Commercially reasonable manner

From The Jolly Contrarian
Jump to navigation Jump to search
Negotiation Anatomy

Walk-away | Escalation | Algorithm | Heuristic | subject matter expert | Operationalisation | Playbook | Smart contract | Dead horse | Knife fight | 7 wastes | Cruddy legal advice

Good faith and commercially reasonable manner” as a general standard

Whether a merchant should commit himself to dealing in good faith, or in a commercially reasonable manner, or both, is one that vexes many of our learned friends. Especially those in America. The only discomfort it should occasion is to a solicitor’s[1] livelihood, for this magic expression, while doing no more than articulating the commercial imperative and the basic commercial outlook of a good egg, puts many a tedious negotiation to the sword.

Everyone benefits but officers of Her Majesty's — or (cough) the People’s — courts.

In good faith and a commercially reasonable manner” cuts the crap and promises to unlock some negotiations and take the tedious line-by-line muck-raking out of others.

There is a certain kind of legal negotiator apt to see phantoms and ghosts at every turn. He has a bleak vision indeed of a counterparty’s general commercial aspirations for his organisation.

“What if,” he will say, “your traders mendaciously use this clause to bring about my firm’s misfortune in a way I – er – cannot now anticipate?” (This fellow’s imagination tend to be fantastical in the abstract, but rather prosaic in the particular).

Such a chap is often placated by the magical expression “acting in good faith and a commercially reasonable manner”. It may help persuade hime across that wobbly bridge to consensus. Many a time it has helped the JC get home in time for supper.

Litigation risk: The one argument against the general principle is that it is inherently vague and therefore a source of potential dispute in itself, even if we always exercise our rights reasonably and in good faith. But come now — it only presents litigation risk to clients who don’t trust you — and here you have bigger problems, frankly — or for those whom you don’t trust — also not without issues. Here, your problem is not the good faith obligation; it’s that you have a lousy client relationship. It hardly affects litigation risk in any case: An unhappy client will take action either way, and will argue a lack of good faith in any case.

A contract is a bond of trust. How would a merchant explain to his counterparty that he wished to reserve for himself the right to act in bad faith?

As for commercial reasonableness, and that objection I can already see you formulating that it admits shades of doubt, and encourages litigation — well, for you the great case of Barclays v Unicredit should be a source of succour. And for you Americans, for whom Barclays v Unicredit is of persuasive value only, there is the fact that “in good faith and a commercially reasonable manner” is written into the Uniform Commercial Code should bend your ear: if it is okay there — and in the 2016 NY Law VM CSA — why not elsewhere?

In any case, whatever your contract says, if a court finds you have acted wantonly, or in bad faith, do not expect much sympathy when you argue that, by the contract, you were entitled to.

Absolute discretion

To be sure, sometimes you might want to be able to act — or, more likely, not act — in your absolute discretion. Here you do not want argument. At least for “omission” cases, the “I never said it was” principle ought to get you home. But you might say the following:

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.

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. As a corrective to any irrationally giddy feelings of happiness this may induce, see also Crowther v Arbuthnot Latham & Co Ltd — this is not a licence to do what the hell you like. If a discretion is designed for one purpose, you can’t use it to the exclusion of that purpose, to achieve another.

Bottom line

This boils down to one of the JC’s home-baked Latin aphorisms: Noli mentula esse.

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

Table of cases

  • Being an officer of the court, American friends, and not someone who goes door-to-door selling encyclopaedias.