In many financing transactions, the day of closing arrives and it becomes clear that certain documents are not yet available or certain conditions precedent have not yet been satisfied. Whereas in many cases, the lender might simply delay funding until all conditions have been met, often neither the lender nor the borrower have control over the closing date. For example, when a borrower is using loan proceeds to complete a purchase transaction, the agreement of purchase and sale will govern the closing date and the seller may not be willing to grant an extension and the borrower could lose the deal.
In situations like this, a borrower may offer a post-closing undertaking to bridge the gap for some unavailable deliveries so that the scheduled closing date can be met. While lenders may not be keen on the idea, especially considering they lose much of their leverage when the advance is made, undertakings are often the compromise that gets everyone over the finish line. For those deliveries that are not completely within the control of the borrower, the undertakings will typically be couched in terms of the use of ‘best efforts’ or ‘commercially reasonable efforts’ to produce the outstanding deliveries or to make something happen. In agreeing to accept such undertakings, it is important for lenders to understand what those ‘efforts’ actually entail.
In short, ‘best efforts’ means something more than ‘commercially reasonable efforts’. It signifies that the lender intends to hold the borrower to a higher standard in its endeavours to track down and deliver the post-closing items. In order to discharge their duty under a ‘best efforts’ undertaking, a borrower must take, “in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned.” 1 However, while it imposes a higher standard than ‘commercially reasonable efforts’, keep in mind that a ‘best efforts’ undertaking is, of course, not a simple covenant. ‘Best efforts’ does not mean that the borrower must do everything possible; it is contextual, depending on the particular undertaking, its purpose, and the understanding between the parties.2 ‘Best efforts’ does not require the borrower to sacrifice itself totally to the economic interests of the lender in chasing down the outstanding delivery, although the interests of the lender must predominate.3 ‘Best efforts’ has also been enunciated as “[making] a genuine and substantial search for the requested information… a cursory inquiry is not good enough… [the borrower] must be able to satisfy a court that a real and substantial effort has been made to seek out what is being requested by the other party.”4
‘Commercially reasonable efforts,’ on the other hand, means something less than ‘leaving no stone unturned.’ It means “the effort that a reasonable person, committed to achieving the objective, would have undertaken.”5 This standard of efforts allows the borrower to take into account its own business goals and economic interests in chasing down post-closing items. Parties have expressed this standard of efforts in a number of ways, including ‘all commercially reasonable efforts,’ ‘reasonable commercial efforts,’ and ‘reasonable efforts.’ However, the courts and commentators have noted that these terms represent similar standards, as ‘commercial’ is implied in the context of a business contract or undertaking, and the use of the word ‘all’ is redundant.6 As noted above, the definition of ‘reasonable efforts’ suggests that the party must take some efforts, which are reasonable in the circumstances, to produce a document or cause something to happen. It is not necessary that all efforts be taken or that the party undertake undue hardship.7 Rather, ‘reasonable efforts’ constitute “a prudent and moderate measure of sustained diligence.”8
Of course, the less confidence a borrower has that a particular item can be delivered post-closing, the less likely they are to offer to undertake using ‘best efforts’ to deliver that item. The most common example of this situation is where the delivery or happening of something hinges solely on the co-operation of a third party. Naturally, if the third party is not benefitting from the financing transaction, it can take significant prodding from the borrower to obtain that post-close item. A Personal Property Security Act (Ontario) (“PPSA”) estoppel letter is one example of an item that a borrower may suggest be delivered post-closing on their undertaking to do so. However, depending on who the underlying PPSA registration favours, obtaining that document may not be a sure thing. A private entity, for example, may be less responsive than a chartered bank or equipment lessor in providing that estoppel letter.
There are a few ways that lenders can help to ensure that a post-close item will be delivered. Instead of potentially having to rely on a court’s interpretation of the efforts required to satisfy the undertaking, a lender could require that the exact steps to be undertaken are specifically spelled out in the undertaking. As well, since the lender loses much of its leverage as soon as the loan is advanced, the undertaking should include a specific time frame for the delivery of the outstanding items. This helps keep the borrower focused on tracking down the post-close items even after the money has hit their account. Finally, for items that are of particular importance to the lender, the undertaking should spell out the consequences if the undertaking is not fulfilled. This could include triggering an event of default under the loan agreement or a reduction in the credit limit available to the borrower without specifying a particular level of ‘efforts’ to be undertaken.
The appropriate standard of efforts, and the final form of the undertaking, may vary depending upon what the undertaking relates to and how important the item is to the lender. However, regardless of the standard of ‘efforts’ required in an undertaking, the lender should always remember that if the borrower can provide evidence that it has taken all of the steps required to meet the applicable standard of ‘efforts,’ but the delivery in question is still outstanding, there is little that can be done as the undertaking has been satisfied. Therefore, the safest route is to never accept a post-closing ‘efforts’-based undertaking for anything that a lender cannot ultimately live without.