The Licensing Corner

• Jurisdiction: United States,Federal,California
• Author: JAMES C. ROBERTS III Global Capital Law Group PC
• Publication year: 2015
• Citation: Vol. 40 No. 1

The Licensing Corner

JAMES C. ROBERTS III Global Capital Law Group PC

BEING (UN)REASONABLE WITH AGREEMENT TERMS

Introduction

Drafting lawyers use "standard" legalese all the time, often without thinking through the implications. A recent article got me thinking about several such instances.¹ I've chosen two oft-used terms: "Best efforts/commercially reasonable efforts" and "unreasonably withholding consent."

How Reasonable Are "Best Efforts?"

Best efforts and commercially reasonable efforts often arise in negotiation drafts. When asked, most lawyers would argue that the common meaning of these terms is straightforward: "Best" means the highest possible efforts and "commercially reasonable" means efforts that within the commercial context would be reasonable.

Interestingly, some commentators argue that these distinctions are superfluous because judges will temper the "best efforts" to a standard that is "reasonable" by its nature. In other words, no one can be expected to go "above and beyond the call of duty"² Put another way, if best efforts exceeds reasonableness then the contract language compels a party to do something that is unreasonable.

There is merit to that argument yet it might contradict another element of contract interpretation, namely, the intent of the parties. If the parties include "best efforts" then, even accepting the proposition that such demands would be unreasonable, it means that the parties intended such supra-normal efforts. However, I do agree that California courts would probably squeeze "best" efforts down into a reasonable domain.

Avoid Both Standards? Perhaps this argument gets a bit too theoretical. I don't want to wait for the courts to decide the meaning of language I have drafted, not to mention the embarrassment if my agreement becomes the focus of a lawsuit. My own view is to avoid both standards because they are qualitative and vague. "Best efforts" could be like the ever-shifting goalposts. "Commercially reasonable" gets further away from risks with qualitative standards but its reference to the commercial setting remains vague. Commercially reasonable for Google could bankrupt a burgeoning startup. Is this what you want?

We don't work in a world where these standards can always be avoided (as an aside and least of all because the other side will insist on it—especially when the attorney across the table is a recently-minted attorney, as inexperienced lawyers seem willing to fight to preserve all language in favor of his or her client. But I digress).

One well-known approach is to specify the commercial framework in which reasonableness would be defined, i.e., the specific sector. This approach might result in language such as "commercially reasonable efforts in the xyz sector for companies in a position similar to [party x]." Make sure that the "xyz sector" is narrowly defined.

Hang on a Minute. Better yet is to take a step back and answer a few questions: What are efforts in question? Why can't they be measured by something more objective? Is some level of "effort" really required? Finally, what are the remedies, other than a breach (whether of the contract or of warranties)?

"Efforts" are usually found...