How Much Effort Does “Best Efforts” Entail?
By: PAUL B. JONES & CARRIE L. SEELE
February 2004
In many contracts, parties are contractually obligated to use “best efforts” to perform part of their obligations. Unfortunately, very few parties know what this obligation entails. As illustrated in the following hypothetical, the most prudent approach is for the parties to define “best efforts” in the agreement and not leave the interpretation to a third party.
The seller has just received a purchase agreement for the sale of a business for what she believes to be a very favorable price. The negotiations were protracted, and the seller believes all the major points have been covered in the term sheet for the purchase agreement. In the negotiations, the buyer insisted that all third parties involved in the business consent to the sale. The seller’s response was that she couldn’t guarantee a consent from each third party, but that she would do her best. In private discussions, the seller told her lawyer that she would contact the third parties, but didn’t want to expend a great deal of effort or any money in obtaining consents.
As the seller reviews the draft purchase agreement, she notices that it provides that the seller agrees to use “best efforts” to obtain the third-party consents. The seller asks her lawyer what this means.
Unfortunately, the lawyer informs her that “best efforts” is vague and not susceptible to easy interpretation. In fact, a good faith attempt to obtain what a party is required to use “best efforts” to obtain, in and of itself, is not enough. Good faith is generally required in the performance of every contractual obligation; “best efforts” represents a greater obligation.
The seller asks her lawyer: “How hard do I have to try to get these consents? Do I have to spend any money?” Again, the lawyer says the answer is unclear. “Best efforts” could mean spending money disproportionate to the importance of obtaining the consents.
There are really two standards used to determine the amount of effort necessary to discharge a “best efforts” obligation: i) pretend the seller and the buyer are the same person and then ask what efforts a reasonable person would exert in that situation; or ii) ask what efforts would a reasonable person expend in your circumstances as seller.
In this instance, the seller knows the importance the buyer attaches to these consents; accordingly, without any modifying language, the “best efforts” obligation would require the seller to exert some substantial effort and/or funds to obtain them. This prompts the seller to notice that there are other provisions in the draft purchase agreement that require her to use “best efforts,” and she asks how to limit this obligation. “Can you use a different standard, such as ‘commercially reasonable efforts’?” the seller asks.
The seller’s lawyer points out that “commercially reasonable efforts” is as vague a concept as “best efforts,” and courts almost always refuse to recognize a valid distinction between the two. Given the nature of the negotiations leading up to the purchase agreement, the seller’s suggests the draft purchase agreement be modified to detail what efforts the seller is willing to undertake to accomplish the obligations, specifically indicating whether the seller is willing to use out-of-pocket funds to accomplish the obligations and, if so, how much the seller is willing to spend. In this manner, no one will be surprised at closing.
As this example illustrates, the definition of “best efforts” should not be left to interpretation. Rather, the parties should undertake to specifically define how much effort is “best efforts.”