The terms "best efforts", "reasonable efforts", and, most recently, "commercially reasonable best efforts", have been subject to considerable judicial interpretation over the years. While the term "best efforts" has been interpreted fairly consistently, there is considerable uncertainty when it comes to the application of the "reasonable efforts" and "commercially reasonable best efforts" standard, as it requires a dive into the specific circumstances of the parties. To complicate the matters further, the Courts routinely imply either reasonable efforts or best efforts into contracts that do not explicitly include these terms.
We've gathered the general principles with respect to the judicial interpretation of these terms, as well as some illustrative examples.
1. Best Efforts
The principles for satisfying “best efforts” standard have been enumerated as follows:
- "Best efforts" imposes a higher obligation than a "reasonable effort".
- "Best efforts" means taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned. However, it does not require a party to sacrifice itself totally to the economic interests of the party to whom the duty is owed, although the interests of the other party must predominate.
- "Best efforts" includes doing everything known to be usual, necessary and proper for ensuring the success of the endeavour.
- The meaning of "best efforts" is, however, not boundless. It must be approached in the light of the particular contract, the parties to it and the contract's overall purpose as reflected in its language.
- While "best efforts" of the defendant must be subject to such overriding obligations as honesty and fair dealing, it is not necessary for the plaintiff to prove that the defendant acted in bad faith.
- Evidence of "inevitable failure" is relevant to the issue of causation of damage but not to the issue of liability. The onus to show that failure was inevitable regardless of whether the defendant made "best efforts" rests on the defendant.
- Evidence that the defendant, had it acted diligently, could have satisfied the "best efforts" test, is relevant evidence that the defendant did not use its best efforts.
- Mere reasonable efforts will not suffice to meet the “best efforts” standard. Neither will occasional efforts made from time to time suffice. A higher level of effort is required.
Examples of situations where the standard was not met include:
- Contract for the purchase and sale of a house required the purchaser to obtain financing. Court found that the purchaser failed to do so because he applied for a loan for an inflated sum (by 60%), delayed the loan application, and that true reason for these actions was that the purchaser simply did not want to buy the property because he received a negative appraisal of it.
- Contract for the purchase and sale of land. The contract required the vendor use best efforts to obtain subdivision approvals. Obtaining approvals was also a condition precedent in the agreement, meaning that the parties could walk away from the transaction if the approvals were not obtained. The vendor hired an agent to obtain approvals, but the agent failed to advance the process. As time went on, the price of the land went up and the vendor notified the purchaser that it ought to be discharged from the obligation to close the transaction due to not receiving approvals. The Court found that the Vendors did not use best efforts. The court commented that to satisfy the standard, one must show progress, as well as reasonable and sensible response to roadblocks.
Examples of where the standard was met:
- An agreement to lease required tenants to obtain a business license to operate a car dealership on best-efforts basis. The tenants submitted an application within 3 days of signing the lease, did so accurately, but were told that the process would take significantly longer than anticipated. Best efforts standard was met.
Generally, there are more decisions where this standard is found to not have been not met than where it was met. Shy of impossibility, the best efforts standard imposes onerous obligations on the party that agrees to be bound by such a clause.
2. Reasonable Efforts or Commercially Reasonable Efforts
Reasonable efforts standard has been consistently interpreted in contrast to the obligation to use best efforts – as meaning something less than best efforts. The term commercially reasonable efforts has been interpreted largely interchangeably with reasonable efforts. The question is whether the course taken by the party is in accordance with sound judgement, having financial considerations as primary aim.
In order to comply with the obligation, a party does not have to take every possible step to pursue an initiative. At the same time, a condition that is subject to commercial reasonable efforts is not merely an option in the absolute discretion of the party with the obligation. The party with the obligation may not take deliberate steps or deliberately not take steps to prevent the occurrence of the condition. The party must proceed up to the point where the uncertainty about success makes it commercially unreasonable to proceed.
Standard was not met:
- The dispute surrounded an application of a retainer agreement between a lawyer and a client. The lawyer was retained to return from the Crown the clients' shares in a corporation, GEI, which were seized pursuant to bribery changes. Under the terms of the retainer, the lawyer was entitled to receive 25% of the value of the shares it recovered for the client unless, despite taking prompt commercially reasonable steps to liquidate the shares, the client is unable liquidate them. While the shares were in forfeiture, the GEI sought a public offering on the London stock exchange. Then, a separate company sought to acquire GEI under a plan of arrangement, which required shareholders to tender their shares. The client received the shares from the Crown before the plan was approved, in April. By June, the client tendered her shares to the plan of arrangement and by end of June, the proceeds from the acquisition were in another lawyer's account. By July 24th, however, the UK Court issued an order seizing the share proceeds while they are under investigation for fraud.
- The question was whether the client had acted reasonably in failing to give her lawyer 25% of the shares between April (when the shares were released by the Crown) and July 24, when they were seized. The Court found that the conduct was commercially unreasonable – that the client ought to have sold 25% of the shares prior to the plan of arrangement being approved in order to satisfy her obligation under the retainer agreement. All parties were aware of significant risk that the shares would be seized in the UK, the difference on the share price between the time the shares were received and the time they were tendered under the plan was negligible. Indeed, the client had legal advice to share the shares but chose not to do so.
Standard was met:
- The plaintiff, Precursor Capital Corp., and the defendant, HydRx Farms Ltd., came together to do business in the medical marijuana industry. The principals of Precursor decided to invest in and work with HydRx towards the goal of HydRx going public. In order to do so, licenses needed to be obtained from Health Canada. Under the terms of various agreements between the parties, Precursor was under obligation to use commercially reasonable efforts to facilitate the go public transaction. HyrRx took the position that Precursor failed to do so by failing to provide sufficient funding. The court disagreed, finding that Precursor did what it could to obtain financing by 1) changing the investment structure; 2) proposing alternative methods of securing the funds. The Court concluded that it was the delays associated with obtaining licenses caused investors to back away from investing, rather than Precursor's lack of efforts.
- The plaintiff, New West, entered into an agreement to purchase land from GC in order to build a casino. The Agreement required GC to use reasonable commercial efforts to obtain rezoning. After GC went to the expense of drawing up plans, preparing a site plan and preparing a model of what was proposed on the Site, it had a meeting with the City. The City made it clear that it would oppose re-zoning. Further, it became apparent the proposal would have had to obtain the approval of the Provincial Lottery Corporation and GC was advised by that Corporation that any continued efforts would be fruitless. At that point, GC abandoned the efforts to obtain rezoning. The Court found that it was commercially reasonable not to waste further time and money on the applications.
While this standard imposes a less onerous obligation on a party, it also results in considerable uncertainty with respect to what level of effort will be sufficient. Contractual matrix, including the purpose of the contract, pre-contract and post contractual relations between the parties, are all considered in order to determine what level of effort is needed.
3. Commercially Reasonable Best Efforts
Until recently, there has been little judicial consideration of the term "commercially reasonable best efforts". But in Sutter Hill, the British Columbia Court of Appeal recently gave some guidance as its meaning, concluding that the terms means that parties intended something between "commercially reasonable efforts" and "best efforts".
The clause in that case required a vendor in a transaction to obtain approvals using commercially reasonable best efforts as soon as possible. After the approval authority provided the vendor with various contracts for their review and comment, the vendor took over a month to obtain a legal opinion on the matter. The Court found that this delay was contrary to the vendor's obligation to use commercially reasonable best efforts to get approvals as soon as possible. There was no reasonable explanation for the delay as the vendor is responsible for delays occasioned by their lawyer. As such, the vendor had breached its obligation to obtain approvals using commercially reasonable best efforts.
4. Where The Contract Is Silent
Where a condition precedent exists in a contract (meaning that the parties can walk away from the contract if something does or does not occur), which one party is obligated to satisfy, the Courts imply a best effort standard.
Recently, the Court also implied a reasonable efforts standard in a contract that did not have such a term. The plaintiff, Cor-Ex, was in the business of hauling water to fracking sites. For this, it had a number of contracts in place to receive water. The relevant contract was between Cor-ex and Associated Aggregates, under which Associated Aggregates was required to supply water exclusively to Cor-ex and Cor-ex was required to market the water. Associated Aggregate refused to honour the agreement, but argued that it should be released from the obligation to supply water due to Cor-ex's breach of the implied obligation to use best efforts to purchase/market its water.
The Court found that the parties intended that Cor-ex use reasonable efforts to buy/market the defendant's water. Given that Cor-ex had multiple water suppliers in place, it did not make sense to impose an obligation on Cor-ex to put the interests of Associated Aggregate above their own or change the way that they do business, absent an explicit term to that effect. Overall, the Court indicated that Cor-ex's other obligations made them unable or unwilling to provide marketing efforts on behalf of Associated, that could constitute a breach of its implied obligation under the Contract. But there was no evidence that Core-ex failed to market/sell the water.
There remains considerable uncertainty in how the Courts interpret and deal with "reasonable effort" and "commercially reasonable best efforts" clauses in the contracts. Much falls to the factual and contractual circumstances of the case, which can result in litigation. At the same time, the "best efforts" standard imposes onerous obligations, while also offering some certainty over what level of effort is required.