More “Efforts” Analysis That I Disagree With

As you’ll note from my recent blog posts, I’ve been having a busy time in the marketplace of ideas.

Here’s another installment, prompted by a reader inquiry: Had I seen this article in Canadian M&A Perspectives? And what did I think of it?

Corporate Counsel Article

Well, let’s start by looking at this article in Corporate Counsel, which the Canadian article cites in its first sentence. It’s by Eric Fishman, a partner at Pillsbury, with help from an associate. Mr. Fishman is making a repeat appearance here: in this April 2013 blog post I critiqued, without mentioned Mr. Fishman by name, a previous Corporate Counsel article that he wrote.

The Corporate Counsel article says that “some states, such as Delaware, hold that ‘best’ requires something more than ‘reasonable’ efforts.” I’m not sure about that: I’ve only dipped into the torrent of efforts caselaw, but other than a couple of marginal cases, I have yet to see a U.S. case that states categorically that such a distinction exists. (If I’ve missed anything, let me know.)

But for our purposes, that’s neither here nor there, because the Corporate Counsel article goes on to say, “many other jurisdictions find the difference in these phrases, in practice, to be purely semantic.” The choice of words is odd: semantics pertains to meaning, so saying that something is “purely semantic” is an unlikely way of trying to downplay its significance. That said, I get the point, which is essentially that U.S. courts regard all efforts provisions as meaning reasonable efforts.

But the focus of the Corporate Counsel article is what comes next:

More fundamentally, while parties often engage in lengthy, but inconsequential negotiations over the type of efforts to be exercised, they often fail to specify just what the party burdened by the clause is supposed to do.

…

The lesson from these authorities is straightforward: parties should consider investing less time in negotiating over the adjective that attaches to an efforts clause, and more time specifying how such efforts are to measured. Just by way of example, the sample clause from above could be modified as follows:

“Supplier agrees to use reasonable efforts to satisfy the requirements of Buyer for widget x by, among other things, (i) at all times maintaining staffing and factory capacity sufficient to complete at least 10 widgets per month, (ii) operating the facility 24 hours/day when necessary to meet widget orders from Buyer, (iii) prioritizing Buyer’s orders over the orders of other buyers when a conflict in timely fulfilling widget orders exists, (iv) sub-contracting fulfillment obligations to another approved supplier when necessary, and (v) giving immediate notice to Buyer whenever the foregoing undertakings cannot be met.”

By providing a non-exclusive list of benchmarks for performance in the efforts clause itself, drafters can materially reduce the risk that the clause will be found to be unenforceable, and markedly increase the odds of getting that which they had hoped to secure.

I disagree, for two reasons:

First, the most basic way to reduce confusion is to use only the phrase reasonable efforts. That way, you avoid the possibility of someone’s having the idea that a degree of effort beyond what is reasonable would be required—an untenable notion. (More about that below.)

And second, yes, you have to provide a standard for measuring performance. If you simply say, “Acme shall use reasonable efforts to produce lots of widgets,” it’s likely that a court would conclude that you haven’t provided enough of a yardstick. That’s something I address in the “Establishing a Benchmark” section of MSCD chapter 8. By contrast, what the Corporate Counsel article proposes doesn’t make sense. Efforts provisions are for when you can’t address an issue by means of a flat obligation, for example because achieving the objective in question isn’t entirely within the control of the party under the obligation. Yet in his sample provision, Mr. Fishman attempts to use a bunch of flat obligations to flesh out an efforts obligation. Since they’re flat obligations, they have no bearing on what reasonable efforts means. You’re left with the question, what, if anything, should the reasonable efforts obligation apply to? I would state the flat obligations separately, then determine what if anything is left for a reasonable efforts obligation.

Canadian M&A Perspectives Article

Now back to the Canadian article. My reservations about it are more basic.

The article trots out the Canadian conventional wisdom:

The adjectives “reasonable” and “best”, as applied to efforts clauses, vary in meaning depending on jurisdiction. In Canada, the courts have concluded that the terms “reasonable” and “best” signify different degrees of diligence and the difference is material.

It then goes on to use that distinction as a reason for shying away from the approach suggested in the Corporate Counsel article:

The case for benchmarking in a “best efforts” context has less appeal. As mentioned above, in the Canadian context, best efforts requires a part to leave “no stone unturned” and providing benchmarks may muddy the waters as to what in fact each party expected of the other.

But the problem with the Canadian article is that the distinction is bogus, and it promises what it can’t deliver. In this 2010 blog post I discuss the Canadian case that ostensibly stands for that distinction, Atmospheric Diving Systems Inc. v. International Hard Suits Inc. It’s perhaps the most broken bit of legal reasoning that I’ve ever encountered.

Furthermore, no drafter has to pay attention to this bogus distinction. Instead, do the following:

• Use reasonable efforts, which isn’t susceptible to the same confusion as best efforts.
• Use an appropriate benchmark, as described in MSCD.
• You can even define reasonable efforts. That’s largely a matter of specifying what actions aren’t required.
• Otherwise use flat obligations to reduce as much as possible what you have to cover in a reasonable efforts provision. See MSCD 8.53.