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Best-efforts obligations: Six negotiation tips

A former colleague asked whether it was common for companies to agree to a requirement that they use their “best efforts” to do X. I’ve never been wild about that kind of obligation, because they’re inherently risky.

The obligated party might well think it has made its best efforts. But in litigation, it usually wouldn’t be hard for the other side’s lawyer — who of course has 20-20 hindsight — to think of other things the company supposedly could have done, and thus should have done. Therefore (so the lawyer argues), the obligated party clearly didn’t use “best” efforts, QED.

But sometimes a company feels it has no choice but to agree to a best-efforts performance obligation. It’s willing to take on the resulting business risk. Here are six things the company could consider putting in the contract to help manage that risk.

1. Try defining “best efforts” and “reasonable efforts” conservatively

It might be possible to limit the scope of a best-efforts obligation with a couple of definitions along the following lines:

Best efforts refers to ‘leaving no stone unturned’ in making reasonable efforts to achieve the stated objective. For the avoidance of doubt, unless expressly agreed otherwise as to one or more specific actions, a party required to make best efforts (i) need not take every conceivable action to achieve the stated objective, and (ii) need not take any action that would not qualify as a reasonable effort.

Comment: The “leaving no stone unturned” phrase above is from a Canadian court decision, Atmospheric Diving Systems Inc. v. International Hard Suits Inc., 89 B.C.L.R. (2d) 356 (1994), excerpted by Ken Adams at his AdamsDrafting blog. Chapter 7 of Ken’s book A Manual of Style for Contract Drafting, 2d Ed., contains additional helpful research, although in my view his opinions about the meaning of best efforts are, how shall I put this, idiosyncratic. See also a useful 2007 Jones Day memo by Shawn C. Helms, David Harding, and John R. Phillips.

Reasonable efforts refers to one or more reasonable actions reasonably calculated to achieve the stated objective. Any determination of what constitutes reasonable efforts shall give due regard to the information about the circumstances that is available to the acting party at the relevant time, including for example (i) the likelihood of success of the specific action(s) taken or contemplated; (ii) the likely cost of other or additional actions; (iii) the parties’ other legitimate business interests, (iv) the safety of individuals and property, and (v) where applicable, the public interest. For the avoidance of doubt, unless expressly agreed otherwise as to one or more specific actions, a party required to make reasonable efforts need not take (x) every conceivable action to achieve the stated objective, nor (y) any extreme- or extraordinary action, nor (z) any action that would subject the party to undue hardship.

Comment: The above definition of reasonable efforts is my own coinage, drawing ideas from various other definitions I’ve read, including one in Ken Adams’s Manual cited above.

2. Help keep disputes from arising: Make the parties talk regularly

Contract disputes have a way of cropping up when the parties haven’t stayed in touch with each other. A useful discipline, that of holding periodic status-review conference calls, might help nip at least some disputes in the bud, including best-efforts performance disputes. Here’s a provision requiring this:

Status review conferences: The parties will hold status-review conferences, by phone or in person, at either party’s reasonable request. The parties anticipate that agendas will typically include, as appropriate and without limitation: (1) progress made; (2) problems encountered or anticipated; (3) plans for future action; and (4) assumptions being made. Conference details will be arranged by the requesting party unless otherwise agreed. The requesting party will seasonably circulate draft minutes upon request; any party may object to the contents of draft minutes by seasonably so advising all other parties in writing.

3. Require early neutral evaluation (ENE) of best-efforts disputes

If a dispute about a party’s best-efforts performance did arise, an early sanity check from a knowledgeable neutral could help resolve the dispute inexpensively before it got out of hand. Here’s a sample provision requiring early neutral evaluation (about which I previously posted at greater length). This ENE provision could be edited so that it applied only to disputes about whether the obligated party has used best efforts:

Early neutral evaluation: At the request of either party, the parties will submit any dispute between them, arising out of or relating to this Agreement or any transaction or relationship arising from it, to (nonbinding) early neutral evaluation, in accordance with the Early Neutral Evaluation procedures of the American Arbitration Association if not otherwise agreed.

4. Create a financial incentive to settle

The parties could provide in the contract that, if a party rejected a settlement offer, but then did not finally do better than the offer (either at trial or in arbitration), then the rejecting party must reimburse the offering party for its attorneys’ fees and other expenses incurred after making the offer. (See this posting from last year for more on that subject.)

Here’s a clause that would require this for any rejected settlement offer, but it could be tailored so that it applied more narrowly to best-efforts disputes only:

Settlement offer rejection: (1) If, in a covered dispute, a party does not timely accept a covered settlement offer, each as defined below, but then finally fails to obtain a more favorable result in the dispute than the offer, then that party must pay or reimburse the offeror’s costs and expenses, including for example reasonable attorneys’ fees, incurred in the dispute by the offeror after making the offer. (2) A covered dispute is any action or proceeding before any tribunal, where the action or proceeding arises out of or relates to (x) this Agreement or (y) any transaction or relationship arising from this Agreement. (3) A covered settlement offer is an offer that (i) is expressly identified as being subject to this section, and (ii) offers to settle a covered dispute. (4) Matters of timing and other procedural issues concerning the offer will be governed in the general manner provided for an offer of judgment under Rule 68 of the [U.S.] Federal Rules of Civil Procedure, any necessary change being made, to the extent the parties do not agree otherwise. (5) Absent consent of the other party, each party shall preserve in strict confidence the existence and details of any offer made by the other party pursuant to this section and any subsequent communications between the parties regarding the offer.

5. Require micro-arbitration of best-efforts disputes

Nowhere is it written that arbitration is an all-or-nothing proposition. Parties to a contract could agree to arbitration of selected issues only — such as a party’s best-efforts performance — while leaving other matters to be tried in court. That could greatly streamline and simplify the courtroom litigation, and might even eliminate the need for it.

6. Agree to refer best-efforts disputes to a special master

One or both parties might be reluctant to agree to micro-arbitration of a best-efforts dispute, because in many cases an arbitration award is often essentially unappealable except on extremely narrow grounds. Atlanta lawyer Cary Ichter suggests an alternative: Agree to refer the dispute to a special master.

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If a best-efforts performance obligation can’t be avoided, these six tips could help reduce the risk of having the obligation backfire into protracted legal warfare.

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