Best Efforts Practical Lawyer - Adams on Contract Drafting

1 Understanding Best Efforts . And Its Variants (Including Drafting Recommendations). Kenneth A. Adams A standard feature of contracts is the best Efforts provision and its variants, but there is a lot of confusion about what they mean. Fortunately, careful Drafting allows you to avoid the pitfalls. Contract PROVISIONS USING the a party has made the required Efforts . This arti- phrase best Efforts or one of its variants are often cle recommends that if you provide in a Contract a source of contention and confusion when a that a party is subject to an Efforts standard, gen- Contract is being negotiated. They can also be a erally you should specify by means of a defined source of dispute after the Contract has been term what sort of actions would satisfy that re- signed.

2 This article analyzes how lawyers use quirement. This article discusses which defined best Efforts and its variants; what best Efforts and term to use and how to define it, and also ad- its variants mean when not defined by Contract ; dresses issues relating to the wording of Efforts and how courts go about determining whether provisions. Kenneth A. Adams has written extensively on legal Drafting . He is the author of A Manual of Style for Contract Drafting (American Bar Association 2004), is a senior associate with the law firm Lehman & Eilen LLP, and is an adjunct profes- sor at Hofstra University School of Law. His website is 11. 12 The Practical Lawyer August 2004. THE FUNCTION OF BEST Efforts PRO- that they enter into. Contracts filed with the VISIONS When accomplishing a certain goal SEC are a source of useful information about is not entirely within Acme's control, Acme current Contract - Drafting usages.

3 Would generally not be willing to enter into a Contract that makes it Acme's absolute duty to The Efforts Variants and accomplish that goal doing so would pose How Often They're Used undue risk of future liability for nonperfor- The following table shows the different ef- mance. In such situations, the parties might in- forts phrases used in contracts filed with the stead agree that Acme is to use best Efforts , or SEC in January 2004, how many contracts used some other level of effort, to accomplish that each phrase, and how many contracts treated goal. Contracts impose an Efforts standard in each phrase as a defined term. The table shows connection with many different obligations, that best Efforts was the phrase used most often, such as an obligation to cause a registration but commercially reasonable Efforts , reasonable best statement to become effective by a certain time, Efforts , and reasonable Efforts were each used an obligation to obtain consents required for often, in the aggregate more so than best Efforts .

4 Closing, or an obligation to promote sales of a Good-faith Efforts , commercially reasonable best ef- product. forts, and diligent Efforts were used significantly less often, while good-faith best Efforts , every effort, Different from an explicit Efforts provision of and an oddity, commercially reasonable and dili- this sort is an Efforts standard that a court im- gent Efforts , bring up the rear. poses even though the Contract language at issue might be read as requiring that the Phrase No. Contracts No. Contracts promisor actually achieve a specific result. See Using Defining E. Allan Farnsworth, 2 Farnsworth on Contracts best Efforts 627 1. (3d ed. 2004). This sometimes occurs with commercially agency contracts. See Restatement (Second) of reasonable Efforts 425 1.

5 Agency 377 cmt. b (1958) ( Under ordinary cir- reasonable best cumstances, the promise to act as an agent is in- Efforts 345 0. terpreted as being a promise only to make rea- reasonable sonable Efforts to accomplish the directed re- Efforts 307 0. sult ). An explicit Efforts provision can also be good-faith Efforts 58 0. distinguished from a duty to use Efforts to ac- commercially complish a goal that is read into a Contract either reasonable by a court or by statute in the absence of an ex- best Efforts 46 0. plicit undertaking regarding that goal. See Wood diligent Efforts 23 0. v. Lucy, Lady Duff Gordon, 118 214 ( good-faith best Efforts 8 0. 1917); 2-306(2); Farnsworth, supra, at every effort 5 0. This article focuses on explicit Efforts pro- visions. commercially reasonable and diligent Efforts 3 1.

6 BEST Efforts AND ITS VARIANTS, AND WHAT THEY MEAN Public compa- What Lawyers Think Best Efforts Means nies are required to file with the Securities and The conventional wisdom among corporate Exchange Commission any material contracts lawyers is that best Efforts is the most onerous of Efforts Clauses 13. the Efforts standards that the promisor is re- 1164, 1171 (2d Cir. 1978) (stating that an quired to do everything in its power to accom- obligation to use best Efforts can be met by ac- plish the goal, even if it bankrupts itself in the tive exploitation in good faith ). Good faith process while other Efforts standards are less has honesty and fairness at its core. Farns- onerous. See Lou R. Kling & Eileen T. Simon, worth, supra, at ; see also Black's Law Dic- Negotiated Acquisitions of Companies, Subsidiaries tionary 701 (7th ed.)

7 1999) (defining good faith and Divisions (2003) ( [P]ractition- as A state of mind consisting in (1) honesty in ers, probably based on some of the broad inter- belief or purpose, (2) faithfulness to one's duty pretations given to best Efforts ,' tend to view all or obligation, (3) observance of reasonable the other phrases, while perhaps not being too commercial standards of fair dealing in a given different from each other, as being definitely dif- trade or business, or (4) absence of intent to de- ferent from best Efforts ' ); Charles M. Fox, fraud or to seek unconscionable advantage ). Working with Contracts 88 (2002) ( Best Efforts ' But more recent cases have held that the is the most stringent standard ). standard is higher than that of good faith. See Satellite Broad.

8 Cable, Inc. v. Telefonica De Espana, What Case Law Says Best Efforts Means 807 F. Supp. 210, 217 ( 1992) (holding that The case law, however, paints a different pic- the net effect of the best Efforts clause at ture. Courts have not required that a party issue was to expand extra-contractual dam- under a duty to use best Efforts to accomplish a ages beyond a mere good faith requirement );. given goal make every conceivable effort to do Kroboth v. Brent, 215 813, 814 ( App. so, regardless of the detriment to it. See, , Div. 1995) ( [B]est Efforts ' requires more than Coady Corp. v. Toyota Motor Distrib., 361 50, good faith,' which is an implied covenant in 59 (1st Cir. 2004) ( Best Efforts ' cannot mean all contracts ). everything possible under the sun ); Triple-A As an alternative to a good faith standard, Baseball Club Assocs.

9 V. Northeastern Baseball, Inc., some recent cases have used a reasonableness 832 214, 228 (1st Cir. 1987) ( We have found standard. See, , Coady Corp., 361 at 59. no cases, and none have been cited, holding that ( Best Efforts ' is implicitly qualified by a rea- best Efforts ' means every conceivable effort ); sonableness test ); Kroboth, 215 at 814. Bloor v. Falstaff Brewing Corp., 601 609, 614 ( Best Efforts ' requires that plaintiffs pursue all (2d Cir. 1979), cert. denied, 485 935 (1988) reasonable methods ). ( The requirement that a party use its best ef- Other recent cases have followed Professor forts necessarily does not prevent the party Farnsworth (see Farnsworth, supra, at ) in from giving reasonable consideration to its own describing the appropriate standard as one of interests ).

10 Diligence. See National Data Payment Systems v. Some courts have held that the appropriate Meridian Bank, 212 849, 854 (3d Cir. 2000). standard is one of good faith. See Triple-A Base- (quoting Professor Farnsworth); Holdings, ball Club Assocs., 832 at 225 ( We have Inc. v. Jenkins, 924 1239, 1250 (Kan. 1996). been unable to find any case in which a court (same). That term is also used by the official found that a party acted in good faith but did comment to 2-306(b)(2), which states not use its best Efforts . ); Bloor, 601 at 614 that the implied obligation to use best Efforts re- (best Efforts imposes an obligation to act with quires that parties use reasonable diligence as good faith in light of one's own capabilities); well as good faith in their performance of the W.