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“REASONABLE EFFORTS” GETS SOME JUDICIAL SCRUTINY. AT LAST.

Summary: Every corporate lawyer has drafted “best efforts” and similar contract
provisions but often without much thought to the meaning and most certainly without
a lot of guidance from US case law. Now the UK High Court has provided some
guidance, with some particularity. Equally interesting, the opinion clearly indicates
that at least that court will go beyond the four corners of the document and look at the
conduct of the distributor relative to overall conditions of and business efforts in the
relevant industry. This makes sense, insofar as “reasonable” requires some
examination of the real world. In the end, this opinion helps. Somewhat. And why?
Because important phrases with little meaning to the drafting lawyers now have to
obtain more substance within the agreement itself. This also gets to our drafting
philosophy—that a contract is also a roadmap for the non-lawyers to use in guiding
the relationship.
The Details.
What corporate lawyer hasn’t drafted a “best efforts,” “reasonable efforts” or
“commercially reasonable efforts” contract provision? And what such lawyer hasn’t
scratched his or her head about the legal meaning of these phrases? Oddly enough, there
is not much guidance from US case law. So now, we have the UK High Court offering a
pretty detailed analysis of the UK law equivalent—“reasonable endeavours.”
The case is CEP Holdings Ltd & CEP Claddings Ltd v Steni AS. Basically, Steni
manufactured cladding (building siding) distributed in the UK by CEP and they
terminated the distribution agreement on the grounds that CEP had breached the
“reasonable endeavours” provisions of that agreement. The distributors sued them for the
termination. (UK and EU distribution agreements are notoriously difficult to terminate
but we will not discuss that part of the larger context here.)
Clean Up Your Act. Well, the court disagreed that the supplier had been in the wrong
after the court looked at the business conduct of CEP. Interestingly, the court took note
of the sales performance during an up market: The relevant market went up roughly 18%
while CEP sales declined roughly 62%. The court noted that much of the decline was
attributable to a “lack of an adequately structured, and directed, sales and marketing
organization[.]” To the facts of the case, the court pointed out that everything rested on
one man and internal processes were pretty informal. In our view, it looks like the court
did not like the sloppiness of the distributor as well as the lack of communications
(rolling sales reports are mentioned).

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The opinion included some guidance in the abstract. In a nutshell: Plan; promote,
monitor, communicate (with your supplier); and improve your sales team if things go
bad. Probably paramount among these matters is regular and meaningful
communications with the supplier (e.g., rolling sales reports).
So What?
Let’s look at the consequences—i.e., what should be drafted. Perhaps the agreement
should specify just what those “commercially reasonable efforts” are and are not. In
other words, one could include language that says something to the effect that “such
efforts do not include the preparation of reports beyond those specified in this Agreement
or promotional efforts beyond those normally conducted by Distributor.” Put in the
positive, one could include an attachment that enumerates the specific marketing efforts
to be undertaken.
Communications is often handled in US agreements by a reporting provision that spells
out in some detail the sorts of reports needed by the supplier on a regular basis. This
begs the question, then, whether that provision needs to be expressly tied to the
“commercially reasonable” standard, as suggested in the language above.
A “contrarian” approach for domestic agreements might be to leave everything out and
rely upon a comparison by the courts to the outside world, thereby leaving the definition
of “reasonableness” to the court. This may make some sense. The absence of case law
may support this proposition. Moreover, the courts are notoriously reluctant to look at
specific business practices and an industry as a whole (excluding for the moment
egregious corporate behavior in other areas).
We, however, would be disinclined to take the contrarian approach. Better to specify (in
an attachment) the marketing efforts to be undertaken. However, in California, there may
be a risk of an “accidental franchise” if the supplier imposes too many conditions,
including, for example, both a marketing plan and employee training. (We’re just as
surprised as you are about that one, by the way.) That is one of the reasons that we like
such efforts to be tied to the normal marketing efforts of the Distributor.
It’s a Small World. And besides, many distribution agreements now cross borders and
jurisdictions. Many companies have distributors in the UK or elsewhere in the EU. They
will be affected by this decision. And they should be. True, this opinion does not carry
much (if any, by some views) weight in this country for domestic agreements. That fact
does not mean that its utility as a guide for drafting should be ignored. And there are
many agreements already in existence guiding UK and EU relationships with the vague
language now subject to scrutiny under this case.
Contract as Roadmap. You have heard us before say that a contract should be a
roadmap for non-lawyers responsible for maintaining the relationship. An attachment
that elaborates—or gives the right and responsibility to the parties to elaborate—
marketing (including co-marketing) efforts goes a fair amount of the way towards
achieving just that goal.
James C. Roberts III (jcrext@globalcaplaw.com) is the Managing Partner of Global
Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic
Group. He heads the international, mergers & acquisitions and transactional practices
and the industry practices concentrating on digital, media, mobile and cleantech
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technologies. He is currently involved in opening the Milan office for Global Capital.
Mr. Roberts speaks English and French. He received his JD from the University of
Chicago Law School, his MA from Stanford University and his BS from the University of
California—Berkeley.
GLOBAL CAPITAL counsels domestic and international clients on legal issues inherent in
the deployment of intellectual & financial capital—a merger or acquisition, foreign
market expansion, a strategic alliance, a digital content license, a mobile deal, foreign
and domestic labor and employment policies, starting a new entity or raising capital.
Clients range from global Fortune 100 corporations such as Deutsche Bank and News
Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.
Industries represented include digital media, Internet, software, medical and
biotechnology, nanotechnology, consulting firms, environmental technology, advertising,
museums and other cultural institutions and manufacturing.

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