Table Of Contents
Best Efforts Meaning
Best efforts are provisions used to set performance parameters for circumstances in which a party is required to make efforts to attain specific goals that it might not be able to accomplish otherwise. The best efforts clause in a contract refers to the relevant party making every possible effort to achieve the required or defined objectives and abide by contractual obligations.
A party involved in a contractual obligation on a best-efforts basis must meet these standards to the highest degree attainable. The party is expected to apply all possible methods to fulfill the listed provisions, even if they are difficult and require focused efforts. Best efforts contracts are often considered burdensome due to execution limitations. Hence, many entities prefer contracts that require parties to adhere to requirements within reasonable limits.
Key Takeaways
- Best efforts basis are provisions used to set performance criteria in situations where a party is required to make an effort to attain a goal it might not be able to without applying all possible measures.
- These efforts are considered a priority and are usually understood to suggest that a party must do everything within its power and reasonably necessary to seek and accomplish an end.
- The primary objective of parties entering into commercial contracts is to ensure that the contract is performed to the best of their abilities. Therefore, it is crucial to establish clear standards to avoid disputes.
Best Efforts Basis Explained
Best efforts in finance and law is a concept relevant to stating and meeting contractual obligations. It describes the level of performance (efforts) expected from one of the parties to the contract. The party is required to fulfill certain obligations as mentioned in the contract. However, they may not necessarily be asked to achieve any particular result.
In legal agreements, an effort clause can define a party's obligations related to completing a transaction or performing a particular function, such as obtaining approval from the government or securing the financing required to finalize a deal. Additionally, an “efforts clause” can establish a party's obligations to a specific aspect of its performance, such as developing a product, marketing and selling goods, or providing services.
These efforts are considered “priorities” and are usually understood to suggest that a party must do everything considered reasonably necessary to seek and accomplish an end. Such a clause is applicable and enforceable even if doing so would materially and negatively impact the seeking party and cause them to incur significant expenses. These provisions, especially in commercial contracts, help courts decide the extent of liabilities attributable to each party. The judgment is based on the quality of execution of these provisions. Quality is considered because it determines the price to be charged for a product or service.
The primary objective of the parties to commercial contracts is to ensure that the contract is performed to the best of their abilities. Therefore, it is crucial to establish clear standards of contractual performance, and best efforts and reasonable efforts are important parameters to decide such standards.
Examples
Here are a few examples for better understanding.
Example #1
Assume Company X and Company Y enter into a contract on a best-efforts basis to create a new software application. As part of the agreement, Company Y promises to make every attempt to finish developing the application by the deadline. By agreeing to this "best efforts" clause, Company Y agrees to use commercially reasonable efforts to ensure the software is created and delivered on time. Examples of such efforts include:
- Allocating a specific team to the project
- Ensuring all necessary tools and resources are available at the right time
- Conducting regular checkups
- Spotting any potential problems or delays
- Regularly updating the system based on requirements
Company Y is expected to give its best at every step, and failure to do so will result in the violation of the best efforts clause. This could attract legal trouble for Company Y.
Example #2
In the case of Bloor v. Falstaff Brewing Corp, the manufacturer was obligated by the contract to make every attempt to market and sell the distributor's beer applying all practical measures. The manufacturer failed to market and sell the beer as agreed upon in the contract. The court ruled this a breach of contract and stated that it indicated the manufacturing company’s failure to apply its best efforts. The manufacturer had violated the best efforts clause in this case and was dragged to court.
Falstaff Brewing Corporation acquired P. Ballantine & Sons' brewing labels, distribution networks, trademarks, and other assets. The company manufactured low-cost beers. Falstaff agreed to royalty payments to the company at fifty cents per barrel on goods sold by Ballantine over six years in exchange for a one-time payment of $4 million. Falstaff was required to use its best efforts to promote and maintain a high sales volume according to a condition in the purchase deal.
Additionally, the agreement had a liquidated damages clause that would become effective if Falstaff stopped selling goods under the Ballantine brand while the royalty period was still in effect.
Sales of Ballantine goods decreased despite Falstaff spending $1 million annually on post-acquisition promotion; Falstaff asserted they lost $22 million in three years due to this. Later, the new Falstaff management implemented a business plan favoring profitability over sales volume in 1975. Falstaff focused on marketing goods under the Falstaff name, shut down several distribution sites, and cut the annual advertising expenditure for Ballantine products to $115,000. Falstaff's overall financial situation was repaired, thanks to the plan, but fewer Ballantine products were sold.
Ballantine's bankruptcy trustee, James Bloor, sued Falstaff for breach of contract because Falstaff had effectively stopped distributing Ballantine products. He also argued that it had failed to put its best efforts into delivering the promise of high sales of those products, invoking the contract's liquidated damages clause.
Best Efforts vs Reasonable Efforts vs Commercially Reasonable Efforts
The differences observed in the three concepts are listed below.
| Key Points | Best Efforts | Reasonable Efforts | Commercially Reasonable Efforts |
|---|---|---|---|
| Concept | It refers to fulfilling provisions based on a party’s efforts categorized as best. They represent the highest standard of effort expected from the parties. | Reasonable efforts refer to efforts made within reasonable or logically acceptable limits. Reasonable efforts are not the highest standards or efforts. | Commercially reasonable efforts are similar to reasonable efforts and are also not the highest standard. |
| Confirmation or adherence to standards | Even if the effort is arduous or involves difficult steps, the party must make every attempt to deliver promised obligations (for which efforts have been made). | It follows a less strict scale where a party is required to exert effort to the extent that seems fair, practical, and logical and has acted in a reasonable manner. | It is used in commercial contracts where businesses apply commercial prudence and make efforts only until it seems commercially viable. The parties do not put in more effort than reasonable and maybe a little lower than the utmost efforts. |
| Steps involved | These demand trying all possible steps to achieve a goal. | Reasonable efforts do not require trying all possible steps; only reasonable measures are taken to achieve a goal. | Commercially reasonable efforts do not require trying all possible steps; only viable measures are taken to achieve a goal. |
Best Efforts vs Firm Commitment
The differences between the two concepts are:
| Key Points | Best Efforts | Firm Commitment |
|---|---|---|
| Concept | This clause demands that each party exercise its best attempts to carry out its duties under the agreement. | A firm commitment underwriting is an arrangement in which an investment banking firm consents to buy the entire stock issue from the issuing company and takes full financial responsibility for any unsold shares. They can also be referred to as best efforts underwriting. |
| Outcome | It does not always ensure a certain outcome. Its enforcement depends on the circumstances. | This clause requires a party to fulfill its duties under the contract despite any unanticipated events or challenges. In this situation, the party is committing, under penalty of law, to bring about the desired result. They risk being held accountable if they cannot do so. |
| Flexibility | If unanticipated circumstances emerge, the best efforts clause may offer more flexibility and protection. | A firm commitment clause may offer greater confidence and certainty of performance and hence, less flexibility. |
Frequently Asked Questions (FAQs)
It is a financial arrangement where banks and financial institutions use optimal efforts to sell securities and loans. They use their networks and expertise to sell the offering but are not obliged to purchase any unsold portion.
These refer to the highest possible efforts employed by a party in a commercial contract. This amount of effort often exceeds a "reasonable effort" threshold, and it calls on the party to take all practical measures to bring about the desired result. The rules of regular contracts apply here, irrespective of the clause.
They refer to contract terms considered reasonable or logical with respect to breaches and remedies. The restatement also offers guidance on the repercussions of a party's failure to employ its utmost efforts, including the possibility of termination and damages.
