I plucked from the SEC’s EDGAR system, largely at random, an asset purchase agreement filed earlier this month. It was drafted by a big law firm, and it contained, along with the usual dysfunction, some glitches that caught my eye.
In particular, here are the different efforts (and endeavours) provisions it uses:
- use its best efforts
- use its reasonable efforts
- use its commercially reasonable efforts
- use its Commercially Reasonable Efforts [defined term]
- use reasonable endeavours
- use reasonably [sic] endeavours
- use its best endeavours
I’m used to this sort of efforts mish-mash. It’s invariably the result of promiscuous copy-and-pasting, without any subsequent cleanup. But this collection is particularly chaotic.
It brings to mind two questions. First, was this contract based on a template? If it was, what does that tell us about the template? If it wasn’t, what does that tell us about the firm’s processes?
And second, I see this routinely in company commercial contracts. Should we expect a big law firm to do better than companies in drafting contracts?
(By the way, I recommend you use only reasonable efforts, and only in those contexts where it makes more sense to be vague than to be precise. If you want more on efforts provisions, go here for my 2019 law review article on the subject. In a 2020 opinion (see this blog post), the Delaware Court of Chancery called my article “The most thorough analytical treatment of efforts clauses” and called me “The leading commentator on efforts clauses.”)
I recently used your idea of sticking with “reasonable efforts” but took the next step to attempt a definition (which wasn’t easy). My goal was to limit my client’s obligations, so I compiled a list from examples in your text (of what wasn’t included), including my favorite–that as long as they chose one reasonable option, they weren’t obligated to try all options. The other side missed the fact that there’s a lot of air in between those two extremes over which they could have fought. The client was happy.
If the client was happy, that’s all that matters!🙂 But I suggest that this is a legalistic notion that doesn’t work when applied to real circumstances.
“Effort” clauses are a practical reality. There is no way to define complex variables sufficient to clarify what’s reasonable, especially with lazy execs who think “reasonable” magically solve their problems.
The key I picked up from your text is, if I’m going to have to use an efforts clause, define as many possible ways that it doesn’t apply to protect my client. Keep it as “reasonable efforts” (not best, etc.), and try and provide as much definition as possible to what that reasonable means or (in my situation) doesn’t mean.
Using many of the examples in your book, I came up with the following — and surprisingly, after a lot of fighting, a very large multinational manufacturer accepted it.
LANGUAGE
“Reasonable Efforts” means the efforts that a reasonable person in the position of the performing Party would use to engage in that conduct competently. Notwithstanding the foregoing, “Reasonable Efforts” only require a Party to take one reasonable course of action and not all of them. (<–One of my favorites they kept trying to change.)
"Reasonable Efforts" does not require a Party:
(a) to engage in conduct, activity, or a process that could harm its business, or that might impair the ability of that Party to sell itself or its assets for its best value or to take any actions that could, individually or in the aggregate, result in an adverse change in that Party or its market value;
(b) to take any action or actions that would be commercially unreasonable for itself under the circumstances,
(c) to act with greater urgency than that to which it attends with its own business under substantially similar circumstances;
(d)to take extreme measures or act unreasonably, or to take illegal actions or actions that could subject it to liability;
(e) to take any action that would cause that Party to incur costs or suffer harm or detriment that (i) is greater than the royalties received under the Agreement for that year, or (ii) is not explicitly required or anticipated by the Agreement, or
(f) other than as provided in the indemnification provisions, initiate any enforcement, litigation, arbitration, or dispute resolution process, including, without limitation, against its suppliers, manufacturers or any other Person.
Hi Dakin. Regarding “Notwithstanding the foregoing, ‘Reasonable Efforts’ only require a Party to take one reasonable course of action and not all of them,” that’s something English courts dreamed up, and it’s weird. :-)
Regarding the second part, I’d wrap it into the first part. And I could imagine challenging most of what it says. :-)
As you stated and know all too well, some jurisdictions, including India, have adopted English precedent and interpreted ‘best efforts’ as necessitating the use of ‘all’ reasonable efforts. (https://indiacorplaw.in/2019/01/law-best-efforts-reasonable-efforts-obligations-commercial-contracts.html)
Such an interpretation can significantly impact obligors, particularly in complex situations like the supply chain disruptions that happened during COVID-19 and led to innumerable lawsuits. CEOs were screaming because they had customer demand they couldn’t fulfill, and GCs were called on the carpet by COOs to explain why their requirements contracts with Tiny Tim suppliers didn’t magically protect Goliath from acts of god.
In that situation, workarounds were plentiful, but implementation, while maybe not bankrupting, was cost-prohibitive and still not guaranteed: Run the factory 24×7, get priority over all the obligor’s other clients, require the obligor to build a factory in another country, have authority to build a factory or source the goods elsewhere at the obligor’s expense, localize or near-shore manufacturing, pay for priority shipping, buy ships, make ships, pay for air freight, buy Cargo planes, hire long-distance row-boats, etc. (More recently I’m seeing contracts that require the Tiny Tim to maintain a year-long advance supply in storage in the USA.)
An obligor can argue that the alternatives aren’t reasonable, but that’s harder to do when (a) the litigation budget of Goliath is a multiple of Tiny Tim’s annual revenues, and (b) the contract not only says ‘best efforts,’ but includes many these cost-prohibitive options as examples of what best or reasonable effort could mean.
Such lists weren’t uncommon as examples of efforts in requirements contracts before Covid. Over a more extended period, however, where China’s leverage improved (not that it was needed, since the contracts were often largely worthless), many companies were okay to leave it to the “best efforts” of Tiny Tim and not list the parade of horribles.
Thus, as a lawyer where the balance of power is skewed against your client, and the client is willing to accept an efforts clause, the goal is to craft a contract that gives the obligor client a strong enough argument against harassing and unwarranted legal challenges and potentially eventual liability. The economic power of the Goliaths can thus force the Davids into highly distressing decisions. Focusing on the practical aspect of reducing litigation risks in this context means defining effort obligations as much as one can.
By getting the purchaser to require only ‘one’ course of action that is reasonable (and include many of the other limitations I included, even if that can be drafted more concisely — see my favorite Mark Twain attributed quote: “If I had more time, I would have written a shorter letter”), one can start to limit the obligor’s liability and reduce the potential for post-hoc analysis or ‘Monday-morning quarterbacking’ regarding which solution, if any, was selected. Such an approach simplifies the obligor’s obligations and offers a more explicit defense against claims of insufficient effort.
The problem has gotten worse post-covid with purchasers fortifying their agreements with what are essentially unconscionable terms so that they can’t be blamed by the CEO/COO/Owner because the contract didn’t expressly include the death penalty, thereby shifting the focus back where it belongs, which was the decision to take the inherent risks of prioritizing profits over the risks of off-shoring your outsourcing, let alone to a country where there is already a fragile cold-war in existence.
Were an of these efforts provisions tied to truly material obligations (e.g., purchase price calculation or the disposition of escrowed purchase price, etc.)? And did these best efforts obligations survive the closing?
Yes to both.