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Drafting contracts

(c) ‘Best endeavours’ and ‘commercially reasonable efforts’

Traditionally, legal systems distinguish between obligations to achieve a result and obligations to make reasonable endeavours to achieve something (without necessarily accomplishing it). If a desired result is not entirely within a contracting party’s control, such party is probably willing to ‘do its best’ but not to guarantee the result. For an elaborate discussion of best effort provisions see Drafting International Contracts by Marcel Fontaine and Filip De Ly[1]. Here, only a few highlights are given.

Best efforts varied. Other than best efforts, drafters also use phrases such as reasonable endeavourscommercially reasonable efforts and good faith efforts. By implication, an obligation to achieve a result is more onerous than any of its best efforts variants. Many lawyers believe that from amongst the variants, best efforts would be the most onerous one; the promisor would be required to do everything in its power to accomplish the goal, even if it leads to its insolvency, while other efforts standards would be less onerous. Making the distinction at all implies that a party obliged to make best efforts should do everything that may reasonably be expected from it, but also things that cannot reasonably be expected from it. This is probably not within the scope of either concept. A larger group would probably reject such contrast of meanings and may even consider that the practical difference is negligible. One thing is for sure, best efforts certainly does not mean second-best efforts.

Sufficient effortsBest efforts and its variants are vague terms. The vagueness implies standards of ‘subsidiarity’ and ‘proportionality’ in what may or must be expected from the party concerned. Occasionally, a party may be obliged to make efforts disproportionate to the benefits under the contract. The vagueness also implies that determining whether a party has made sufficient efforts depends on all facts and circumstances. The minimum standard would probably be that the party has made a good faith effort to achieve the anticipated result. The Unidroit Principles[2] give something to hold onto:

Art. 5.1.4 – …Duty of best efforts

2.   To the extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances.

Art. 5.1.5 – Determination of kind of duty involved

In determining the extent to which an obligation of a party involves a duty of best efforts in the performance of an activity or a duty to achieve a specific result, regard shall be had, among other factors, to:

a)  the way in which the obligation is expressed in the contract;
b)  the contractual price and other terms of the contract;
c)  the degree of risk normally involved in achieving the expected result;
d)  the ability of the other party to influence the performance of the obligation.

Model clause. When Willem Wiggers worked at Allen & Overy, he reworded this Unidroit principle as a contractual clause. The clause was later used in the firm’s model corporate joint venture agreement. Many years after leaving the firm, in an entirely different M&A-context, he received a mark-up of a share purchase agreement prepared by another reputable law firm. It contained the model clause exactly the way it was originally drafted.
Over the years, experience shows that a best efforts provision must have teeth in order to ascertain effectiveness beyond an otherwise relatively weak concept. What required improvement was (a clarification of) the burden of proof, as well as making more explicit the scope of a party’s duty to explain and justify. In fact, to clarify what best efforts entail, the drafter should phrase it as an obligation to achieve a result or link it to a contractual right to manage failure:

Where any obligation is qualified or phrased by reference to use reasonable endeavorsbest efforts or wording of a similar nature, it means the efforts that a person desirous of achieving a result would use in similar circumstances to ensure that such result is achieved as expeditious as possible. The Party under such an obligation shall, if a result aimed at is not achieved or achieved after delay, upon the request by a Party explain in writing (a) the actions taken by it in order to fulfil this obligation, (b) any choices made where two or more alternative courses of action would have been reasonably appropriate, and (c) plausibly how any external factors influenced its performance and the achieved result.

The efforts can be further strengthened by providing that either party may require that the efforts made and explanations given shall be confirmed by an independent expert. In addition, the best efforts provision can be extended such that, failing sufficient efforts, the expert (then acting as a binding adviser) may determine which course of action a party should pursue in order to meet its obligation. To smoothen this, the expert may be empowered to give such binding advice only if the efforts made by that party are clearly insufficient or reasonably inadequate. An experienced drafter will furthermore address the independence of the expert and its appointment and allocate the related costs.

[1] Marcel Fontaine and Filip De Ly, Drafting International Contracts – An analysis of contract clauses, reflecting the work of a truly international Working group on international contracts (Groupe de travail contrats internationaux).

[2] Unidroit Principles of International Commercial Contracts (2004).

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Drafting contracts

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