How to Limit the Uncertainty in “Reasonable Efforts”

So we know the following about efforts provisions:

  • It makes sense to use efforts to express an obligation if the party under the obligation doesn’t have complete control over achieving the desired result.
  • Contract parties also use efforts obligations as an expedient alternative to stating precisely what a party under an obligation has to do to achieve the desired result.
  • It’s best to use only reasonable efforts, because best efforts promises more than it can deliver.

But that still leaves serious uncertainty, namely uncertainty over the magnitude of efforts required to comply with an efforts obligation.

The extremes were on display in the article I wrote about in this recent post. In one case, Rex Med. L.P. v. Angiotech Pharm. (US), 754 F. Supp. 2d 616 (S.D.N.Y. 2010), the court was of the view that in determining whether a party has complied with an obligation to use commercially reasonable efforts to achieve an objective, its financial hardship was irrelevant—that was an argument that the party in question should, in the memorable words of the court, “save for the bankruptcy court.” By contrast, in another case the court held that acting in a commercially reasonable manner “does not require a party to act against its own business interests.”

Of course, the idea that the reasonableness of a party’s actions can be divorced from its financial resources is preposterous. Once you eliminate the need for a rational relationship between efforts expended and the return on those efforts, then the sky’s the limit—anything that leads to progress toward achieving the objective becomes mandatory, no matter what it costs.

But the role of the contract drafter isn’t to complain about how a court was irrational in interpreting a contract. And although I haven’t encountered another case as extreme as Rex Med, it’s from the Southern District of New York, so it’s best not to pretend that it doesn’t exist. So the task facing anyone drafting or reviewing a contract is to word reasonable efforts provisions in such a way that courts are prevented from giving free rein to irrational interpretation. How do we accomplish that?

Assuming that you can’t drop reasonable efforts in favor of being precise—the safest option—then the next-best course would be to specify what the obligation to use reasonable efforts doesn’t consist of.

The way not to do that would be to say that a party under a reasonable efforts obligation won’t be required to act against its own business interests. That could in effect be construed—by that party and, conceivably, by a court—as an invitation for that party to sit on its hands.

Instead, be more specific, for example by saying that the reasonable efforts obligation won’t require incurring out-of-pocket expenses or hiring new employees. Or won’t require spending more than a specified amount. Or you could exclude specific measures—for example, that in using reasonable efforts to obtain a government permit you won’t be required to hire lobbyists.

Such limits could be free-standing, or they could be in the form of carve-outs from a definition of reasonable efforts. (See this post for my most recent version of a definition.)

Of course, if you start spending a lot of time negotiating limits to a reasonable efforts obligation, it might make sense to approach the issue from the other direction and instead state precisely what the obligation does consist of—in other words, replace reasonable efforts with a flat obligation.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

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