Just When I Thought I Was Out: “Efforts” Provisions and the Delaware Supreme Court’s Opinion in the ETE–Williams Dispute

Well, here’s something I didn’t expect: that I would wade in again on efforts, and in a back-to-basics way.

On 23 March, the Delaware Supreme Court issued its opinion in Williams Companies, Inc. v. Energy Transfer Equity, L.P. (here). I won’t mention the broader details of the opinion. Instead, I’ll limit myself to what it and some related discussion have to say about efforts standards. I’ll work my way through the cast of characters.

The Law Firm

First, let’s consider whoever drafted the merger agreement. Here’s how the court summarized the efforts standards:

The Agreement also contained provisions that required the parties to use “commercially reasonable efforts” to obtain the opinion and to use “reasonable best efforts” to consummate the transaction.

It’s commonplace to find a mix of efforts standards in a contract. (I recently found nine efforts variants in a single commercial contract.) It’s the result of copy-and-pasting with no real attempt to create a consistent whole. That’s the simplest explanation for the two efforts standards in this merger agreement, “commercially reasonable efforts” and “reasonable best efforts.” (That combination might be a thing: it was on display in the merger agreement for acquisition of The Washington Post, which I discuss in this 2013 post.)

The first thing any court might well ask is, Why the two efforts standards? Using multiple efforts standards always has the potential to make mischief. It invites a court to attribute significance to what arose from carelessness.

The Court

As it is, the court declined to make anything of the two efforts standards. Instead, it said simply, regarding the “reasonable best efforts” obligation, “This language not only prohibited the parties from preventing the merger, but obligated the parties to take all reasonable actions to complete the merger.” That’s all a sensible court could say: reasonable means reasonable. The hard work is in determining what’s reasonable in a given context.

The Dissent

Chief Justice Strine wrote a dissent. In it, he says, “The Merger Agreement imposed a specific duty on ETE in connection with the opinion, which was to use ‘commercially reasonable’ efforts to obtain the opinion. That is an affirmative covenant and a comparatively strong one.” He cited in a footnote his authority for the second of those sentences:

LOU R. KLING & EILEEN T. NUGENT, NEGOTIATED ACQUISITIONS OF COMPANIES, SUBSIDIARIES AND DIVISIONS § 13.06 (2001) (observing that “best efforts” standards can potentially lead to the party making the promise having to take extreme measures to fulfill it and that “commercially reasonable efforts” is a strong, but slightly more limited, alternative).

The Chief Justice’s second sentence seems to say that a commercially reasonable efforts obligation is stronger than some other, unstated obligation. By contrast, the footnote says that a commercially reasonable efforts obligation is weaker than best efforts. Perhaps the Chief Justice used comparatively loosely to mean “somewhat”; that would clear up the inconsistency.

In any event, what readers will take away from the second sentence and the footnote is that one efforts obligation can be more onerous than another. That’s unfortunate. It’s not so much that this distinction makes no sense and is unworkable, as I explain below. It’s that outside of what the Chief Justice has himself said on the subject, there’s essentially no caselaw to support that proposition. I’ve found only two U.S. court opinions that endorse the notion of a difference between efforts standards, and they don’t attempt to offer any explanation. They can be considered irrelevant outliers in the face of the mountain of contrary caselaw.

The Chief Justice cites the 2001 edition of Kling & Nugent as support for his proposition. I don’t have access to that edition. In my 2004 article on efforts (here) I quote a footnote in the 2003 edition:

[P]ractitioners, probably based on some of the broad interpretations given to “best efforts,” tend to view all the other phrases, while perhaps not being too different from each other, as being definitely different from “best efforts.”

So already by 2003, Kling & Nugent were more equivocal than they were in the 2001 edition, assuming that the Chief Justice’s footnote accurately reflects the 2001 edition.

And here’s the relevant passage of the 2016 edition:

The Authors of this treatise believe that most practitioners treat “reasonable efforts,” “commercially reasonable efforts” and “reasonable best efforts” as all different from and as imposing less of an obligation than, “best efforts.” There is no universal agreement, however, as to whether these three standards are, as a practical matter, any different from each other, notwithstanding the fact that “reasonable best efforts” sounds as if it imposes more of an obligation than “commercially reasonable efforts.”

In other words, starting at least as far back as 2003, Kling & Nugent’s assessment of efforts provisions doesn’t focus on objective reality. Instead, it says what practicing lawyers think is the case. That’s a very different proposition from what the Chief Justice cites Kling & Nugent for. So the Chief Justice is basing his view of efforts jurisprudence on an out-of-date edition of a treatise that evidently expresses a view that the authors have since moved on from.

The Chief Justice cited the 2001 edition of Kling & Nugent to the same effect in his opinion in Alliance Data Systems Corp. v. Blackstone Capital Partners V L.P., 963 A.2d 746, 763 (Del. Ch. 2009). I tried to explain that away in this 2013 blog post. It’s now clear from Williams Companies that citing the 2001 edition of Kling & Nugent in Alliance Data Systems wasn’t some aberration. The Chief Justice’s Williams Companies dissent has no value as precedent, but it still muddies the waters.

Chief Justice Strine has been a force for rationality in understanding basic contracts terminology. I’m particularly grateful for his assessment of indemnify and hold harmless in Majkowski v. American Imaging Management, LLC, 913 A.2d 572, 588–89 (Del. Ch. 2006). I hope he has occasion to rethink his approach to efforts standards.

The Treatise

I agree with Kling & Nugent that practicing lawyers think that a best efforts obligation is more onerous than other efforts standards. But so what—the question is what drafters should do. Kling & Nugent doesn’t say. That’s OK, because that’s what A Manual of Style for Contract Drafting is for.

And that bit about how reasonable best efforts “sounds” as if it imposes more of an obligation than does commercially reasonable efforts? We’re dealing with the English language here, and things are often not as they seem if you approach it with a legalistic mindset.

The Law Professor

Thanks to @amk351 on Twitter, I learned of this blog post by Stephen Bainbridge that riffs on the Supreme Court’s Williams Companies opinion. A couple of things caught my eye.

First, Bainbridge finds the law on efforts provisions unsatisfactory. Here’s what he says about the Supreme Court’s holding:

So a contract requiring reasonable best efforts obligates the parties to take “all reasonable actions.” That’s not helpful. Isn’t a basic rule of lexicography that one is supposed to avoid circular definitions; i.e., a definition of a word being defined as part of the definition? If the court had adopted such a rule, it might have enjoyed the resulting clarity.

That “basic rule of lexicography” is irrelevant for contracts; see the MSCD extract at the end of this blog post. But more to the point, it’s completely unrelated to this issue. Efforts standards are vague, so the clarity Bainbridge seeks cannot be achieved. That’s why it’s called vagueness! What’s required is that you act reasonably in a given context, and people get into fights over whether someone did in fact act reasonably. So prudent drafters use vagueness only when uncertainty over future circumstances precludes being precise.

After acknowledging the caselaw on efforts, Bainbridge goes on as follows:

I propose that we draw a basic distinction between “best efforts” and “reasonable efforts,” with the former being regarded as more onerous. To be sure, as we’ve seen, many “courts use the term ‘reasonable efforts’ interchangeably with ‘best efforts.'” Soroof Trading Dev. Co. v. GE Fuel Cell Sys., LLC, 842 F. Supp. 2d 502, 511 (S.D.N.Y. 2012). But as a matter of plain English “best” does imply something more onerous than “reasonable.”

That’s a really, really bad idea. It proposes that we disregard a mountain of sensible caselaw in favor of the semantically bankrupt notion that in this context best is more onerous than reasonable. The only way that that makes sense is if you’re relying on a dictionary definition of best. In fact, the best in best efforts offers nothing more than a rhetorical flourish, like the best in to the best of my knowledge and it’s in your best interests.

Furthermore, best as more than reasonable can’t work as a matter of contract logic. More onerous than reasonable equals unreasonable. End of story.

Like many who have views on what contract prose should look like, Bainbridge perhaps underestimates what’s involved in understanding it. (That’s something I wrote about in this recent post.) For one thing, he might not be aware that work has already been done on this subject. Instead, he sent out the following tweet:

https://twitter.com/ProfBainbridge/status/847579268175454208

For what it’s worth, in the manuscript of the fourth edition of A Manual of Style for Contract Drafting I devote over 8,000 words to efforts provisions.

Those Who Work with Contracts

If you draft or review contracts, do yourselves a favor and forget all efforts standards except reasonable efforts. And use that carefully. Other efforts standards promise more than they can deliver, and they create confusion.

Excuse me if I leave it at that. For more, you’ll have to consult the current edition of MSCD or wait for the fourth edition, or browse my dozens of blog posts on the subject.

***

I thought that in the courts, at least in the U.S., the whole best-is-more-than-reasonable thing was a non-issue, allowing us all to focus on how to limit the uncertainty in efforts provisions generally. (Don’t get me started on the English caselaw.) I hope this episode is only a brief distraction. Nevertheless, I feel compelled to close with the video below. Now somebody get me a stiff drink.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.