What's It Going to Take? Efforts Clauses in Commercial Contracts

Transaction Tips

You have bought a business and agreed to use "best" efforts to obtain regulatory approval of the transaction. The regulator has decided that it won't clear the deal unless you divest one of your product lines. Doing so would not make much commercial sense for your business. Are you on the hook to sell the line anyway given your "best" efforts obligation?

The answer is … it depends.

In Canada, there is no single test to define what fulfills a "best efforts" covenant. The courts have said that in order to meet this standard, you must "leave no stone unturned." Specifically, all reasonable steps should be taken to achieve the required objective and "carry the process to its logical conclusion." This is already more onerous than a "reasonable commercial efforts" standard, but the real question remains: how far do you need to go?

Looking to the interpretation of "reasonable commercial efforts" as a benchmark can help answer this question. Canadian courts have found that "reasonable" implies "sound judgment," and "commercial" means "having profit or financial gain" rather than a loss as the main purpose. This suggests that, unlike a "best efforts" obligation, the reasonable commercial efforts standard allows a party to reasonably consider its own financial interests in deciding when to cease further efforts.

And while a best efforts standard implies something beyond this, Canadian courts have also said that a best efforts covenant does not require a party to "sacrifice itself totally" to the economic interests of the other party, although that other party's interests must prevail on balance.

This leaves a great deal of room for debate and disagreement between parties. Although some economic sacrifice is implied with a "best effort" covenant, ultimately the interpretation of an efforts clause will be highly dependent on the specific contract and the circumstances and context in which the clause was agreed to.

And finally, somewhere in between these two efforts standards lies the "reasonable best efforts" covenant, which the Canadian courts have yet to consider. This wording borrows from both the reasonable efforts and best efforts standards, rendering its meaning even more unclear.

In the United States, the law is also muddy. Under Delaware law, a "best efforts" covenant does not necessarily mean something different from a "reasonable efforts" or "reasonable best efforts" obligation, often leaving the courts to interpret these standards on a fact-specific, case-by-case basis. Under New York law the courts have taken this approach in some instances, but in other cases have deemed a best efforts provision unenforceable unless it included objective standards against which the performance could be judged. Whether under Delaware or New York law, do not presume that "best efforts" or "reasonable best efforts" will mean something more than "reasonable" efforts.

Tip: Depending on the law governing your contract, "best efforts" can be interpreted differently. To avoid uncertainty, parties should negotiate standards and timelines for specific actions required (and identifying those actions that are not required, such as making payments in order to obtain a third party consent) to satisfy the efforts obligation in their contract.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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