By Terry Warco, General Counsel and Treasurer, the High companies
Almost all transaction documents have a provision or two requiring a party to exercise an effort to achieve an end. Sometimes the provision requires the party to exercise “best efforts” to do so. Sometimes the effort required is “reasonable efforts.” If the parties to the document are business entities, it is common to see the effort described as “commercially reasonable.” Are these efforts different? Is there an ascending level of these efforts? Does it matter which words are used to describe the efforts?
Most people will probably be surprised to learn that there are no commonly accepted judicial definitions of these terms. Courts generally look beyond the words “best,” “reasonable” and, with limited exceptions, “commercially reasonable” when required to determine the level of effort a party is required to make. Rather, courts will look to the document and, if necessary, the facts and circumstances to give meaning to the terms.
As courts will do when asked to interpret words in a document, the judge will first look to the document itself to find a meaning. If the document defines a term, the court will apply that definition. If not explicitly defined, a judge will look more broadly at the document to determine if a definition can be derived from the context. If a broad look at the document is unhelpful, a judge will look to see if there is a course of dealings between the parties. As a last resort, the judge will look to the world at large for guidance.
The only way to be certain of the level of effort required is to define the term and to be consistent in its use throughout the document. A definition should use objective criteria to describe the actions required to satisfy “effort.” A definition should include specific examples. If it is not possible to include specific examples, include carve outs. For example, specify a dollar ceiling that a party is not required to pass. Provide that a party is not required to take actions which would be materially adverse to it. Provide for proportionality—the benefit gained by the receiving party is not substantially greater than the detriment suffered by the acting party.
Of course, very few transactional documents define the effort term. Without a definition, what factors can parties expect a judge to consider when determining the level of effort required? Most courts will treat best efforts and reasonable efforts as interchangeable. Courts will apply objective criteria—the effort a reasonable party would have made under the circumstances. If the document also requires good faith, courts will require that the party to have acted honestly and fairly. Looking at it another way, courts will not require the acting party to have taken every conceivable action, to take unreasonable actions, to jeopardize its own economic or business interests or to suffer substantial losses to perform.
Although “commercially reasonable” sounds like a higher standard, absent a definition a judge is likely to consider the above discussed factors to determine the level of effort required. A judge will consider what a similar business would do in the same situation. Said another way, what is reasonable?
To achieve certainty, define the term. If a party is expected to take certain actions, specify those actions. With or without a definition, consistently use the same term.
The above are things for you to think about and do not constitute legal advice. Before you enter a contract, consult with a qualified attorney.