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It is common for two parties in a business transaction to include a clause, or several, into their contract which sets the level of effort the other party has to use to reach the goal of the contract. These clauses are known as “effort” clauses and can be found in everything from manufacturing, to leases, to purchase agreements, to service contracts and beyond. It is important that a business owner carefully review any agreement and verify the level of effort required prior to signing. In the event of an issue or a delay, it is important to know in advance exactly what efforts are required.
Surprisingly, based on popularity of these clauses, the law on deciphering and enforcing these clauses is still developing in Illinois along with many other states. One of the reasons for the developing law is the variety of different “effort” clauses that are used. We will focus on three (3) of the most commonly used clauses in this article; best efforts, reasonable efforts and commercially reasonable efforts.
Although these clauses are commonly used in commercial contracts, there are no standard, universally, court approved definitions for the underlying terms on which these clauses are based.
Certain courts, including some in Illinois and Delaware, have refused to enforce “efforts” clauses claiming that they are too vague and uncertain to be enforceable. The best protection for parties who wish to include “efforts” clauses is to define the term within the contract and include objective criteria for determining if a parties’ obligation has been met. It is often beneficial to include examples of actions that are not required of the obligated party (i.e. take illegal actions, pay certain fees to third-parties, take actions that would be subject to liability, etc.).
While the terms themselves may be up for interpretation by the courts, many commercial attorneys agree on how they fall into a hierarchy of sorts.
THE BEST EFFORTS CLAUSE
‘Best Efforts’ has generally been considered to be the most demanding of the standard; it has been interpreted as requiring a party to take every action conceivable to accomplish the goal of the contract regardless if the action is unreasonable or the cost exceeds the value of the contract. Though recent cases seem to show courts are stepping away from this harsh determination – a recent article by The National Law Review states that California courts have recently held that the Best Efforts clause needs to be interpreted in light of the circumstances and should be reconciled with other clauses in the contract – clarifying that this efforts clause does not absolutely mean every conceivable effort.
This clause is commonly requested by the party receiving the goods or services and is often included as a starting point for negotiations. Due to the confusion between common usage by attorneys and court interpretation, if you see “Best Efforts” in a contract setting out something you are obligated to do – proceed carefully and seek advice.
THE REASONABLE EFFORTS CLAUSE
‘Reasonable Efforts’ is many times considered to be a compromise between best efforts and commercially reasonable efforts. It is considered to impose a lesser standard than best efforts as it allows a party to give reasonable consideration to their own interests (i.e. cost, feasibility of solution, etc.). It is often interpreted as requiring that an obligated party make a good faith effort to resolve the issue and use reasonable business judgment. However, it is important to note that some courts disregard attempts to differentiate between best efforts and reasonable efforts and consider them to be the same.
THE COMMERCIALLY REASONABLE EFFORTS CLAUSE
‘Commercially Reasonable Efforts’ is frequently considered to require a party to take only those actions which could be considered reasonable from a business and economic sense (as opposed to what an general person may consider “reasonable”). This standard requires that a party use a good faith effort to take those actions which would be reasonable in the situation giving the cost of the action and the value of the agreement. Though it is important to note that some courts disregard attempts to differentiate between reasonable efforts and commercially reasonable efforts and consider them to be the same.
SO HOW DO I USE THESE CLAUSES?
It is important that the “efforts” clauses, or the related term, be used consistently through-out the agreement as failing to do so can lead to confusion and result in the court imposing their own interpretation. When establishing the criteria for determining if an obligation has been met, it is common for parties to identify specific events which can trigger the obligated party to act or include certain timetables that have to be met.
To further confuse efforts clauses, a recent Delaware case went so far as to say the “reasonable” efforts standards may not stop at “good faith efforts” and may instead require obligations closer to what most attorneys consider a “best efforts” level. In The Williams Companies, Inc. v. Energy Transfer Equity, L.P, the Delaware Supreme Court affirmed the lower court’s decision in a case involving an alleged breach of a merger agreement with respect to a purchaser’s obligation to use “commercially reasonable efforts” to obtain a tax opinion and to use “reasonable best efforts” to consummate the transaction. The majority opinion determined that the terms “commercially reasonable efforts” and “reasonable best efforts” may impose affirmative obligations on parties to take all reasonable steps toward closing a transaction and that acting in good faith may not be enough to satisfy such a standard. In this case the court looked at the context the language was used in the agreement and found additional language that escalated the efforts clause obligation.
If you are considering including an “efforts” clause into your current contracts or anticipating signing a contract which may contain one, it is strongly recommended that you speak to an attorney to clarify the obligations to be imposed and confirm that such are properly stated within the agreement.
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