During my seminar at the Calgary office of Blakes last Saturday, I made my usual point regarding best efforts: as a matter of idiom and contract logic, it’s untenable to suggest that a best efforts obligation is more onerous than a reasonable efforts obligation. Case closed, game over.
I’ve previously considered Canadian caselaw on this ostensible distinction, most recently in this June 2010 post on AdamsDrafting, which shows how in the leading case, Atmospheric Diving Systems, the court’s reasoning is flagrantly illogical. But a couple of those present at the Blakes seminar expressed uncertainty regarding another aspect of efforts caselaw—whether commercially reasonable efforts means something different from reasonable efforts. They were under the impression that might do.
More specifically, Dan Shea, an associate, provided me with a photocopy of Geoff R. Hall, Canadian Contractual Interpretation Law § 8.4.1 (2007). It discusses a single case on the meaning of reasonable commercial efforts, 364511 Ontario Ltd. v. Darena Holdings Ltd., [1998] O.J. No. 603, 55 O.T.C. 13 (Ont. Gen Div.), vard [1999] O.J. No. 1784, 120 O.A.C. 280 (Ont. C.A.). (Go here for a PDF copy.) My thanks to Dan for letting me know about it.
That case involved a prospective tenant that proposed to establish a bingo hall. It entered into an “offer to lease” with a landlord and paid a deposit, but ultimately it determined that it wouldn’t be able to secure the necessary approvals. The offer to lease contained the following provision (emphasis added):
This Offer to Lease shall be conditional for a period of sixty (60) days from the date of execution of this Offer to Lease (the “Conditional Date”) upon:
(i) 364511 Ontario Limited receiving all necessary approvals and licenses from the City of Mississauga and the province of Ontario to legally operate a Bingo Hall
The tenant agrees that it shall use its reasonable commercial efforts to satisfy the foregoing condition.
The landlord refused to refund the deposit on the grounds that the prospective tenant had failed to use reasonable commercial efforts to satisfy the condition.
Here’s what the court had to say:
It is necessary to consider whether Delta made reasonable commercial efforts to have the condition satisfied. This question involves a finding of fact. Before an analysis of that finding can be completed, it is necessary to consider the meaning of the words “reasonable commercial efforts.” Counsel could not refer me to any cases for guidance. My own research was unproductive.
I rely upon the normal dictionary meaning of these words. Reasonable implies sound judgment, a sensible view, a view that is not absurd. Commercial means having profit or financial gain as opposed to loss as a primary aim or object.
These words impose a standard of reasonable commercial efforts, not one of the best efforts or bona fide efforts. The latter standards might engage the defence submission that the application had to be carried to decision. It would seem to me that this standard of reasonable commercial efforts would allow Delta, if it had a doubt from the efforts made that no approval would be granted, to be free to conclude its efforts would not be successful and it could withdraw from the transaction.
Aside from the suggestion that reasonable commercial efforts represents a lesser standard than best efforts—more of the old nonsense—it would be hard to object to what this court has to say. Reasonable means … reasonable. Commercial means … you’re allowed to try to make money.
That’s consistent with my conclusion that the commercial in reasonable commercial efforts and the commercially in commercially reasonable efforts are redundant. Reasonableness is always a function of circumstances, and if the circumstances are those of a commercial transaction, they would be taken into account in determining what would be reasonable.
As for Canadian Contractual Interpretation Law, it says the following regarding the court’s definitions of reasonable and commercial:
This formulation nicely illustrates the two competing aspects of the standard. The “commercial” aspect allows the party with the obligation to have regard for its own economic perspective in deciding when to crease further performance efforts. The “reasonable” aspect constrains that party’s ability to place its own interest above that of the party to whom the obligations is owed.
This assessment is a bit facile, in that “reasonable” doesn’t compete with “commercial”—it’s as likely to work in favor of the party under the obligation as against it.
But what’s more pernicious is that it seems that some have fastened on the “have regard for its own economic perspective” language—which doesn’t appear in the case—and are under the impression that it means that adding commercial or commercially to an efforts standard somehow makes it subjective rather than objective.
As a general matter, a subjective–objective distinction makes no sense. Determining whether someone has used reasonable efforts involves considering the circumstances from the perspective of a reasonable person on the position of whoever’s under the obligation, and I have no idea how a subjective perspective might come into play. But it’s particularly odd to think of commercial and commercially as being agents of a subjective–objective distinction. I don’t know how anyone could be expected to deduce that from reasonable commercial efforts, other than through dark-arts magic-wordery.
By the way, when I say that it’s untenable to suggest that a best efforts obligation is more onerous than a reasonable efforts obligation, I’m not inviting you to argue in front of a court that best efforts means reasonable efforts. I don’t want to pit my meaning against the other guy’s meaning; instead, I want to avoid a fight.
Even in jurisdictions that have wrongheadedly embraced the distinction, the phrase best efforts will inevitably create confusion. You’d be much better off using only reasonable efforts—although it’s vague, its meaning is otherwise clear.
Similarly, you’d be best off omitting commercial and commercially. Just as that issue created some uncertainty at my Blakes seminar, it could result in confusion among contract parties.
Ken writes: … the commercial in reasonable commercial efforts and the commercially in commercially reasonable efforts are redundant. Reasonableness is always a function of circumstances, and if the circumstances are those of a commercial transaction, they would be taken into account in determining what would be reasonable.
The problem, Ken, is that a contract drafter can’t blindly assume that a given judge will apply commercial standards if the contract language doesn’t expressly require it.
An experienced commercial lawyer might take it for granted that a particular business practice was reasonable. In contrast, a judge whose résumé is devoid of significant business experience might regard the same business practice as outrageous.
I’ve experienced this first-hand in my own work. When I went in-house, I had to get up to speed about the generally-accepted accounting principles (GAAP) that are holy writ when it comes to revenue recognition by public companies. It was important for me to learn GAAP, because they can significantly constrain a vendor’s contract negotiations.
Back then, I thought some parts of GAAP were insane. This, even though experienced accountants explained to me why, in their view, those parts were perfectly reasonable.
Now suppose I’d been a judge trying to interpret the term “reasonable” in a contract. Suppose further that one party wanted my interpretation to take into account (what I then regarded) as the insane parts of GAAP — but the contract didn’t expressly say I was to do so.
In those circumstances, it’s entirely possible that I might have consciously disregarded those “insane” parts of GAAP, because to me they were simply unreasonable.
D.C.: I don’t see how including commercial or commercially would address the issue you raise. Ken
Ken – thoughts on the usefulness of calling out “industry standard” within such efforts clause, rather than “commercial” or “commercially”? As in “best efforts consistent with industry standards”
RCROSS, that’s a creative suggestion. The difficulty I see, though, is that in a lawsuit you’d have expensive discovery, and a similarly expensive battle of experts, in an attempt to assess whether a party had used “best efforts consistent with industry standards.”
Then, you’d be rolling the dice as to what the jury would say. Keep in mind that the jurors would probably be untutored in industry practices: That’s because one side or the other would try to strike any prospective juror with significant industry experience, either for cause or using peremptory strikes.I grant you, “commercially reasonable efforts” has similar problems of its own. My somewhat-educated guess, though, is that a lawsuit over that term would be less complex, less contentious, and less expensive than one over “best efforts consistent with industry standards.”
RC: In the discussion of how to define “Reasonable Efforts,” MSCD says “Sometimes the parties will want to specify that what constitutes reasonable efforts is to be determined by reference to the promisor’s past practice or to the practice in a given industry. This concept can be added to the core definition … .
But I’m not crazy about such attempts to constrain analysis of what was reasonable in a given context. If considering industry practice, as opposed to just the prior dealings of the parties, would be helpful, it would make sense for a court would consider it. But if considering industry practice wouldn’t be helpful, it wouldn’t make sense to have the contract say that that’s what the court must nevertheless do.
Ken
Ken:
The court says that it would have reached a different conclusion under a best efforts or bona fide efforts clause. I kind of doubt it. I don’t see anything about the phrase “best efforts” or “bona fide efforts” that would require someone to continue with what they reasonable believe are futile efforts.
As an aside, I wish that courts would stop saying things like this. It’s pure dictum and just serves to assuage their sense of fairness. But what it really does is dump the drafter into the land of malpractice.
But suppose that the drafter had wanted the result that court claims would have resulted if the drafter had said best efforts — that the tenant had to see the application through. I believe your recommendation in this situation — where reasonable efforts by itself is not enough — is to specify the efforts to be taken. So, what would you propose as language?
My cut at it is:
The tenant shall promptly apply for all approvals and licenses from the City of Mississauga or the province of Ontario needed to legally operate a Bingo Hall (the “Licenses”). The tenant shall promptly take every additional action required to obtain the Licenses, except that tenant need not spend more than $______ (in aggregate) to take those additional actions. The tenant shall not voluntarily withdraw its applications for the Licenses, except if the landlord consents in writing or if the cost to complete additional required actions has reached the sum stated above.
Chris
Chris: I like your language. It’s a great example of adding flat obligations to whittle down what you have to leave within the scope of a vague efforts provision. Ken