to such clauses, which can speed up contract negotiations, even though the vagueness of the term poses a risk of disagreement later. (Clients can sometimes be overconfident that "we'll just work it out later if the issue ever comes up"— forgetting that the congenial individuals who negotiated the contract might not be in the same jobs later.)

Williams Cos.: "Commercially reasonable efforts" means "all reasonable efforts"

The Delaware Supreme Court's recent holding in Williams Cos. v. Energy Transfer Equity¹ implies that contract drafters might want to specifically define commercially reasonable effort, possibly as stated at the end of this note, to reduce the risk that their clients will be caught unawares by a far-stronger commitment than they might have actually intended.

The court remarked that the use of commercially reasonable efforts "placed an affirmative obligat ion on the parties to take all reasonable steps"² to achieve the stated objective. (This, even though the contract elsewhere used the term reasonable best efforts,³ which, under the principle of inclusio unius, exclusio alterius, might have suggested that the two terms were intended to have different meanings.)

In a dissent on other grounds, Chief Justice Strine opined that commercially reasonable efforts is "a comparat ivel y strong" commitment, one that is only "slightly more limited" than best efforts.⁴ Indeed, in the proceedings below, the chancery court had all but equated the term commercially reasonable efforts with reasonable best efforts, holding that a party that had made such a commitment had "bound itself to do those things objectively reasonable to produce the desired [result]."⁵

But what do clients expect?

Clients might be taken aback by the notion that commercially reasonable efforts requires the making of all reasonable efforts; if pressed, many clients might rank "efforts" commitments in roughly the following ascending order:

• Reasonable efforts: One or more reasonable actions reasonably calculated to achieve a stated objective, but with no expectation that all possibilities are to be exhausted. Colloquially, this could perhaps be phrased as, "I'll give it a shot."
• Commercially reasonable efforts: Those reasonable efforts that reasonable business people would expect to be made, but again not necessarily all such efforts. Or, again colloquially: "I'll do what professionals would normally do." In a major lawsuit between the state of Indiana and IBM, the contract in question defined the term as "taking commercially reasonable steps [circularity, anyone?] and performing in such a manner as a well managed entity would undertake with respect to a matter in which it was acting in a determined, prudent, businesslike and reasonable manner to achieve a particular result."⁶
• Best efforts: All reasonable efforts—as a Canadian court said, "leaving no stone unturned in seeking to achieve the stated objective."⁷ Or it could be stated in sports terms: "I'll bring my "A" game." (In the U.S., courts sometimes define best efforts in terms of diligence, although some case law seemingly equates best efforts with mere reasonable efforts.⁸)

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These differences in client expectations about different "efforts" clauses could be illustrated with a...