Commercial Reasonableness
A standard requiring a party to act in a manner consistent with practices accepted in the relevant industry or trade, applying ordinary business judgment without demanding perfection.
While straightforward in theory, many businesses fail to actively track obligations tied to this concept - often resulting in missed deadlines, unintended renewals, penalties, or loss of contractual rights.
US Law · For business owners and foundersWhat is a Commercial Reasonableness?
Commercially reasonable is a legal standard requiring a party to conduct themselves in a manner consistent with what a reasonable, prudent business person would do under similar circumstances in the same trade or industry. It is an objective standard - courts ask what a reasonable commercial actor would do, not what this particular party thought was best. It is less demanding than "best efforts" (which requires maximizing effort) and more demanding than "good faith" alone.
The "commercially reasonable" standard appears most frequently in: consent clauses ("consent not to be unreasonably withheld, conditioned, or delayed"), sale of collateral under UCC Article 9, efforts clauses in M&A agreements, assignment and subletting provisions, and mitigation of damages. When a contract uses "commercially reasonable efforts" rather than "best efforts," courts generally interpret it as requiring reasonable business judgment, not heroic effort.
Under UCC Article 9 (secured transactions), a secured party who repossesses and sells collateral must dispose of it in a "commercially reasonable manner" - using recognized markets, obtaining a fair price, and providing proper notice. Failure to conduct a commercially reasonable sale can reduce or eliminate the deficiency balance the debtor owes.
In practice, many teams rely on a contract expiry tracking system to stay on top of dates and obligations tied to clauses like this.
Key Elements
Objective Standard
What matters is what a reasonable business person in the same circumstances would do - not the subjective judgment of the party making the decision.Industry Norms
Courts look to industry custom and practice to define what is reasonable. What is commercially reasonable in one industry may differ significantly from another.Cost-Benefit Analysis
Commercially reasonable actions do not require a party to spend unlimited resources or take extraordinary steps - the expected benefit must justify the cost and effort.Timeliness
Commercial reasonableness includes acting within a reasonable time - delays that cost the other party money or opportunity may not be commercially reasonable even if the ultimate action taken was appropriate.Real-World Example
A software licensing agreement allows the licensee to sublicense with the licensor's consent, "not to be unreasonably withheld." The licensor refuses consent to a sublicense with a well-funded, reputable company solely because the licensor wants to negotiate a higher royalty rate.
The licensor's refusal is likely not commercially reasonable. Using consent as a leverage tool to extract higher royalties - rather than for legitimate business reasons related to the proposed sublicensee - violates the commercial reasonableness standard. The licensee could seek a declaratory judgment that consent was improperly withheld.
This is why many businesses adopt automated deadline tracking to ensure no critical dates are missed before they pass.
Sample Clause Language
Commercially Reasonable Efforts ClauseWatch Out For
"Best Efforts" Is a Higher Standard
Avoid confusing "commercially reasonable efforts" with "best efforts" - the latter is generally interpreted to require more extensive action. Choose the standard that matches your actual expectation.Withholding Consent for Ulterior Motives
If your contract says you can withhold consent only on "commercially reasonable" grounds, using consent as a bargaining chip for unrelated concessions likely violates the standard.Document Your Reasoning
When relying on commercial reasonableness to justify a decision - especially a refusal or delay - document your business reasoning contemporaneously. Courts look at the reasoning behind the decision, not just the outcome.Don't let commercial reasonableness deadlines catch you off guard
Key dates tied to commercial reasonablenesss - renewal windows, expiry cutoffs, notice periods - can easily slip through the cracks when tracked manually. Missing them triggers automatic extensions, penalties, or lost rights. ExpiryEdge tracks every critical deadline and sends automated reminders before they're due - so nothing slips.
Instead of relying on spreadsheets or manual follow-ups, a centralized renewal reminder system ensures every deadline is visible, tracked, and actioned automatically.
How to Use This in Your Favor
Define "Commercially Reasonable" in the Contract
Rather than leaving the standard undefined, specify in the contract what factors parties may and may not consider in making commercially reasonable decisions. This reduces room for dispute.Use "Commercially Reasonable" for Consent Rights
When granting consent rights to the other party, include "commercially reasonable" or "not to be unreasonably withheld, conditioned, or delayed" language - this prevents the other party from using consent as a veto for illegitimate reasons.Related Terms
Frequently Asked Questions
What is the difference between "commercially reasonable efforts" and "reasonable efforts"?
"Commercially reasonable efforts" applies a business-context standard - what a commercial actor would do. "Reasonable efforts" may be interpreted more broadly. In practice, courts often treat them similarly, but "commercially reasonable" signals a business-context evaluation.
Can a party refuse consent on any commercial ground?
No - if the contract requires consent not to be unreasonably withheld, the party must have a legitimate, objectively reasonable commercial reason. Pretextual, self-serving, or punitive reasons do not qualify.
How does commercial reasonableness apply to mitigation of damages?
A non-breaching party must take commercially reasonable steps to mitigate their damages - e.g., finding a replacement tenant or supplier. Failure to take commercially reasonable steps can reduce the damages they can recover.