Practice Pointers on Choosing Standards: “Commercially Reasonable Efforts,” “Best Efforts” and Similar Standards

Morrison & Foerster LLP

Background -

Contracting parties frequently use terms such as “commercially reasonable efforts,” “reasonable efforts,” “best efforts” or similar standards when describing their expectations regarding the performance of a party’s obligations. However, these terms are inconsistently interpreted by courts and are often subjectively applied. A requirement that a party undertake its “best efforts” in performing its obligations is universally understood to be the highest standard, requiring everything to be done by a party, except bankruptcy, in order to accomplish the stated objective. On the other end of the spectrum, “reasonable efforts” is a less stringent standard, requiring only that the party do what it can within reason in order to accomplish the stated objective. “Commercially reasonable efforts” is at a level below “best efforts” and is generally interpreted as requiring the party to exert substantial effort without requiring that the party take any action that would be commercially unreasonable under the circumstances. Finally, “commercially reasonable efforts” is a standard that has received limited interpretation by courts. In this article, we discuss how “commercially reasonable efforts,” “reasonable efforts,” and “best efforts” have been interpreted in recent court decisions and considerations with respect to the use of such terms by contracting parties.

“Commercially Reasonable Efforts” -

In Williams Cos. v. Energy Transfer Equity, LP, a recent Delaware Court of Chancery case, the court offered guidelines for interpreting the conduct of a party to a merger agreement using the “commercially reasonable efforts” standard. Williams involved a merger agreement between The Williams Companies, Inc. (“Williams”) and Energy Transfer Equity, L.P. for the creation of Energy Transfer Corp LP (“ETC”), into which Williams would merge. However, following entry into the merger agreement, the energy markets sharply fell and the merger became significantly less attractive to ETC. The merger agreement included a condition precedent requiring ETC to use commercially reasonable efforts to obtain a tax opinion from its outside counsel stating that the merger should be treated by the Internal Revenue Service as a tax-free exchange. However, ETC’s outside tax counsel concluded that it would be unable to provide the required opinion. As a result, ETC had reason to terminate the merger agreement. Williams sued ETC, alleging, among other things, that ETC had materially breached its obligations under the merger agreement to use “commercially reasonable efforts” to obtain the tax opinion at closing.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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