Commercially reasonable manner

In what follows I assume you’re a good egg; the sort of person who means what he says, says what he means, and gives a legal covenant only in circumstances where he has an honest intention of carrying it out. If you’re not of that fibre, you have no place here.

In good faith and in a commercially reasonable manner cuts the crap by promising (faintly) to unlock some negotiations and take much of the tedious line-by-line muck-raking out of the others. It only presents litigation risk to clients who don’t trust you, or whom you don't trust. In those cases your problem is not that you have a good faith obligation; it’s that you have a lousy client relationship. It hardly adversely affects litigation risk in any case: A dissatisfied client will take action, and they will argue an absence of good faith in any case.

What should a self-respecting advocate think about the phrase: “in a commercially reasonable manner” - or ever “in good faith' 'and a commercially reasonable manner”?

While there may be circumstances where one would want specifically to preserve the right to act with absolute discretion without argument, in most cases agreeing to act in good faith or in a commercially reasonable manner involves no great concession. It is hard to imagine when a good egg would deliberately behave otherwise; agreeing such language may help to persuade your counterparty across the wobbly bridge to consensus. It might unblock those negotiations where he had been saying “yes, but with that provision, your client literally would be entitled to do [and here insert some fantastically horrifying deed that your adversary - a chap otherwise apparently short of imagination - has managed to dream up] without any commercially reasonable basis for doing so” and so on.

Such cautious souls are rarely persuaded that it is not in a fellow’s interest to wantonly aggravate his client and contractual counterparties for the sheer fun of it, even though this is undoubtedly true.

Whatever the contract says, if a court finds that you have acted unreasonably or in bad faith, you should not expect much sympathy when you seek to demonstrate that, by the contract, you were entitled to act in bad faith.

The one argument against the general principal is that it is inherently vague and a potential source of dispute in itself. For certain key risk protections we do not want to give any grounds for dispute even though we will always exercise these rights reasonably and in good faith.

The sort of text we are considering to address this concern, is as follows:

Standard of conduct: Each party must act in good faith and (unless expressly entitled to act in its absolute discretion) in a commercially reasonable manner.

This allows us to explicitly except some rights (by making them “absolute discretions”) and also explicitly puts the onus on the person alleging bad faith/commercial unreasonableness.

The law

A good place to look is Barclays v Unicredit, which considered what a party must do if it is required to act in a commercially reasonable manner.

In popular fiction

commercially reasonable manner can be found in all sorts of places:

• FCA conduct of business rules (including the “client’s best interest” rule) impose it as a minimum standard of conduct.
• Both versions of the Industry standard ISDA CSA impose it as standard;
• It’s a standing term of the Uniform Commercial Code (you can contract out of it, though why you would is harder to say);
• Recent case-law (Barclays v Unicredit) finds that acting in a commercially reasonable manner means having regard to one’s own commercial interests, not the other chap’s.

See also

• Good Faith and Commercially Reasonable Manner (CSA Provision)
• Implied terms (could a commercially reasonable standard ever be implied? In England, no; in the US, yes).