When contract drafters can’t agree on a standard of performance (or can’t express the standard in words), they often kick the can down the road by stating that the party in question must make “commercially reasonable efforts.” But what exactly does the quoted term mean? A holding by the Delaware chancery court suggests that the Indian-English expression “do the needful” might be a useful shorthand reference. See Williams Cos. v. Energy Transfer Equity, L.P., No. 12168-VCG (Del. Ch. Ct. June 24, 2016); see also the annotation to the Common Draft definition of commercially reasonable.
- The case involved a multi-billion-dollar oil industry merger agreement in which a buyer was to acquire the assets of a seller.
- The agreement gave the seller an “out” from the deal: The seller would not have to close the deal if it did not get a favorable opinion from its own tax counsel (as opposed to, say, getting an opinion from an independent expert) about the deal’s expected tax consequences.
- The agreement, though, also required the seller to use commercially reasonable efforts to get a favorable opinion.
- After the merger agreement was signed, the market price of crude oil collapsed. This brought with it a drastic drop in the value of the seller’s assets, making the deal much less attractive to the buyer.
- The buyer ended up backing out of the deal, citing newly-discovered concerns about the expected tax consequences. The seller tried to assuage the buyer’s new concerns; when that failed, the seller sued the buyer for breach of contract. The seller alleged, among other things, that the buyer had failed to honor its commitment to use commercially reasonable efforts to obtain a favorable tax opinion.
The chancery court noted that the merger agreement did not define “commercially reasonable efforts”; it found that:
… by agreeing to make “commercially reasonable efforts” to achieve the 721 Opinion, the Partnership [i.e., the seller] necessarily submitted itself to an objective standard—that is, it bound itself to do those things objectively reasonable to produce the desired 721 Opinion, in the context of the agreement reached by the parties.
Williams Cos., slip op. at 46 (emphasis added). The court held that, in view of the facts of the case, the buyer had not breached its obligation to use commercially reasonable efforts.
I’ll be updating the annotation to the Common Draft definition of commercially reasonable to include a reference to this case.