By: David L. Simmons, Drewry Simmons Vornehm, LLP
Contracts frequently contain conditions that specify the level of performance required by the parties. For example, some contracts require a party to exercise “commercially reasonable efforts” in performance of its obligations. Not infrequently, contracts contain a requirement that a party use his “best efforts” in the performance of obligations, although this standard is seldom defined within the four corners of the contract. When a contract dispute arises, the question of what constitutes the “best efforts” of a party may constitute one of the primary questions for resolution.
Fifty years ago, it was generally accepted that a duty defined only in terms of “best efforts” was too indefinite to be enforced. However, that is no longer the case, and most courts including Indiana hold that “best efforts” provisions can be contractually enforced. For example, the Seventh Circuit ruled in Hinc v. Lime-O-Sol Co. 382 F. 3d 716 (7th Cir., 2004), that a “best efforts” clause was enforceable under Indiana law, although it did not provide any guidance on the level of performance required by this standard.
Unfortunately, the use of the phrase “best efforts” in a contract without more leaves significant room for disagreement between the parties, particularly where the level or quality of performance is in dispute. Some parties have argued that a “best efforts” clause requires a party to perform an obligation with extraordinary effort. However, most courts disagree with this position and hold that a party is not required to perform with exceptional effort without regard to cost or consequence when performing under the “best efforts” obligation. Neither bankruptcy nor substantial loss need be braved to satisfy the “best efforts” obligation.
Rather, courts generally hold that the “best efforts” standard requires something more than good faith performance, and will be judged based upon a variety of factors such as the language of the contract, the surrounding circumstances, the capabilities of the parties, and the prior performance of similar contracts. One court reasoned that a “best efforts” obligation does not require a party to accomplish a given objective, but rather make a diligent, reasonable, and good faith effort to accomplish the objective. This obligation takes into account unanticipated events and the exigencies of continuing business, but does not require such events or exigencies be overcome at all costs. Rather, “best efforts” requires a party to exercise all reasonable efforts within a reasonable time to overcome hurdles and accomplish the objective.
Parties that contract for performance in different parts of the county should be aware that sharp differences exist between various courts in the interpretation of “best efforts” clauses. For example, the Second Circuit adopted a rather high standard in Bloor v. Falstaff Brewing Corp., 601 F. 2d 609 (2d Cir., 1979), in which a “best efforts” clause under New York law required a party to treat the promisee’s affairs better than its own. On the other hand, the Seventh Circuit concluded in Olympia Hotels Corp. v. Johnson Wax Development Corp., 908 F. 2d 1363 (7th Cir., 1990), that a “best efforts” clause under Illinois law required only that a party perform at the same level as it did in parallel contracts where its efforts have not been questioned.
What we know for sure is that judicial interpretations of “best efforts” obligations will vary widely. The courts look at a variety of factors in resolving the standard that should be applied to a “best efforts” clause, including:
- Ability and resources of a party;
- Language defining the object of the task;
- Hurdles that must be overcome in performance;
- Expectations of what a reasonable party would do;
- Efforts used to perform comparable contracts;
- Industry custom and practice;
- Performance by other parties;
- Competing obligations to third parties;
- Responses to alleged noncompliance;
- Business justifications for not making a better effort;
- Statements made during contract negotiations; and
- The totality of the circumstances.
- Avoid the use of “best efforts” language in a contractual undertaking if possible. This eliminates the risk resulting from vague performance standards and the wide variance of court opinions.
- Ascertain the performance level required of “best efforts” clauses in the governing jurisdiction agreed by the parties. Request your lawyer to ascertain how the courts in the governing jurisdiction have treated “best efforts” clauses in court opinions.
- Where no governing jurisdiction has been specified in the contract, ascertain the level of performance required by the courts in the jurisdiction where the contract is being performed. Request your lawyer to review the transaction and provide an analysis of what law will govern.
- Where “best efforts” language must be used, include supplemental provisions that more particularly define the performance effort required. Although “best efforts” will govern the performance, a court will look to the provisions of the contract in determining the effort required.
- Ascertain the expectations of the promisee and address ambiguities where possible.
- Provide performance that is consistent with the standards of the industry, and furnish examples of industry standards if a dispute arises.
- Review the level of performance of similar contracts, and provide a similar effort.
- Review carefully any allegations of defective performance and respond promptly.