Parties regularly enter into contracts for the purpose of achieving a desired result. Sometimes there is an absolute requirement to achieve the result; sometimes merely an agreement to try to achieve the result. Included in this spectrum of commitment is a trio of phrases that are commonly used but not so commonly understood: “best efforts”, “reasonable efforts”, and “commercially reasonable efforts.” What do these terms require of a party that agrees to use such efforts? Does one of them require something more than the others? In this article, we will explain why and when such terms are used, look at how New York courts interpret them, and offer some advice on how to reduce the uncertainties that accompany their use.
When Are These Terms Used?
Efforts clauses are most likely to be used where a party is unable to control an outcome, the parties are unable to predict if an outcome can be achieved, or a party simply is unwilling to guarantee an outcome. For example, a party selling its business may require a third party’s consent to an assignment of a contract between the selling party and the third party. The purchase agreement could require the seller to obtain the consent, failing which it would be in breach of the agreement, or provide for one of the “efforts” standards. So long as the seller used the required efforts, it would not be in breach of the contract if the third party refused to consent to the assignment of its contract.
What Are Efforts Clauses?
An efforts clause requires a party to take some level of effort to achieve the desired result. Failure to use such efforts would be a breach of the clause; failure to achieve the desired result would not be a breach, so long as the required effort was used.
The three most common used efforts clauses are “best efforts”, “reasonable efforts”, and “commercially reasonable efforts.” Attorneys and contracting parties generally view best efforts as the most demanding of the efforts clauses, commercially reasonable efforts as the least, and reasonable efforts as a middle ground. As discussed below, what attorneys and parties believe is not necessarily what the case law dictates.
Does Best (or Any Other) Efforts Require a Party to Do Anything Necessary?
The obligation to use reasonable efforts, commercially reasonable efforts, or even best efforts does not generally mean that the promising party must be successful or take exhaustive measures to fulfill the obligation. Under New York law, these efforts terms do not require a party to act against its own business interests. Courts in other states have frequently held that even “best efforts” does not require a party to take every conceivable effort, take unreasonable actions, or incur substantial losses to perform an obligation. By agreeing to use best efforts, a party is not agreeing to take every possible action, to incur unlimited costs, or take unlimited time to achieve the desired result.
What’s the Difference Among the Efforts Clauses? Is There Even a Difference?
Parties rarely bother to define what they mean by “best”, “commercially reasonable” or “reasonable” efforts, meaning that in a dispute they are leaving it to a court to determine not only whether the effort has been made but what the effort required in the first place. Courts have wide latitude in determining what the parties may have intended to be required, and attempting to reconcile the efforts clause with other provisions of the contract so that the provisions of the contract work in harmony. Judges will often look to the contract’s surrounding facts and circumstances, if such facts and circumstances will enable them to determine the meaning of the efforts clause with a reasonable degree of certainty.
“Best Efforts” and “Reasonable Efforts”
New York courts have taken inconsistent positions with regard to the interpretation of efforts clauses. Some courts view “best efforts” and “reasonable efforts” as equivalent and interchangeable, while other courts find a distinction between them. One decision interpreted “commercially reasonable efforts” as requiring at the very least some conscious exertion to accomplish the agreed goal, but something less than a degree of efforts that jeopardizes a party’s business interests. As one federal court noted, New York has been “anything but a model of clarity” when it comes to interpreting efforts clauses.
In particular, there is a series of cases holding that both best efforts and reasonable efforts (the two more stringent standards in the view of most attorneys) impose an obligation on the promising party to act with good faith in light of its own capabilities; allow such parties the right to give reasonable consideration to their own interests; and permit such parties to rely on their good faith business judgment.
On the other hand, there is also case law in New York supporting the proposition that a best efforts standard is more onerous than a reasonable-efforts standard. Following this line of cases, courts often define the standard by using the implied covenant of good faith and fair dealing (as the base standard expected in all New York contracts) to explain that a best-efforts clause requires (i) a higher standard than mere good faith and (ii) a party to pursue all reasonable methods to achieve the result in question.
Finally, some courts analogize a best-efforts provision to a contractual obligation to perform promptly or diligently.
Most New York courts agree on one issue (not that it is helpful to litigants): the determination of whether a party used best efforts or reasonable efforts is a fact-intensive inquiry. Unfortunately, due to the lack of a decision by the New York Court of Appeals, New York case law is divided as to whether (a) there must be objective criteria or clear guidelines against which a party’s efforts to meet the required standard can be measured to be enforceable, or (b) best efforts is an enforceable obligation, even when objective criteria are unavailable if external standards or circumstances impart a reasonable degree of certainty to the meaning of the phrase.
“Commercially Reasonable Efforts”
Until recently, few New York courts had dealt with interpreting and applying a commercially-reasonable-efforts standard. The developing consensus is that the standard for satisfying commercial reasonability under New York is fairly lenient, with a balance between some conscious exertion to accomplish the agreed goal and something less than a degree of effort that jeopardizes the party’s business interests, as judged objectively based on industry standards.
With regard to “commercially reasonable efforts”, New York courts generally evaluate a party’s performance in light of an objective standard of reasonableness as opposed to a party’s subjective belief of what the contract requires.
What Can Be Done to Reduce Uncertainty?
There are some actions that can be considered if a party desires to reduce, to the extent possible, the uncertainty of a judicial interpretation of an efforts clause.
First, if at all possible, simply avoid using an efforts clause — make the desired result an express obligation of the other party. In this case, the inquiry is simply whether the result was achieved, not whether a party used sufficient efforts to try to achieve the result.
Second, define what is meant by “best”, “reasonable” or “commercially reasonable” efforts. This gives the court an ascertainable standard to determine whether the required effort was made, with the less subjectivity the better in this regard. For example, efforts could include sending a notice, incurring up to a certain amount of expense, engaging a specialist with expertise in the given subject matter, appealing an adverse administrative decision, and so on, tailored, of course, to the applicable result being sought. An efforts clause can also be defined to state what efforts are not required, such as commencing litigation, incurring excess costs, taking actions that are illegal, or taking action that would reasonably be likely to expose the party to liability.
Third, use objective criteria. For example, if a party is required to give a notice or take other action as part of an efforts clause, state the date by which the notice must be given or the action taken, and avoid phrases such as “within a reasonable period of time.”
While there is much ambiguity in the use of efforts clauses, with some (best/reasonable/commercially reasonable) effort, the following conclusions can be drawn:
- unless specifically agreed to, none of the “efforts” clauses requires a party to do everything possible (such as bankrupting itself or take other unreasonable actions) to achieve the desired result;
- depending on what court you end up in, “best” and “reasonable” efforts may, despite what may appear from the respective terms, mean the same level of effort; and
- if achieving a desired result is important, and the counterparty is unwilling to commit to an absolute obligation to accomplish it, then consider including objective details as to what that party is expected to do as part of its efforts so that a court can more readily determine whether that effort has been made if the result is not achieved.
 Holland Loader Co. v. FLSmidth A/S, 313 F. Supp. 3d 447 (S.D.N.Y. 2018)