What Best Efforts Means Legally
Best Efforts is a term often used in contracts. It can be a useful term for the parties to use to signal their commitment to exerting their best efforts to carry out the terms of a contract. Often, when discussing a proposed transaction with a counterparty, one party or another will ask that the other use its best efforts to accomplish something. However, how does one determine if it has met the standard required by best efforts? If the other party does not consider the efforts to be best efforts, is it in breach of the contract if it does not accomplish what it was asked to do?
To explore this issue, it is useful to look at how best efforts is defined in the context of an effort standard such as reasonable best efforts or commercially reasonable best efforts. In this context, the term describes the level of diligence and promptness a party must use to fulfill contractual obligations. The background to how courts have come to interpret the use of the term in the context of commercial contracts is instructive in understanding the general meaning of the term. One of the first courts to consider the meaning of the term Best Efforts was the New Jersey Supreme Court in American Cyanamid Co. v. Capuano.
The Court stated:
"the `best efforts’ language in an agreement is not self-executing. It requires certain effort to be manifested and that the effort be deemed best in the opinion of the party making the evaluation . It is subject to judicial review. It is not a subjective test . . . [a] court may grant summary judgment if, after construing the `best efforts’ language most favorably to the nonmovant, there is no basis to conclude that the effort was best. Thus, a reviewing court may find that a party has failed to exercised its best efforts as a matter of law where, for example, it is not disputed that the efforts of that party were insufficient when measured against a reasonable person’s standards. However, if the facts are presented where a trier of fact reasonably could differ about whether the efforts constitute best efforts, then summary judgment is inappropriate and the facts must be placed before a trier of fact."
The first source of authority in understanding the general meaning of the term best efforts is the words themselves. A second source of authority, aside from a court judgment, is a legislative history. Although there is no known legislative history regarding the term Best Efforts, the origin and the legislative context of the term in the UCC is helpful in understanding the general sense in which the term is to be used.
The second source of authority that can be asked to review a party’s performance of Best Efforts is the market. The market or reasonable person’s opinion of the best efforts displayed will play a role in determining whether a party has displayed the best efforts required.
Best Efforts Compared to Other Efforts Standards
Any discussion of best efforts should also include a description of other levels of efforts often used in contracts: "reasonable efforts" and "commercially reasonable efforts." In fact, some contracts include all three levels, defining them distinctly and adjusting them according to the situation at hand.
The distinction between these terms is rarely the subject of legal battles, because they are easy enough to discern from context. However, there are some nuances worth noting:
Reasonable efforts. This is a relatively low standard. It varies depending on what is reasonable in the specific situation at hand. It does not require the same level of diligence as "best efforts."
Commercially reasonable efforts. This standard suggests that the party must undertake the sort of efforts that are "commercially reasonable" (in the eyes of an objective observer) to achieve the goals outlined in the contract. This doesn’t demand "best" efforts, but it has more teeth than just "reasonable" efforts.
The Contractual Best Efforts Clause
A best efforts clause is typically included in a contract where the parties agree to "best efforts", which is a lower standard than "reasonable efforts" or "commercially reasonable efforts". For example: "Party A shall make commercially reasonable efforts to commercialize Product X." "Each Party shall use its best efforts to provide all necessary data, evidence, support, and assistance as reasonably required to obtain and maintain all necessary Regulatory Approvals." Where a party regularly provides commercial diligence towards an effort, using "best efforts" may be appropriate. An example of a clause where these terms are regarded as interchangeable is this: Buyer shall use its best efforts (a) to market, promote, sell and distribute the Products and communicate fully with the Seller regarding these efforts and (b) to encourage the distribution by any other distributor or third-party of the Products and the marketing, promotion, selling, and distributing thereof.
For a party to make these efforts "best", it can generally involve numerous activities, including: Purchasing orders Production Shipping Sales Marketing Delivery Advertising Installations Training
In addition, the scope of the clause should be defined in a manner that is specific enough to the activity at hand. If a party fails to meet the standard as agreed to in the contract, the other party may seek redress through suit for breach of contract.
Best Efforts: Legal Construction and Enforcement
The interpretation and enforcement of best efforts clauses can vary widely across jurisdictions, making it a particularly challenging term to negotiate and draft. In the United States, courts generally require a clear definition of better than reasonable efforts in order to give it legal meaning and effect.
U.S. Courts
The United States’ federal courts have been particularly strict with enforcement of best efforts clauses. The Southern District of New York has "found that the phrase ‘commercially reasonable efforts’ is devoid of any real meaning, let alone a legal one."
In Ortho Pharmaceutical Corp. v. Amgen Inc., the court compared what was commercially reasonable efforts with what was best efforts. Since the agreement did not define what constituted best efforts, the court interpreted the phrase to mean something similar to due diligence. As such, U.S. courts prefer all parties to make best efforts "in good faith."
A subsequent case involving American Cyanamid Co. as plaintiff and Elan Corp. Plc. as defendant reinforces the New York ruling. It expands on the scope of best efforts by determining that "licensee’s obligation to use best efforts does not extend to the risk that it will not in good faith pursue the product development program." In particular, the court found that best efforts extended to the parties’ obligations to engage in research and development, and to ensure that a product had the appropriate marketing approvals.
UK Courts
The English courts are less strict than the U.S. regarding best efforts. A 1996 decision (X Co. v. Y Co) asserted that the US approach was too narrow. Rather, the English court issued a ruling that clarified the precedence for enforcing best efforts and commercially reasonable efforts as the following:
‘.. the correct interpretation to be applied to the term ‘best efforts’ is (1) it means ‘to exert more than ‘reasonable efforts’; and (2) it does not simply mean ‘to act in good faith’. Although to act in good faith is not sufficient to meet the commitment, acting in good faith is nevertheless necessary to comply with it.’
Recent Developments
The inclusion of the best efforts clause in a contract is often never the end of the story. In re Hwang (2012) 2012 WL 2910606, the court found that the inclusion of best efforts was not enough to prevent a fraud case. The petitioner, who had invested a significant amount of money into the development of the company’s drug product and later suffered losses, could pursue his claim of fraud against the remaining members of the company.
The court determined that the terms of the contract ultimately led the petitioner into investing in the company, and the terms of the contract had not been followed. The case was then implemented under the rule that the "partial failure of best efforts does not bar a claim for fraud." This case sheds light on the importance of not listing too many intricate details on what constitutes best efforts.
Best Efforts Provisions: How To Draft Them
When drafting ‘best efforts’ clauses, legal professionals are advised to address the accompanying standards. Standards are derived from the context of a provision. Different standards will manifest depending on, among other things, an attorney’s skill, knowledge, and experience, or industry standards.
When determining the applicability of industry standards, courts are most interested in whether diligent attempts have been made to fulfill the obligation, as opposed to whether the "best possible efforts" have been devoted to meeting the obligation. The latter would be an unreasonably high standard that would essentially eviscerate the clause of any meaning. By implementing parameters, the drafter better ensures that the specific goal of the piece can be carried out.
In USF Farm Labor, Inc. v. United States, the court interpreted best efforts as, "the standard that a prudent person would exercise in the management of his own affairs." Despite vestiges of ambiguity , reliance on the standard depends more on the acceptance it has garnered within the relevant industry and the intent of the parties.
Whether establishing industry standards or other definitions, drafters are well-advised to anticipate arguments regarding vagueness and the enforceability of best efforts clauses, as discussed above. When challenged, the inquiry is whether there is a failure of consideration. Because consideration serves to execute the intent of the parties, the lack thereof exists when there is no response to the performance to be rendered. Drafters should also aim to specify the triggering conditions of the best efforts clause. When the best efforts clause is triggered by another action, parties can expect litigation when that action fails to occur. For example, in Tumey v. Chicago Title & Trust Co., a provision to "immediately thereafter" turn over certain documents as soon as they were available was construed by the court to mean as soon as the documents could be inspected.
What Are The Typical Problems With Best Efforts Clauses?
As a common phrase in contracts, the term "best efforts" can lead to disputes when it’s not clear exactly what performance is being promised. Parties don’t always mean the same thing when they use the same contractual terms. With a best efforts clause, a party might intend to convey its intent to act in good faith with the best interests of the other party in mind without guaranteeing success, but another party may understand the same clause as promising that party will fully commit its resources to achieving the intended result.
For example, in Plastic Suppliers v. Exxon Chemicals, plastic resin manufacturers sued an oil and gas company for breach of contract when its manufacturer cancelled its contract for the production of PVC resin to purchase PVC resin from a different supplier. The oil and gas company agreed to purchase PVC resin "as required and in accordance with Standard Industry Practice" only from the resin manufacturer. But the manufacturer breached that provision when it cancelled the supply contract with the oil and gas company. On appeal, the manufacturer argued that its contract with the resin supplier gave it to right to terminate at any time without penalty while the resin company argued that it would have continued to supply resin to the manufacturer but for the oil and gas company’s breach of its agreement to purchase the resin.
The court agreed with the resin company because the contract between the resin manufacturer and the oil and gas company was "intended to confer benefits on the resin plastic supplier." The court found the contract was an "output contract" in which the supplier agreed to supply the entire output of the resin manufacturer’s PVC resin business in return for a fee. This meant the oil and gas company had "implicitly bound himself to meet the reasonable requirements of the purchaser." The contract language "Standard Industry Practice" suggested the parties agreed that the oil and gas company would follow the "contract’s normal practices" in fulfilling its obligations. And the evidence showed the oil and gas company did not meet the "Standard Industry Practice" – to make good faith efforts to supply PVC resin to the manufacturer.
Another dispute about "what best efforts means" arose in Daplan, Inc. v Citibank, N.A., a case involving a dispute arising out of a loan agreement between a pharmaceutical company and two banks. At issue was how to calculate payment obligations under a "Best Efforts" clause, which stated that the company would pay interest on its outstanding balance only if: (1) its cash on hand, accounts receivable and costs of goods sold exceeded $10 million and; (2) the company’s aggregate net sales were no more than $17 million. The company had $21 million of cash on hand, with net sales exceeding $77 million.
The banks argued an additional "liquidity covenant" limited the pharmaceutical company’s ability to repay early, and that the company could not borrow under the loan agreement unless its cash and accounts receivable exceeded $10 million. In contrast, the company argued the clause simply meant net cash flow could not exceed $10 million. Despite the management letter stating that the "best efforts" clause was intended to enable early repayment, the Court found for the banks because a "court cannot insert a term which is not in the agreement."
These cases show the challenges — and resulting disputes — when "best efforts" language lacks specificity. As these cases show, various aspects of a best efforts clause -from the specific language to how it interacts with other contractual provisions -may contribute to disputes. Given the ambiguity of "best efforts" clauses, specifying what the parties mean in the contract, and making sure the term aligns with other binding provisions, may be important to mitigating risk of future litigation.
Best Efforts Clause From An International Perspective
In international settings, the application of "best efforts" can vary significantly among jurisdictions. In the United Kingdom, for example, the courts have recognized the difficulties in attempting to define the term and the imprecision that accompanies its use. The tendency of the English courts to construe "best efforts" as "reasonable efforts" has been commented on by some as a result of the practical difficulties caused when "best efforts" obligations are imposed in the context of counter-commercial forms of contracting. In such jurisdictions, the courts may more readily seek to impose obligations of reasonableness to either avoid the uncertainties created by the term or to align best efforts with the more precise term "reasonable efforts."
In Germany , some scholars have attempted to equate "best efforts" with a "reasonable efforts" or "diligent efforts" standard. A German court has found that an obligation for a party to "use its best efforts" means that party must "do what reasonable care demands, while taking into account other commercial interests." More recently, German legal scholars have advocated a more restrictive interpretation between "best efforts" and "reasonable efforts," but this remains to be seen by the courts.
In some other jurisdictions, including Japan and China, the term is relatively unknown, and courts will likely treat it as a problem of interpretation under general legal principles of "good faith."