What is the standard of effort that a contracting party must meet in order to satisfy its obligations under a contract? That will depend on the language of the contract. Consequently, before agreeing to be held to a particular standard, it is prudent for a contracting party to understand the terms often found in contracts to set forth the applicable standard.
SUMMARY:
- “Best efforts”: Taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned.
- “Reasonable efforts”: This does not mean “all efforts”. It does not mean “efforts to the point of undue hardship”. It does not mean “every effort”. What it means is efforts that are reasonable in the circumstances all things considered.
- “Commercially reasonable efforts”: This standard has received little judicial consideration. They are something less than best efforts. Some argue that “commercially reasonable efforts” are exactly same as “reasonable efforts” since reasonable means reasonable in the circumstances and the circumstances are commercial.
- “Reasonable best efforts”: The Courts have not yet addressed whether the addition of the word “reasonable” has any impact on the interpretation of the “best efforts” obligation. Arguably “best efforts” already incorporates an element of “reasonableness” by definition as the Courts have defined “best efforts” to mean: “taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned.”
BEST EFFORTS:
The leading case in Canada on the interpretation of the phrase “best efforts” is the decision of the British Columbia Supreme Court in Atmospheric Diving Systems Inc. That decision summarized the following principles to be followed:
- “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.
- “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 issues 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.
The foregoing analysis of “best efforts” put forth in the Atmospheric Diving decision has been endorsed by a number of subsequent Canadian decisions.
However, with respect to limitations on the meaning of “best efforts”, some case law suggests that while “best efforts” require “first class efforts”, they do not require the party making them to sacrifice its own economic interest. On the other hand, some case law also suggests that financial disadvantage does not excuse performance under a “best efforts” standard. In other circumstances, the Courts have noted a reasonable middle ground in considering the “best efforts” duty stating: “[the duty does not require] the 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.”
REASONABLE EFFORTS:
The Canadian courts have made the following statements regarding the interpretation of “reasonable efforts”:
- “Reasonable efforts” does not mean “all efforts”. It does not mean “efforts to the point of undue hardship”. It does not mean “every effort”. What it means is efforts that are reasonable in the circumstances all things considered. What is reasonable in the circumstances will, obviously, depend on the facts of particular cases.”
- “Reasonable” in the provision is synonymous with the adjectives “logical”, “sensible” and “fair”, but does not mean that before resort can be had to the provision the applicant must go to whimsical or unwarranted lengths.”
- “Reasonable effort’ does not require … all possible steps … [but rather] reasonable steps. “Reasonable efforts” does not mean “best efforts” which imports a higher obligation on persons to accomplish the required task.
- “Reasonable efforts” is not “best efforts” and includes “all reasonable and measured steps” to complete the obligation.”
Note that Courts will generally imply “reasonable efforts” where a contract is silent on the standard of effort required.
COMMERCIALLY REASONABLE EFFORTS:
Contracts often stipulate a “commercially reasonable efforts” standard but this standard has received little judicial consideration and ought to be treated with caution and perhaps with the inclusion of a description of what would or would not constitute “commercially reasonable efforts” in the particular circumstances.
In interpreting “commercially reasonable efforts”, the Courts have determined that there exists a distinction between the term “commercially reasonable efforts” and “best efforts” and that “commercially reasonable efforts” are something less than “best efforts”. But it remains an open question as to whether “commercially reasonable efforts” are a higher or lower standard than “reasonable efforts”. In fact some argue that “commercially reasonable efforts” are exactly same as “reasonable efforts” since reasonable means reasonable in the circumstances and the circumstances are commercial.
The Courts have found that although a contract may state all “commercially reasonable efforts” must be undertaken, uncertainty can also make it “commercially unreasonable” to proceed. For example, where the approval of an application is very remote and a reasonable business person could see that pursuing the application would almost certainly be unsuccessful, the party does not have to take the application through to refusal under the standard of “commercially reasonable efforts”.
REASONABLE BEST EFFORTS:
The Courts have not yet addressed whether the addition of the word “reasonable” has any impact on the interpretation of the “best efforts” obligation.
Arguably “best efforts” already incorporates an element of “reasonableness” by definition as the Courts have defined “best efforts” to mean: “taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned.”
The Courts have commented that the express inclusion of the word “reasonable” certainly cannot hurt and such an express condition could be interpreted as evidencing an intention to ease the full force of the onerous “best efforts” standard.
But overall, there is no clear guidance when considering the meaning of “reasonable best efforts”.
Invitation for Discussion:
If you would like to discuss this blog in greater detail, or any other business, contract or securities law related matter, please do not hesitate to contact one of the lawyers in the Business Law group at Linmac LLP.
Disclaimer:
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.