-
8/14/2019 BLOG Global Capital Reasonable Endeavours UK Opinion
102809l
1/3
G L O B A L C A P I T A L
B L O G
REASONABLE EFFORTS GETSSOME JUDICIAL SCRUTINY. AT LAST.
Summary: Every corporate lawyer has drafted best efforts and
similar contractprovisions but often without much thought to the
meaning and most certainly withouta lot of guidance from US case
law. Now the UK High Court has provided someguidance, with some
particularity. Equally interesting, the opinion clearly
indicatesthat at leastthat court will go beyond the four corners of
the document and look at theconduct of the distributor relative to
overall conditions of and business efforts in therelevant industry.
This makes sense, insofar as reasonable requires someexamination 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 draftingphilosophythat a contract is also a roadmap for
the non-lawyers to use in guidingthe relationship.
The Details.
What corporate lawyer hasnt drafted a best efforts, reasonable
efforts orcommercially reasonable efforts contract provision? And
what such lawyer hasntscratched his or her head about the legal
meaning of these phrases? Oddly enough, thereis not much guidance
from US case law. So now, we have the UK High Court offering
apretty detailed analysis of the UK law equivalentreasonable
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 theyterminated the distribution agreement on the grounds
that CEP had breached thereasonable endeavours provisions of that
agreement. The distributors sued them for thetermination. (UK and
EU distribution agreements are notoriously difficult to
terminatebut 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 wrongafter the court looked at the business conduct
of CEP. Interestingly, the court took noteof 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 wasattributable to a lack of an adequately structured, and
directed, sales and marketingorganization[.] 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 courtdid not like the sloppiness of the
distributor as well as the lack of communications(rolling sales
reports are mentioned).
GLOBALCAPITAL LAW GROUPPC
-
8/14/2019 BLOG Global Capital Reasonable Endeavours UK Opinion
102809l
2/3
GLOBALCAPITAL/Page 2
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 meaningfulcommunications with
the supplier (e.g., rolling sales reports).
So What?
Lets look at the consequencesi.e., what should be drafted.
Perhaps the agreementshould specify just what those commercially
reasonable efforts are and are not. Inother words, one could
include language that says something to the effect that suchefforts
do not include the preparation of reports beyond those specified in
this Agreementor promotional efforts beyond those normally
conducted by Distributor. Put in thepositive, one could include an
attachment that enumerates the specific marketing effortsto be
undertaken.
Communications is often handled in US agreements by a reporting
provision that spellsout 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
thecommercially reasonable standard, as suggested in the language
above.
A contrarian approach for domestic agreements might be to leave
everything out andrely upon a comparison by the courts to the
outside world, thereby leaving the definitionof reasonableness to
the court. This may make some sense. The absence of case lawmay
support this proposition. Moreover, the courts are notoriously
reluctant to look atspecific business practices and an industry as
a whole (excluding for the momentegregious corporate behavior in
other areas).
We, however, would be disinclined to take the contrarian
approach. Better to specify (inan attachment) the marketing efforts
to be undertaken. However, in California, there maybe a risk of an
accidental franchise if the supplier imposes too many
conditions,including, for example, both a marketing plan and
employee training. (Were just as
surprised as you are about that one, by the way.) That is one of
the reasons that we likesuch efforts to be tied to the normal
marketing efforts of the Distributor.
Its a Small World. And besides, many distribution agreements now
cross borders andjurisdictions. Many companies have distributors in
the UK or elsewhere in the EU. Theywill be affected by this
decision. And they should be. True, this opinion does not carrymuch
(if any, by some views) weight in this country for domestic
agreements. That factdoes not mean that its utility as a guide for
drafting should be ignored. And there aremany agreements already in
existence guiding UK and EU relationships with the vaguelanguage
now subject to scrutiny under this case.
Contract as Roadmap. You have heard us before say that a
contract should be aroadmap for non-lawyers responsible for
maintaining the relationship. An attachment
that elaboratesor gives the right and responsibility to the
parties to elaboratemarketing (including co-marketing) efforts goes
a fair amount of the way towardsachieving just that goal.
James C. Roberts III ([email protected]) is the Managing
Partner of GlobalCapital Law Group and CEO of the strategic
consulting firm, Global Capital StrategicGroup. He heads the
international, mergers & acquisitions and transactional
practicesand the industry practices concentrating on digital,
media, mobile and cleantech
mailto:[email protected]:[email protected]
-
8/14/2019 BLOG Global Capital Reasonable Endeavours UK Opinion
102809l
3/3
GLOBALCAPITAL/Page 3
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 ofChicago Law School, his MA
from Stanford University and his BS from the University
ofCaliforniaBerkeley.
GLOBAL CAPITAL counsels domestic and international clients on
legal issues inherent in
the deployment of intellectual & financial capitala merger
or acquisition, foreignmarket expansion, a strategic alliance, a
digital content license, a mobile deal, foreignand domestic labor
and employment policies, starting a new entity or raising
capital.Clients range from global Fortune 100 corporations such as
Deutsche Bank and NewsCorporation and its subsidiaries, MySpace.com
and Fox Interactive Media, to start-ups. Industries represented
include digital media, Internet, software, medical
andbiotechnology, nanotechnology, consulting firms, environmental
technology, advertising,museums and other cultural institutions and
manufacturing.
www.g l oba l cap l aw.com
GLOBALCAPITAL LAW GROUPPC
