Most transactional documents include effort clauses as covenants to require a party to perform a certain act or acts to achieve a stated goal. These terms generally include the following:
- Best efforts
- Reasonable efforts
- Commercially reasonable efforts
There are no universally accepted definitions or standards for interpreting these terms. As a result, their use can create ambiguity and uncertainty when a dispute arises, making it difficult to predict an outcome.
When a court evaluates whether a party has exerted the necessary effort standard, the court generally first examines the business contract for a definition of the efforts term. If the business contract contains such a definition, the court will apply that standard. If the business contract is silent, the court has discretion to interpret an efforts clause or term by considering the business contract’s facts and circumstances.
In the absence of a definition, a court will impose standards of:
- Good faith, which requires honesty and fairness from the acting party
- Reasonableness, which requires diligence from the acting party and is often a more demanding standard than good faith
Other courts may evaluate the acting party’s efforts by comparing those actions to an independent standard, such as the effort:
- A reasonable third party would have exerted in the same situation
- The party would have taken on its own in the same situation
- The party would have taken on behalf of a single entity, if both parties to the contract were part of that entity
State courts differ in their review. For example, Texas courts will enforce an efforts clause only if the underlying business contract contains objective guidelines or criteria against which a party’s efforts can be measured. New York courts have held:
- Best efforts and reasonable efforts are interchangeable terms
- Both best efforts and reasonable efforts impose an obligation to act with good faith in light of one’s own capabilities, allowing promising parties the right to give reasonable consideration to their own interests, and permit promising parties to rely on their good faith business judgment
Having said that, there is support in New York case law for the hierarchy in which a best efforts standard is more onerous than a reasonable efforts standard.
A California Court of Appeals has held that a promise to use best efforts is a more exacting standard than a promise to use good faith.
Despite a drafter’s attempt to distinguish between best efforts, reasonable efforts and commercially reasonable efforts, courts tend not to recognize such differences. On the contrary, many courts interpret the two terms as being substantially the same.
To determine if a party made commercially reasonable efforts, courts have considered the specific facts of the case and the entire business relationship of the parties, including:
- If the promising party used the level of effort that a reasonable business entity would have used in similar circumstances
- The economic feasibility and profitability of an action, and other factors relevant to the industry in which the parties operate
- The costs, skills and efficacy factors that relate to the industry in which the parties operate
- The promising party’s financial resources, business expertise and business practices
- If the promising party used reasonable efforts and worked in good faith to satisfy its obligations
Courts have held that the obligation to use best efforts, reasonable efforts or commercially reasonable efforts does not mean the acting party must be successful or take extraordinary measures to satisfy its obligations. Courts have held that these terms do not require a party to:
- Take every conceivable effort
- Take unreasonable actions
- Sacrifice its own economic and business interests
- Incur substantial losses to perform its contractual obligations
Drafters of efforts clauses can avoid ambiguity and uncertainty by careful draftsmanship, including considering the following:
- Define the meaning of the terms in the business contract
- Consider including specific carve outs in the definition
- Use the terms consistently throughout the business contract
- Use objective criteria to describe the required actions to satisfy the obligation
Carve outs are helpful when drafting an effort clause. Examples include not requiring the party to perform the efforts clause to:
- Spend a specified dollar amount that is not expressly stated in the business contract
- Engaging in conduct that would be materially adverse to it
- Take any action that would cause it to incur expenses or suffer a detriment that is not reasonable in proportion to the benefits under the business contract
- Take any action that would subject it to liabilities
- Disregard its own business strategies or economic interests
- Take illegal actions
- Take actions which would harm its existence or solvency
As with any clause in a transactional document, care must be utilized in the drafting of the efforts clause to avoid ambiguity and uncertainty. Inadvertent liability can be incurred if an efforts clause does not receive the same scrutiny of other material clauses.