LSHC Horizons Brochure 2024 - Flipbook - Page 54
Hogan Lovells | 2024 Life Sciences and Health Care Horizons | Litigation
What are “commercially reasonable efforts”? Litigating efforts clauses
in international courts and arbitral tribunals
Many agreements in the life sciences sector,
notably development and/or commercialization
contracts, include so-called efforts (endeavors)
clauses, obligating the parties, or one party, to
use a certain level of effort in respect of all, or
some, of their obligations in support of a project.
The concept is vague, but international
courts and arbitral tribunals have provided
some guidance as to what efforts/endeavors
obligations entail. For example, “best efforts”
typically requires all steps a prudent and
reasonable person would take, even if against
their own commercial interests. “Reasonable
efforts” normally only requires a party to take
reasonable steps to achieve an outcome; they are
not required to act against their own interests.
Commercially reasonable efforts (CRE) are
usually understood to be less onerous than
best efforts. But what are commercially
reasonable efforts? Given the uncertainty,
contract makers are well-advised to define
CRE in their contract. Do they wish to include:
a fixed minimum expenditure or minimum
hours requirement? A longstop date, by which
development must be completed?
Most importantly, what is the relevant standard
for CRE: is it “internal”, benchmarking to the
efforts/resources the party usually expends
to develop similar products at a similar stage;
or “external”, referencing to efforts/resources
that a similarly-situated company may use to
develop a similar product at a similar stage of
development? Whatever the parties select, it’s
important to consider potential procedural
implications if a dispute arises, specifically:
Dr. Inken Knief
Partner
Munich
• A party defending an alleged failure to meet
an “internal” CRE standard may benefit
from not being required to demonstrate that
its efforts reached “industry standards”;
however, the flipside could be the
requirement to disclose significant quantities
of highly confidential documentation relating
to other products it has in development (to
evidence its internal standards), thereby
driving up costs of document production.
• By contrast, a party subject to an “external”
CRE obligation may have stronger grounds to
resist production of internal documentation,
but will be heavily dependent on expert
evidence on the likely efforts expended by
a theoretical similarly-situated third-party
pharmaceutical company developing a
similar product to establish the standard it
was required to meet; and, on fact evidence
from its personnel to demonstrate that
it met that standard. In such cases, early
identification and instruction of appropriate
expert(s) is key to a successful outcome.
Contested issues in CRE disputes typically
include: whether adequate resources (financial
and personnel) were allocated to development,
whether development was conducted in
accordance with the development plan and
whether sufficient attention was devoted to
the project. Risks associated with these areas
can be mitigated, to an extent, by good recordkeeping, communication with the counterparty
and ensuring that budgets, staffing, and
attention are in accord with usual practices for
the relevant stage of development.
Annabel Maltby
Counsel
London
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