Last fall, we featured a blog post that offered a Canadian perspective on the interpretation and use of benchmarking in efforts clauses. Some of the commentary that ensued suggests that Canadian courts were “doomed to incoherence” by distinguishing between best efforts and reasonable efforts.[i]
Yet this distinction between efforts clauses has existed for some time in Canadian jurisprudence[ii] and Canadian courts have continued to render coherent decisions with very little difficulty in applying the standards of performance to efforts clauses.[iii] This leads to the reasonable conclusion that, in fact, there is no crisis and no reason to be overly concerned.
We all agree that in order for parties to understand their contractual obligations, contracts must clearly identify the standard that must be met by the party discharging its duties. Vaguely drafted standards of performance are undoubtedly a source of confusion for the parties and the courts tasked with interpretation. To facilitate this, Canadian case law has established three distinct standards of performance:
- a simple covenant, which results in strict liability for breach, regardless of the promisor’s reason for non-performance;
- a best efforts obligation, which relieves the promisor of liability if performance cannot be achieved in light of the particular contract, but the promisor must take, “in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned”[iv] – the duty to use best efforts “does not require the party to sacrifice itself totally to the economic interests of the party to whom the duty is owed, but the interests of the other party must predominate;”[v] and
- a commercially reasonable efforts obligation, which allows the promisor to exercise business judgment and consider its own financial interests and does not require the promisor to exhaust all possible means of fulfilling its obligation nor to undertake steps which are expensive or time consuming – it describes the effort that a “reasonable person, committed to achieving the objective, would have undertaken.”[vi]
While some of our esteemed blog readers have called the distinction illogical and head-spinning, the structure is commercially sensible and quite tenable. We know of no Canadian case that shares the view that the distinction is incoherent. For example, in Diamond Robinson, the promisor saw no point in pursuing regulatory approvals any further and the court held that, in the given circumstances, this did not satisfy its best efforts obligation to secure that approval.[vii] Whereas, in both Darena and Nelson, the contracts required commercially reasonable efforts to obtain regulatory approvals and the court held this required the promisor to proceed up to the point where the uncertainty of success made it commercially unreasonable to proceed and that “simple doubt” about the prospects of a successful application is not enough to justify withdrawal from the transaction.[viii] In Darena and Nelson, the requirement to use commercially reasonable efforts was fulfilled when the promisor concluded that an application for approval was very unlikely to succeed and that it was commercially unreasonable to proceed.[ix]
It is incorrect to suggest that the standards do not take context into account, as contractual interpretation is contextual and does not operate in a vacuum. Furthermore, a best efforts standard does not require the promisor to act unreasonably – in fact it must act reasonably by taking all reasonable steps, with the economic interests of the other party predominating.
Moreover, there may be good commercial reasons to distinguish between best efforts (in which case the economic interests of the party with the obligation play little role in determining when the obligation has been fulfilled) and commercially reasonable efforts (in which case the economic interests of the party with the obligation play a much more significant role). As long as Canadian courts have no difficulty with the distinction, there is no reason for contract drafters to throw up their hands and give up on it simply because of a perceived “incoherence” in the point.
We recommend that contract drafters be attuned to these efforts clauses, as it does make a difference whether the parties agree to a best efforts standard or a commercially reasonable efforts standard. It’s not just a matter of semantics.