Let’s fill a gap in A Manual of Style for Contract Drafting!
MSDC has something to say about mutually agree, and it has something to say generally about reasonably modifying a verb, but it doesn’t say anything about reasonably agree.
I’m here to tell you that if you’re contemplating using reasonably agree in a contract, you might want to hold off.
Here’s an extract from a merger agreement:
As soon as reasonably practicable after the Effective Time … Parent and the Surviving Company will … send to each record holder of an outstanding share of Company Common Stock as of immediately prior to the Effective Time … (A) a letter of transmittal … in customary form and with such other provisions, in each case as Parent and the Company may (prior to the Effective Time ) reasonably agree, for use in effecting delivery of shares of Company Common Stock outstanding immediately prior to the Effective Time and entitled to Common Stock Merger Consideration pursuant to Section 3.01 to the Paying Agent, and (B) …
Use of reasonably agree in this extract suggests that if Parent and the Company agree, but their agreement is unreasonable, the standard won’t have been met. But Parent is the acquirer, the Company is the target, and the merger agreement is between Parent, a merger sub, and the Company. If Parent and the Company agree to something, who is there to object!
Same with this, from some other bit of EDGAR flotsam:
The Purchasers shall have received from Cooley LLP, counsel for the Company, an opinion, dated as of the Closing, in customary form and substance to be reasonably agreed upon with the Purchasers and addressing such legal matters as the Purchasers and the Company reasonably agree.
If the Purchasers and the Company agree to something, who is going to challenge that the agreement was unreasonable? Might the Company suggest, after the fact, that its agreement with the Purchasers had in fact been unreasonable? That wouldn’t make sense.
The one context where reasonably agree might work is when those doing the agreeing consist of one or more parties representing one side of the transaction, or one or more nonparties. Here’s an example of the former:
The Credit Parties shall satisfy the milestones set out on Schedule 1 on or before the dates indicated therein (or such later dates as the Requisite Holders may reasonably agree) (collectively, the “Milestones”).
The Credit Parties are the borrower and two guarantors; the Requisite Holders own a majority of the notes in question. So it’s conceivable that the Credit Parties might have thoughts on later dates selected by the Requisite Holders. But I suggest it would be clearer to have reasonableness address not agreement of whoever it is, but instead whatever is the subject of the agreement—in this case, the dates. Here’s how I’d do that:
The Credit Parties shall satisfy the milestones set out on Schedule 1 on or before the dates indicated therein (or any reasonable later dates the Requisite Holders agree to) (collectively, the “Milestones”).
To summarize: Don’t use a standard based on whether both sides to a transaction reasonably agree to something: if they agree, end of story! But if the standard is based on whether one or more parties representing one side of the transaction, or one or more nonparties, reasonably agree to something, that makes sense, but you might want to have reasonableness relate not to agreement of whoever it is, but instead whatever is the subject of the agreement.
Ken:
I think the actual issue lurking here is vagueness. The parties have to do some things in order to close the transaction or whatever. There’s a possibility that they will fail to agree on how to handle those things. But a court would find the underlying transaction sufficiently definite to enforce the deal as a whole, so will then fill in missing pieces. The parties have some sense that there’s a gap to be potentially filled. And they want to cast the other side as unreasonable if the parties fail to agree (because OUR side is ALWAYS reasonable). But this is a waste of brainpower. A court is going to look to the general intentions of the parties and read reasonable terms in. If you really wanted to modify the standard, chucking a random reasonable into the sentence this way won’t change that. To change or more tightly define the standard, a better approach is to … explicitly modify the standard! And if it is really important, you could appoint an arbitrator to do so (a done thing in options to buy companies), and require that the arbitrator have experience that is relevant to the standard you set.
Chris
Chris, I completely agree – this language is a poorly drafted attempt to imply what you actually said, something like “the parties shall negotiate and agree on a reasonable price for the Surplus Goods.” The still-unstated part from that short version is the hope that they’ve imposed a reasonableness standard that a court will pick up if they can’t actually agree. I’m sure the language could be improved in a second draft.
Thank you, Chris and Rick. I guess I’ll be rewriting this! But articulating their approach clearly seems futile: an obligation to agree is a bad idea.
Ken:
Generally yea, if the missing terms are material, then it is an unenforceable agreement to agree — the definition of futile. But if the agreement provides the core, material terms of a transaction (price, what is being given up for the price, etc.), then the court will fill in the blanks.
I think in each of your examples, you could construct a mechanism for what happens if the parties fail to agree on the missing terms. Some of the constructions tend toward nothing filling in the blank of the parties don’t agree: “such additional terms as the parties agree.” But you could do either of two things. One is that you could provide a standard and an obligation to negotiate reasonably: “The parties shall use reasonable efforts to negotiate [the missing terms]; in determining whether a party has fulfilled this obligation, a court must consider terms that are typical of [relevant comparator deals].” I prefer the second option because you don’t have to try to prove breach: “If the parties do not reach agreement on [the missing terms] within [time frame], either party may submit the matter to binding arbitration administered by [arbitral body] under its [expedited rules]. The arbitrator must provide [the missing terms] based on [relevant comparator terms].” There’s a lot more that would go into a fully worked example, but I’m typing with my thumbs on vacation, so that’s what you get. Also, there are probably other ways of resolving it, some of which might be very dependent on the deal.
Chris
Chris, that seems possible, but if the open items aren’t essential, perhaps the parties should grow up and sort it out themselves.
But to get back to my original point: I don’t think “reasonably agree” can reasonably be understood as imposing an obligation to agree. The “may” in the second example precludes that meaning.
Ken:
I think you are right about that, but I don’t think that is what motivates the insertion of that language.
And ideally, yes, the parties ought to sort it out but there can be cases where the parties could anticipate that not happening for example, my company enters a strategic partnership with yours. As part of that, we get an option to buy your company at a set price. But we aren’t going to negotiate all of an acquisition agreement and it’s related documents at the time that we take the option. So there’s a lot left to agree upon. And given that things will certainly change between now and when the option gets exercised, the parties’ interests won’t necessarily align to negotiate the full agreement. What do I do when you refuse to give a warranty that your company has ownership or license to all the IP it uses? We need a resolution mechanism. From there, you can imagine a lot of good alternatives, but relying on “and additional warranties to which the parties reasonably agree” isn’t going to get us there.
Chris
Chris