Law of Best Efforts and Reasonable Efforts Obligations in Commercial Contracts

[Prabhakar Yadav is a third year B.A.LL.B. (Hons.) student at National Law School of India University, Bangalore]

Introduction

Commercial contracts impose absolute obligations on the parties to perform their part of the promise, the breach of which would result in contractual liabilities. However, in practice, the ability of the parties to deliver on their performance may be impacted due to certain other external factors as well. This might be due to events which are beyond the control of parties or owing to some obligations which are contingent upon third party performances. Hence, incorporating endeavours clauses in commercial contracts has become a potent tool for parties to avoid potential liability for breach of a contract. The reason is that endeavour clauses give flexibility to the parties to set their own non-absolute obligations framed in terms of “best efforts” and “reasonable efforts” clauses. Consequently, if the parties demonstrate that they have undertaken their best or reasonable efforts, in order to bring about a desired promised result, they could avoid contractual liability for breach.

Nonetheless, the exact standards of performance required under the best efforts and reasonable efforts clauses lack clarity. The scope and the precise meaning of these endeavour clauses differ in common law jurisdictions. Thus, the aim of this post is to delineate the scope and distinction between the standards of obligations incurred by best efforts and reasonable efforts endeavour clauses in commercial contracts.

What is the Scope of “Best” in Best Efforts?

The meaning and the scope of best efforts covenants in commercial contracts was illustrated in Canadian case of Atmospheric Diving Systems Inc. v. International Hard Suits Inc.[1] In this case, the Court concluded that the term best efforts imposes a higher onerous obligation on the party to discharge its performance than other endeavour clauses such as the reasonable efforts or all reasonable efforts clause in a commercial contract. The Court interpreted the standard of obligations under the “best efforts” clause as equivalent to the standard of “leaving no stone unturned“.[2] Hence, a party consenting to use best efforts in discharging its promise is assumed to be implicitly signalling to its counterpart that it will leave no stone unturned in fulfilling its contractual obligations.[3]

Thereupon, the Court laid down the following tests in order to delineate the scope of “best efforts” clauses in commercial contracts.[4] It explicated as follows:

i. Best efforts means taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned.

ii. Best efforts includes doing everything known to be usual, necessary and proper for ensuring the success of the endeavour.

iii. The meaning of best efforts is, however, not boundless. It must be approached in the light of the particular context, the parties to it and the contract’s overall purpose as reflected in its language.

iv. While best efforts of the defendant must be subject to such overriding obligations as honesty and fair dealing, it is not necessary for the plaintiff to prove that the defendant acted in bad faith.

v. Evidence that the defendant, had it acted diligently, could have satisfied the best efforts is relevant evidence that the defendant did not use its best efforts.

Hence, from the above laid down tests in Atmospheric Diving, it can be deciphered that best efforts clause is not categorized as a “hell or high water clause“. This is because the Court has recognized certain exceptions in favour of the party, which has consented to its use. For instance, the “promising party is not required to do everything possible under the sun” to conclude its obligation. Nonetheless, it is imperative for the promising party to reassure that all the necessary actions are taken in good faith and there is “no wilful breach” of the obligations under the contract. Thus, the intention of the parties is also equally pertinent when the court undertakes task to determine what constituted best efforts in the given facts and circumstances.

Likewise, courts have also recognized another limitation in the best efforts clause, which surmises that though the best effort clause imposes an onerous burden on the parties, it is not an insurmountable one. For instance, a party subjected to the best efforts obligation need not sacrifice its own economic interest while discharging its performance, although the interests of the other party must dominate. Thus, courts have sought to take a middle ground while interpreting the best efforts duty, stating that the duty does not require the party to sacrifice itself totally to the economic interests of the party to whom the duty is owed, although the interests of the other party must predominate.

Therefore, it is postulated that reasonable economic considerations of the obliged party may be taken into account; nevertheless the party cannot be excused of non-performance on the grounds of financial disadvantage under a best efforts clause.[5]

Common law Notion of Best Efforts

Over time there have also been several cases litigated in English courts on the meaning of “best endeavours”.[6] The crux of these rulings has established the scope of best efforts clauses in commercial contracts. For instance, it is now well accepted in common law jurisdictions that best endeavours does not entail such actions or undertakings which could lead to financial ruin of the obligor or is deleterious to its commercial standing or goodwill.[7]

For instance, in Rackham v. Peek Foods Ltd.,[8]  the share purchase contract stipulated that the buyer and the merchant bank would use their “best endeavours” in obtaining a shareholders’ approval regarding the proposed transaction. However, a subsequent legislation enacted posed a significant financial hurdle to the buyer because the said purchase would not in buyer’s best interest. Thereupon, the buyer and the merchant bank took appropriate action to ensure that shareholder approval was not obtained. In a suit filed against the buyer and the merchant bank for breach of their best endeavour obligations, the Court declared that a best endeavours covenant in a contract does not oblige the directors to give bad advice about the proposed transaction. The Court observed: “If, after the date of the conditional agreement, the directors consider that the bargain has become unacceptable from the point of view of the shareholders, it is the duty of the directors so to advise the shareholders and that advice by the directors does not constitute a breach of the best endeavours covenant by the company.”[9]

Thus, from the analysis of above decisions, it can be stipulated that best efforts endeavours are not regarded as commercial synonyms of “no fault liability“. This is because of the deferred consideration granted of reasonable interests, which the parties can take into account while discharging its non-absolute obligations wrapped in the language of its best efforts obligation.

How Best Efforts Clauses Differ from Reasonable Efforts Clauses?

Reasonable efforts as the name suggests are considered to the watered down version of best efforts obligations. However, to confer any kind of precise degree of dilution between these two clauses is no less than a hopeless muddle. The position of law, which is commonly accepted between these two qualifiers, was well illustrated in Atmospheric Diving Systems. Therein, the Court concluded that the obligations imposed by reasonable effort clauses are less onerous than that of best efforts clauses in commercial contracts. Therefore reasonable efforts does not require all possible efforts, but rather reasonable steps to bring the contract to its logical conclusion.[10]

For instance, in Rhodia International Holdings v Huntsman International,[11] it was held that “reasonable efforts warrant that the obligor has to pursue at least one reasonable course of action to bring the desired contractual outcome.” However, in the best efforts clause, the obligor has to pursue all reasonable courses of action until they are fully exhausted. Further, the Court also stated that reasonable effort clauses are not absolute.[12] This is because the nature of obligation under the reasonable endeavours clause depends on what was reasonable under those circumstances. For instance, the party has a right to protect its economic and commercial interests while delivering the promise.[13]

Therefore, it can be deciphered that a reasonable endeavours clause does not put an obligor in a condition to take an unwarranted or whimsical path to achieve the purpose of the contract; this is unlike in the best efforts endeavour where the obligor has to leave no stone unturned in fulfilling its contractual obligations.[14] For that to ascertain, the courts have also looked onto the Travista test to determine the nature of effort — best or reasonable, that is warranted in a particular case, taking into consideration how an ordinary, prudent, and sensible man would act under such circumstances.[15]

Conclusion

Contractual effort clauses need to be paid due attention owing to the nature of liabilities which the parties might incur in consequence of the breach. Through this post, I have analysed the distinction between best and reasonable efforts clauses in commercial contracts. The conclusion reached was that best efforts obligations are regarded as the onerous and stringent version of the reasonable efforts obligations. However, it does not warrant that party consenting to use best efforts prejudice its own financial interests while delivering on its promise. I also concluded that, in common law jurisdictions, the obligor is further obliged to pursue all reasonable courses of action under its best efforts obligations and required to spend significant resources in order to fulfil its performance; however, the said responsibility is diluted in case of enforcement of reasonable efforts obligations of the obligor. Thus, it can be said that though the law of best efforts and reasonable efforts needs more objectivity and clarity in its enforcement, yet the distinction between efforts clauses is indeed real.

Prabhakar Yadav

[1] [1994] BCJ no 493.

[2] Id at 77.

[3] Sonja Homenuck and Michael Toshakovski, “Best efforts” more onerous than “reasonable efforts” in lease. A Carswell Publication. June Volume 31. Number 3

[4] Jane Sidnell Christopher Knight, “Best efforts” – “reasonable efforts” – “commercially reasonable efforts” – what do these terms mean? June 7, 2010.

[5] Id.

[6] Markland v Jack Barclay [1951] 1 All ER 714; Sheffield District Railway Co. v Great Central Railway Co, [1911] 27 TLR 451; Rackham v Peek Foods Ltd, [1990] BCLC 895.

[7] Terrell v. Mabie Todd & Coy Ltd., [1952] 69 RPC 234.

[8] [1990] BCLC 895.

[9] Id.

[10] Note 1 above.

[11] [2007] 2 ALL ER (Comm) 577.

[12] Electricity Generation Corporation v. Woodside Energy Ltd. [2014] HCA 7.

[13] Russell Kennedy, Reasonable endeavours”: Electricity Generation Corporation v Woodside Energy Ltd., July 31 2014.

[14] Dobb v Insurance Corp of BC (1991) BCWLD 1987 (SC).

[15] Travista Development Pte Ltd v Tan Kim Swee Augustine and Others [2008] 2 SLR(R) 474.

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1 comment

  • Isn’t the definition of “no stone unturned” subjective? The court, in Atmospheric Diving System, hasn’t dealt with that, has it?

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