This article is written by Komal Mittal, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.
Table of Contents
What are the best efforts and reasonable efforts obligations?
These are the standards of performance of obligations decided by the parties in commercial contracts. These standards help the courts to decide the liabilities of the parties in commercial contracts in case of any dispute regarding the performance of contract.
Best Effort in simple terms means the greatest possible effort to achieve something or do something, especially when this is difficult. Corbin on Contracts describes the best-efforts standard as “a more rigorous standard than good faith.”[1] Reasonable Efforts simply means what a reasonable person in a similar situation would do.
Why do we need these standards in commercial contracts?
In commercial contracts, the quality of performance is of utmost importance as the quality of performance distinguishes the price charges for any product/service e.g. Cars, Mobiles, Laptops in all these all minute details/ minor parts are very important and affects the performance of the Product. That’s why the standard of performance must be clearly laid down in the Contract to hold the Parties accountable for the quality of work.
What is the scope of “best” in best-efforts?
In Gilson v. Rainin Instrument[2], the Court held that the duty to use best efforts is a combination of reasonable efforts and due diligence. In Rhodia International Holdings Ltd. and Rhodia UK Ltd. v. Huntsman International LLC case the parties had a contract for the sale of a chemical surfactant for business purposes. The claimant was obliged to use reasonable efforts to obtain the consent of a third party for the assignment of the contract to supply energy to the business. The defendant argued that the commitment to use reasonable efforts was equivalent to a duty to use best efforts. The court held that the best-efforts obligation means to use all the reasonable efforts.[3]
Common law notion of best-efforts
Common law refers to the body of law developed in England mainly from judicial decisions based on custom and precedent, unwritten in statute or code. Common law is the basis of the English legal system and the legal system in all of the U.S. except Louisiana.[4]To understand the common law notion of best-efforts as a standard of performance in commercial contracts let us analyze the stand of the U.S. and U.K.
U.S.
Majority of courts in the U.S. have not found any substantial difference between the various effort standards unless specifically mentioned by the parties in the contract.[5] In Bloor v. Falstaff Brewing Corp.[6],the US court held that the best-efforts standard doesn’t necessarily prevent the other party from giving reasonable consideration to its own interests. The court in this case imposed a duty on the defaulting party to act in good faith or at least perform “as well as the average prudent” person.
In another U.S. case it was held that whether a party used its best efforts is a subjective factual issue, and to decide it the courts will consider a party’s experience, financial status, expertise and other abilities.[7]
U.K.
Initially, an onerous test was laid down under which the obliged party was required to leave no stone unturned to fulfill the best-efforts standard. [8] This approach is changed by subsequent cases and the best-efforts clauses are now judged by standards of reasonableness. In Terrell v. Mabie Todd & Co. Ltd.[9] and Pips (Leisure Productions) Ltd. v. Walton,[10] courts held that the parties are not required to act against their own interests to fulfil the best-efforts obligations laid down in the contract.
Further, in Midland Land Reclamation Ltd. v. Warren Energy Ltd. the court held that best efforts should not be regarded as “the next best thing to an absolute obligation.”[11]
In Rhodia International Holdings Ltd. and Rhodia UK Ltd. v. Huntsman International LLC[12] it was held that: The reasonable efforts clause in a contract probably only requires the obliged party to take only one reasonable course, whereas the best efforts clause requires a party to take all the reasonable efforts.
Some people believe that the best-efforts clause requires the obliged party to do everything in its power, including spending unlimited amounts of time, efforts and money. Whereas, as per the case laws of the United States and United Kingdom, this view is unjustified.
How best-efforts clauses differ from reasonable efforts clauses?
In the majority of the cases, the courts do not recognize any difference between the best-efforts clause and reasonable efforts clause until and unless parties have specifically defined the same in the agreement. The difference between these clauses largely depends on facts of the case, country, industry practices and other factors.
The Canadian case laws have established the distinction between standards of performance: According to this distinction, in case of the best efforts clause the promisor must take, “in good faith, all reasonable efforts to accomplish the objective, carrying the process to a meaningful conclusion, leaving no stone unturned” – the duty to use best efforts doesn’t require the party to neglect all its economic interests for the interests of the other party, but in case of best efforts obligations the interests of the other party always predominates.”[13]
Whereas, in case of reasonable efforts clause in the contract, the obliged party is permitted to exercise business judgment and consider its own interests as well. The obliged party is not required to exhaust all the possible means of fulfilling its obligations nor to undertake steps which are expensive/time consuming. The party must undertake the effort that a “reasonable person would have undertaken.”[14]
The major difference between these standards is the number of reasonable efforts a party is obliged to take.[15]
Important points to be considered by the drafters
To avoid any dispute related to best efforts and reasonable efforts as standard of performance in a commercial contract the following points should be considered while drafting best efforts clause or reasonable efforts clause:
- The language of these clauses should be simple.
- The intention of the parties must be reflected clearly in the contract.
- The performance standard should be defined elaborately and must include what are the expectations of the party from the contract.
- Best effort or reasonable efforts clause in the contract may include some examples to make it easy for the parties to understand the nature and scope of such clause.
- A benchmark can be included as per industry standards to check whether the obliged party has acted as per best effort or reasonable efforts standard laid down in the contract.[16]
- In case the parties are unable to define the level of efforts required, they can refer to prior contracts. Example – The reasonable efforts clause in the contract may state that the obligation to use reasonable efforts is fulfilled if the effort is comparable to efforts made in the earlier contracts.[17]
- Contract drafters should carry out the process of due diligence about the jurisdiction within which their contracts will fall and ensure that they have an approved library of clause templates to address the different situations.
Conclusion
In commercial contracts as the performance of contract is the main motive of the parties, it becomes very important to set the standards for performance in the contract and best and reasonable efforts are important parameters to decide such standards of performance. The concept of best efforts and reasonable efforts is not properly developed yet but it is getting recognized by some courts and in this way the concept is evolving through judgements of various courts. The prime difference between these two clauses is still not very clear and depends on various factors as discussed above.
It can be said that the best-efforts obligation is not a synonym of “no fault liability” and one thing which can be concluded is that the best efforts obligation is surely a stricter obligation than reasonable efforts obligations. Keeping these things in mind the contract drafters should be very careful while including such clauses in the agreement.
References
[1] Arthur L. Corbin, Corbin on Contracts § 6.5, at 246 (rev. ed. 1993)
[2] Gilson v. Rainin Instrument, LLC, No. 04-C-852-S, 2005 U.S. Dist. LEXIS 16825, at *14 (W.D. Wis. Aug. 9, 2005)
[3] Rhodia Int’l Holdings Ltd. & Rhodia UK Ltd. v. Huntsman Int’l LLC (2007) EWHC 292 (Comm)
[4] https://www.merriam-webster.com/dictionary/common-law
[5]“The case law on the meaning of best efforts suggests that instead of representing different standards, other efforts standards mean the same thing as best efforts, unless a contract definition provides otherwise.” Kenneth A. Adams, “Understanding ‘Best Efforts’ and Its Variants (Including Drafting Recommendations),” 50 Prac. Law. 11, 14 (2004). See also Kenneth A. Adams, “Contract Drafting: Debunking Urban Legends,” New York Law Journal, Dec. 2, 2005
[6] Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir. 1979)
[7] Triple-A Baseball Club Assoc. v. Northeastern Baseball, Inc., 655 F. Supp. 513, 540 (D. Me. 1987); Carlson Brewing Co. v. Salt Lake Brewing Co., 95 P.3d 1171, 1179 (Utah Ct. App. 2004)
[8] Sheffield Dist. Ry. Co. v. Great Cent. Ry. Co. (1911) 27 TLR 451
[9] Terrell v. Mabie Todd & Co. Ltd. (1952) 69 RPC 234
[10] Pips (Leisure Prods.) Ltd. v. Walton (1981) EGD 100
[11] Midland Land Reclamation Ltd. v. Warren Energy Ltd. (1995) ORB No. 254.
[12] Rhodia Int’l Holdings Ltd. & Rhodia UK Ltd. v. Huntsman Int’l LLC (2007) EWHC 292 (Comm)
[13] Eastwalsh Homes Ltd. v. Anatal Developments Ltd., [1990] O.J. No. 564 (H.C.J.)
[14] https://www.mccarthy.ca/en/insights/blogs/canadian-ma-perspectives/reasonable-efforts-vs-best-efforts-why-fuss
[15] Rhodia Int’l Holdings Ltd. & Rhodia UK Ltd. v. Huntsman Int’l LLC (2007) EWHC 292 (Comm)
[16] Pinnacle Books, Inc. v. Harlequin Enters., Ltd., 519 F. Supp. 118, 121 (S.D.N.Y. 1981); UCC § 2-306(2) (2006)
[17] https://www.jonesday.com/en/insights/2007/07/best-efforts-and-endeavourscase-analysis-and-practical-guidance-under-us-and-uk-law
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