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Best efforts clauses - what buyers expect versus how suppliers respond

Published: 29 May 2015 Average Rating: 4 / 5 Print
 
This article appeared in Contracting Excellence magazine on 27 Jul 2015 view edition
 

Author: John Pavolotsky, Senior Attorney at Intel, San Francisco

Rare is the commercial agreement without some type of "efforts" clause, resulting in prolonged and often contentious negotiations. But what does "best efforts" actually mean? And when may they not be good enough? Understanding the shortcomings of efforts clauses - and how to get the result you want - may seem impossible. We've found an answer.

Efforts clauses are many and varied. They may call for best effortsreasonable best effortscommercially reasonable efforts, diligent efforts or good faith efforts - to name but a few. But what they actually mean is often a matter of huge contention and much time and cost wasted in trying to pin down the meaning. That's understandable – buyers want the high road and suppliers prefer the lower, more “reasonable” road. And you as a negotiator want to keep your sanity? You can - even if you might not think so. This article takes a practical look at what's involved and reviews case law.

Legal interpretations may vary across jurisdictions – and even within jurisdictions – but these issues are familiar to us all. Typically, we use an efforts clause to bridge the gap between an unqualified, firm commitment (e.g. supplier will deliver X units of item Y to buyer on Z date) and no commitment at all. In negotiations, the buyer in our example will press for the seemingly higher standard (best efforts), while the supplier will push for an ostensibly lower standard (reasonable best efforts or commercially reasonable efforts).

This, of course, begs two key questions:

  • First, what does the buyer get, and what is the supplier obligated to do (and not do), under a best efforts clause?
  • Second, does the adjective “best” preceding the word “efforts” make a tangible difference, justifying prolonged negotiations?

A quick review of the relevant U.S. case law will shed light on both questions.  It's important to note that, although this article focuses on efforts clauses under U.S. law, contract law, under which efforts clauses would be construed, is a matter of state law. Thus, a practitioner would begin his or her inquiry with the state law governing the contract at issue. This article does not attempt to identify themes relating to the construction of efforts clauses under non-U.S. laws.

Different jurisdictions – but same themes emerge

Although case law on efforts clauses is not uniform, even within jurisdictions, several consistent themes emerge. First, consider what a best efforts clause does not do. It does not create a fiduciary relationship. Thus, the promisor is not expected to “act primarily for the benefit of another in matters connected with his undertaking.”Similarly, “best efforts” does not require the promisor to make every possible effort.2 The promisor is not expected to bankrupt itself or to incur substantial losses in discharging its obligations under a best efforts clause.3 Rather, if the contract does not define best efforts, “the promisor must use the diligence of a reasonable person under comparable circumstances.”4 “Best efforts is implicitly qualified by a reasonableness test – it cannot mean everything possible under the sun.”5

The test of “reasonableness”

The element of reasonableness in best efforts clauses is especially noteworthy. Among other things, reasonableness seems to remove any practical difference between a best efforts clause, reasonable best efforts clause, and a commercially reasonable efforts clause. Beyond this, a meaningful distinction between these clauses assumes that for a party to discharge its obligation to use best efforts, it would need to use commercially unreasonable efforts. Similarly, reasonable best efforts imply the possibility of unreasonable best efforts.

So, why the fuss?

Perception, at least in part. “Best efforts” intuitively implies a higher standard than, for example, “commercially reasonable efforts.” Substantively, however, analyses of best efforts clauses are highly fact-intensive.6 The same principle would apply to other efforts clauses as well. “Best efforts cannot be defined in terms of a fixed formula … [but] varies with the facts and the field of law involved.”7

In Gilmore, for example, the defendant lessors were obligated to use “their best efforts to see that there is sufficient water to irrigate” property leased by the plaintiffs.8 The court examined the various attempts of the lessors to fix the pumping plant, including, ultimately, drilling a new well, and thus restoring irrigation to the land. The court concluded that the defendants could have discharged their obligations to use best efforts by drilling the new well when the problem was first reported to them, rather than pursuing unsuccessful, intermediate steps.9

On the same facts judges may differ

This focus (on the facts) means that if judges, even within the same jurisdiction, reviewed the same set of facts, under the same rules, some may conclude that a party did enough to accomplish the object of the best efforts clause, while others may not. Put another way, the application of a best efforts clause is inherently unpredictable, especially if the standard for measuring performance is not clearly stated in the contract. For this reason, the promisor may prefer an ostensibly lower standard, under the false belief that a court will require less of it to discharge its obligations under that lower standard. On the other hand, the promisee may prefer best efforts to further motivate the promisor to achieve the desired goal (e.g. delivery of an item on-time), although practically, as noted above, the effect is more qualitative than anything.

So what's the answer?

  1. Where possible use unqualified, firm commitments
    If a party cannot make a firm commitment, understand what it can do (without qualification) and the reasons (if not readily apparent) why it cannot agree to perform a certain activity unconditionally.
  1. Understand the shortcomings…
    of an efforts clause. As noted earlier, best efforts does not mean every possible effort. As a corollary, even if a contract expressly required the promisor to use every possible effort to accomplish a stated goal, a court would likely read into the contract a reasonableness requirement. Accordingly, if it is critical for a promisee that the promisor achieve a certain goal (e.g. meet forecasted demand), it may be wise to negotiate an unqualified, firm commitment for that goal, and agree to a “lesser” standard or to no express contractual commitment for another.
  1. Avoid efforts clauses if…
    it is virtually impossible to determine whether the promisor has actually met its obligations under that clause. A court could find that provision impermissibly vague or indefinite. Even if the provision is enforceable, it may have little practical value, due to inability to measure compliance. If the parties decide to use an efforts clause (because they cannot agree on an unqualified firm commitment), the parties should try to contractually define “best efforts” or “commercially reasonable efforts” (or any other agreed level of effort).
  1. List exemplary activities
    that would help the promisor meet its obligations under the efforts clause. For example, a contract could provide that a supplier will use its “commercially reasonable efforts” to achieve a certain product specification by, without limitation, dedicating top resources to any required development efforts, executing to the activities specified on the project plan, and so on. Of course, while this helps avoid misunderstandings, for flexibility purposes, the parties may prefer ambiguity.
  1. Use efforts clauses consistently
    within a contract, unless the parties intend a higher or lower standard to apply to the performance of certain activities. For example, if a supplier was obligated to use best efforts to discharge certain obligations and commercially reasonable efforts to discharge others, a court would conclude, based on the general principle that each word should have its own meaning, the supplier will need to do more to satisfy those obligations that required it to use its best efforts. Similarly, unless otherwise intended, be careful about using different standards in related agreements. For example, if the supplier and buyer are parties to a software license agreement and a related software implementation agreement, use of a “best efforts” clause in one agreement and a “commercially reasonable efforts” clause in the other agreement will suggest that the parties contemplated different levels of effort.
  1. Last, but not least, for a promisee, an efforts clause is better than nothing
    Certainly, an efforts clause will require the promisor to use some modicum of effort to achieve the goal desired by the promisee. Put another way, even under a commercial reasonableness standard, the promisor cannot simply decide to do nothing without breaching its obligations under the clause. On the other hand, the promisor could decide, after a thorough internal review, and perhaps some limited activities, that the goal qualified by the efforts clause is infeasible, and further efforts are unwarranted. If others, similarly situated, would have objectively reached the same decision, there could be no liability.

Conclusion

We spend much time negotiating the specific levels of “effort” for endeavors without, perhaps, appreciating the differences or assuming there are differences where none may actually exist (depending on the judge). Appreciating these differences, or the lack of differences, should help contract negotiators attach appropriate value to these clauses and, as a result, streamline negotiations.

END NOTES

  1. Farnsworth on Contracts (3d ed. 2004) §7.17c., p. 405
  2. See Triple-A Baseball Club v. Northeastern Baseball, 832 F.2d 214, 228 (1st Cir. 1987).
  3. See Bloor v. Falstaff, 601 F.2d 609, 613 (2nd Cir. 1979).
  4. California Pines Property Owners Association v. Pedotti (206 Cal.App.4th 384, 395 (2012)).
  5. Coady Corp. v. Toyota Motor Distributors, Inc., 361 F.3d 50, 59 (1st Cir. 2004).
  6. See Gilmore v. Hoffman, 123 Cal.App.2nd 313, 320 (1954).
  7. Triple-A Baseball Club, 832 F.2d at 225.
  8. Gilmore, 123 Cal.App.2nd at 315.
  9. See id. at 319.

‚ÄčABOUT THE AUTHOR

John Pavolotsky is Senior Attorney at Intel Corporation, supporting its Technology and Manufacturing Group.  Prior to joining Intel, John was Of Counsel in the Intellectual Property and Technology Group of Greenberg Traurig LLP. John is Co-Vice Chair of the Licensing Interest Group of the IP Section of the State Bar of California. He is a graduate of the U.C. Davis School of Law and Haas (U.C. Berkeley) School of Business.

 

 
 
 

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