Friend of the blog Francis Pileggi's post from last year on The Williams Companies, Inc. v. Energy Transfer Equity, L.P., prompted a mild rant on my part about lawyers using "best efforts" and its variants without understanding its meaning. Francis now reports on a Supreme Court decision in that case, which produced a 4-1 split, with CJ Leo Strine dissenting. Oddly, neither opinion cites my blog. Most curious.
Anyway, Francis observes:
The legal meaning of the phrase “commercially reasonable efforts” does not enjoy clarity in the law. Lawyers and jurists alike should be excused if they view the law on this topic as not entirely self-evident. The split decision of the Delaware Supreme Court in the case styled The Williams Companies, Inc. v. Energy Transfer Equity, L.P., Del. Supr., No. 330, 2016 (Mar. 23, 2017), proves the point.
Very well put. I especially liked his understated observation that these clauses do "not enjoy clarity in the law"! That's both very deft and very true. It's one of those turns of phrase one wishes one had thought of.
The Williams decision does not create much in the way of clarity. Consider this key passage, which is as close to a definition as the Court provides:
Hexion, with which we agree, recognized that covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.
Section 5.03 of the Agreement in this case states:
[The parties] shall use [their] reasonable best efforts to, and shall cause their respective Affiliates to use reasonable best efforts to, take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper, or advisable to consummate and make effect, in the most expeditious manner practicable, the [merger] . . .
This language not only prohibited the parties from preventing the merger, but obligated the parties to take all reasonable actions to complete the merger.
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.
I'm also a little vexed by Strine's dissent. He cites a treatise for the following proposition:
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).
That's not how I read the case law. In my M&A class, I use the following slide to state the law, expressly rebutting the Kling & Nugent treatise:
In my forthcoming Mergers and Acquisitions casebook (coauthored with my friend and UCLA law colleague Iman Anabtawi), we explain that:
Although practitioners generally believe that efforts standards differ, there is no general agreement in case law as to whether the various clauses in fact reflect different standards. Courts often use the same analysis in determining whether an efforts clause has been breached, regardless of the specific level of effort prescribed in the agreement. Specifically, courts frequently consider the facts and circumstances of the case and require that the parties act diligently, reasonably, and in good faith in complying with an efforts clause. [NB: There's that circular definition problem again, but it's not my fault, it's what courts say.]
In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001).
See Triple-A Baseball Club Assocs., 832 F.2d at 225 (“We have been unable to find any case in which a court found...that a party acted in good faith but did not use its best efforts.”); Bloor v. Falstaff Brewing Corp., 601 F.2d 609, 614 (2d Cir. 1979) (best efforts imposes an obligation to act with good faith in light of one’s own capabilities); W. Geophysical Co. of Am. v. Bolt Assocs., Inc., 584 F.2d 1164, 1171 (2d Cir. 1978) (stating that an obligation to use best efforts can be met by “active exploitation in good faith”).
See, e.g., Triple-A Baseball Club v. Northeastern Baseball, 832 F.2d 214 (1st Cir. 1987); In re Chateaugay Corp. v. LTV Aerospace and Defense Co., 198 B.R. 848 (S.D.N.Y. 1996)
So let's try again. 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."
Everything else (with one exception) should be regarded as mere surplusage. To be sure, there is a canon of construction creating a presumption that every word should be given meaning and not dismissed as surplusage. See Willner v. Manpower Inc., 35 F. Supp. 3d 1116, 1131 (N.D. Cal. 2014) (referencing "the canon of statutory construction requiring that 'a construction making some words surplusage is to be avoided'”). But applying that canon in this context is inconsistent with the goal of enjoying clarity. In addition, refusing to give the multiple variants independent meaning will encourage lawyers who want to use constructions such as "commercially reasonable good faith best efforts" or some such nonsense to define the term in the agreement.
Having established those basic principles, we then operationalize them with the following definitions:
- "Best efforts" imposes an affirmative obligation to maximize "the contractual benefits of the person to whom the duty is owed, even if the benefits to the one owing the duty have been depleted.” See In re Heard, 6 Bankr. 876, 884 (Bankr.W.D.Ky.1980). Put another way, best efforts should require “that the party put its muscles to work to perform with full energy and fairness the relevant express promises and reasonable implications therefrom.” In re Cambridge Biotech Corp., 186 F.3d 1356, 1375 (Fed.Cir.1999).
- Unless the term is given specific definition in the pertinent agreement, adding additional verbiage such as "reasonable best efforts," "commercially reasonable best efforts," and the like does not change the meaning of best efforts. Such qualifiers are mere surplusage. But see # 4 below re "commercially ...."
- "Reasonable efforts" imposes a duty to act in good faith toward the other party. It does not require the party owing the duty to sacrifice the benefits it gains from the contract.
- "Commercially reasonable efforts" should only be used where there is an accepted trade usage defining the scope of the effort obligation. See Jeffrey M. Dressler, Good Faith Rejection of Goods in A Falling Market, 42 Conn. L. Rev. 611, 627 (2009) (observing that “'commercially reasonable standards of fair dealing in trade” is meant to be an objective measure of conformity based on trade usage, course of dealing, and course of performance'").
- If the party claiming a breach of the efforts clause is unable to prove the existence of such a trade usage, then the word "commercially" should be regarded as mere surplusage and the duty again should be one of acting in good faith.
- Unless the term is given specific definition in the pertinent agreement, adding or substituting other verbiage such as "good-faith reasonable efforts" or "good faith efforts" or "reasonably diligent efforts" or "diligent" efforts and the like shall be regarded as mere surplusage. The obligation remains merely one of acting in good faith.