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The BUSKLAW October Newsletter: Are "Efforts" Provisions in Contracts Worth the Effort?


OK, class (as in budding students of contracts and astute readers). Launch your word processing or Adobe Acrobat Reader software and open one of your longer business contracts. Pull up the text "find" feature and search for the following three contractual phrases:
  • best efforts 
  • commercially reasonable efforts 
  • reasonable efforts 
Do you have any hits? Regardless, have you ever wondered what these phrases mean? Whether you are on the receiving or giving end of these "efforts" provisions, you should know what you're in for! 

The short answer is not a lot. But keep reading

Many contracting-drafting lawyers are enamored by these phrases. If their client is on the giving end of a contractual duty, they use "commercially reasonable efforts" to perform that duty. But if their client is on the receiving end of a contractual duty, they will argue for a supposedly higher performance standard: "best efforts." But in the words of the infamous Captain Hook, here's where the canker gnaws. According to John R. Trentacosta, author of Michigan Contract Law:

Different states have different judicial interpretations of what the standard of diligence should be for each of these various clauses...Adding to the uncertainty, Michigan's higher courts do not provide any guidance on interpreting "effort" terms. This creates ambiguity and uncertainty in contract interpretation...

Kenneth Adams, the author of the respected A Manual of Style for Contract Drafting (now in its fourth edition), discusses the supposed differences between the various efforts clauses. He notes that only two courts have suggested that one can distinguish between "best" efforts and "reasonable" efforts...and in neither case does the court provide a coherent rationale for its position. And he further states that there's no basis for saying that adding "commercially" to "reasonable efforts" affects its meaning. Ken then goes on to suggest using only a "reasonable efforts" clause with the following recommended core definition:

"Reasonable Efforts" means, regarding conduct by a party, the efforts that a reasonable person in the position of that party would use to engage in that conduct competently and promptly.

But the problem remains that any efforts clause, however defined, is still ambiguous. In the above definition, what is a reasonable person? What is competently and promptly? I believe that the best solution is to avoid "efforts" clauses and use objective benchmarking language instead.

Consider the following provisions from the world of information technology contracting where Acme is providing cloud-based data processing services ("Services") to the Customer:
  1. Acme shall exercise reasonable efforts to provide the Services 7x24, 365 days per year. 
  2. Acme shall provide the Services 99.9% of the time during the term of this agreement according to the Service Level Agreement attached as Exhibit A. 
Service level agreements (SLAs) are part and parcel of cloud computing (and other) information technology contracts and are further explained here. SLAs provide an objective network uptime benchmark that must be maintained (or service credits are triggered) rather than the nebulous "reasonable efforts" obligation described in the first example. (Aside to IT vendors and customers, have you reviewed your SLAs recently? And for IT customers, have you considered the consequences of your vendor's chronic failure to meet an SLA?)

So the inclusion of efforts provisions in contracts isn't the best approach if an objective standard can be used instead. So why do efforts provisions exist in contracts anyway? Because it's easier to throw in an efforts clause in a contract rather than draft something better! And effective contract drafting isn't easy. It takes time and thought. But if your contracts contain efforts clauses, you would do well to consider their replacement. And I can certainly help with that, ahem, effort.
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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks!

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