Delaware “Efforts” Caselaw and Why It’s Irrelevant

Last week I read an organization’s internal analysis of efforts provisions, based on a handful of articles on the subject. According to this analysis, those articles suggest that Delaware courts have held that best efforts represents a more exacting standard that does reasonable efforts.

I wasn’t aware of that. MSCD chapter 8 contains what I like to think is the clearest and most practical analysis of efforts provisions, but it doesn’t cite any Delaware cases standing for that proposition. Instead, it cites a bunch of cases that show that U.S. courts have gone out of their way not to say that best efforts imposes a more exacting standard than does reasonable efforts. That stands to reason, as it’s a distinction that cannot work, as a matter of idiom and as a matter of contract law.

But then I remembered this article, by Eric Fishman and a Pillsbury associate. I critiqued it this post, but I didn’t get around to mentioning that it says, without citing any cases, that “some states, such as Delaware, hold that ‘best’ requires something more than ‘reasonable’ efforts.”

When originally I read that, I cocked a quizzical eyebrow, but didn’t look into it. But on hearing that assertion repeated, and on realizing that the Fishman article was one of the articles consulted in preparing that analysis, I thought some research was in order.

What I found is a 2010 Delaware District Court case, Crum & Crum Enterprises, Inc. v. NDC of California, LP, CIV. 09-145 RBK, 2010 WL 4668456 (D. Del. Nov. 3, 2010) (PDF copy here), in which the court held that best efforts represents a more exacting standard than good faith. More specifically:

Although Delaware courts do not define the precise contours of the duty of best efforts, precedent from other jurisdictions is instructive. Generally, the duty of “best efforts” is more exacting than the duty of good faith, and requires the promisor to undertake its contractual obligations diligently and with reasonable effort.

The notion that best efforts imposes a more exacting standard than good faith is a standard one; see MSCD 8.24. What this case doesn’t do is compare best efforts to reasonable efforts.

Another potentially relevant case is Alliance Data Systems Corp. v. Blackstone Capital Partners V L.P., 963 A.2d 746, 763 (Del. Ch. 2009) aff’d, 976 A.2d 170 (Del. 2009) (PDF copy here). In its opinion, the Chancery Court considers a section of the merger agreement at issue, section 6.5.1. It consists of two sentences, the first of which states an obligation that is subject to a “reasonable best efforts” standard, the second of which (the “antitrust sentence”) states an obligation that isn’t subject to an efforts standard. Here’s what the court said in a footnote to that analysis:

In contrast to the antitrust sentence, the first sentence of § 6.5.1 only requires reasonable best efforts. Although it does not have a specific meaning, “reasonable best efforts” is, at least, clearly understood by transactional lawyers to be less than an unconditional commitment. See, e.g., JAMES C. FREUND, ANATOMY OF A MERGER: STRATEGIES AND TECHNIQUES FOR NEGOTIATING CORPORATE ACQUISITIONS 289-91 (1975) (discussing when it is appropriate to use a best efforts requirement versus an absolute commitment); LOU R. KLING AND EILEEN T. NUGENT, NEGOTIATED ACQUISITIONS OF COMPANIES, SUBSIDIARIES AND DIVISIONS § 13.06 (17th ed.2001) (noting that it is not clear how far a party must go to satisfy best efforts, which is a more rigorous standard than reasonable best efforts). The distinction between a “best efforts” obligations and an unconditional commitment is also reflected in case law. See, e.g., Coady Corp. v. Toyota Motor Distribs., Inc., 361 F.3d 50, 59 (1st Cir.2004) (“ ‘Best efforts’ is implicitly qualified by a reasonableness test-it cannot mean everything possible under the sun.”).

This 2010 Dechert newsletter suggests that in this footnote the court states that “there is a difference between best efforts and any other efforts standard.” And I suspect that this footnote is the basis for the reference to Delaware law in the Fishman article. But that’s not what this footnote says. The footnote serves to support what the court has to say regarding the distinction between “reasonable best efforts” and “an unconditional commitment”—an obligation that isn’t subject to an efforts standard. In its opinion, the court doesn’t consider the meaning of different efforts standards. As such, it doesn’t make sense to see this footnote as endorsing the statement in Kling & Nugent (which happens to be unsupportable). After all, in this footnote the Chancery Court goes on to quote Coady Corp. to the effect that best efforts represents a reasonableness standard—the opposite of what Kling & Nugent apparently asserts.

The fact that in Crum & Crum Enterprises the District Court doesn’t cite Alliance Data Systems is consistent with my analysis.

So until someone shows me that I’ve missed something, I say that the statement of Delaware law in the Fishman article is unfounded, and that that might have been what resulted in that organization’s analysis being misleading as to what Delaware courts have said about best efforts.

That brings to mind two points.

First, I’m reminded how the literature on contract interpretation is rife with misinformation.

But second, and more fundamentally, for purposes of contract drafting, I don’t particularly care what Delaware caselaw has to say about best efforts. And that holds true even if a Delaware case standing for the proposition advanced in the Fishman article were to materialize.

That’s because idiom and contract law mean that the proposed distinction between best efforts and reasonable efforts cannot work and will always create confusion. It’s gratifying that U.S. caselaw shows that U.S. judges have overwhelmingly declined to endorse that distinction, but an oddball case in Delaware or elsewhere wouldn’t make any difference.

Optimal contract drafting isn’t a matter of pandering to whatever some judge might have said (although on rare occasions that’s necessary). Instead, it’s about stating the deal in a way that avoids confusion. When it comes to efforts provisions, you do that by dropping best efforts from your contracts lexicon and instead using just reasonable efforts. See MSCD for further nuances.

So I suggest that for purposes of contract drafting, everyone should stop wasting time poring over efforts caselaw and should also stop relying on misleading commentary that purports to parse subtle distinctions between different efforts standards.