Whether to Add an Escape Hatch to “Reasonable Efforts”

You’ve prepared a contract that imposes on Acme an obligation to use reasonable efforts to sell Widgets. If you leave it at that, a fight could arise at any time over whether Acme has used reasonable efforts.

You could add to the deal by saying that you may terminate if Acme doesn’t reach stated sales targets. That would give you an exit that you wouldn’t have to fight over.

But the trade-off is that if Acme achieves those targets, you might well have a harder time convincing a court that Acme hasn’t used reasonable efforts, even though the one isn’t necessarily related to the other. After all, it could be that unexpected market conditions mean that Acme was able to reach those targets very easily, and since doing so it has sat on its hands. But you couldn’t blame a court for assuming that any target you set for termination represents your minimum notion of acceptable performance by Acme.

I don’t have any caselaw directly on point, but that approach is broadly comparable to “benchmarks” used by courts (see MSCD ¶8.49). For example, in assessing compliance with an efforts provision, one court looked at sales figures for previous years.

Wouldn’t using sales targets in a termination provision obviate the need for a reasonable efforts obligation? I suggest not, for two reasons. First, you would retain the possibility of an action for breach, even if it might be challenging to recover if Acme meets the targets. Second, and more importantly, retaining a reasonable efforts obligation would give you a basis for terminating the contract for breach (depending on how the termination provisions are worded) instead of having to wait until Acme fails to meet the targets.

This approach to reasonable efforts could be combined with that discussed in today’s other post.

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.

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