Best Efforts vs Reasonable Efforts in U.S. Law

Contracts frequently require parties to use best efforts, reasonable efforts, commercially reasonable efforts, or similar language. These terms sound straightforward but create significant interpretive challenges. What exactly must you do to satisfy a best efforts obligation? How does that differ from reasonable efforts? Understanding these standards helps you draft clearer contracts and assess your obligations under existing agreements.

The stakes are high because efforts standards appear throughout commercial contracts. They govern obligations to seek regulatory approvals, to market products, to prevent harm, and to achieve countless other objectives. When disputes arise about whether a party satisfied their efforts obligation, the outcome often determines the entire dispute. This article explains how U.S. courts interpret efforts language and how to protect yourself when negotiating these provisions.

The Hierarchy of Efforts Standards

Best Efforts

Best efforts represents the most demanding standard. It requires a party to take all reasonable steps that a similarly situated person or company would take to achieve the objective, without regard to the costs or burdens involved. Some courts interpret best efforts as requiring everything possible within legal and ethical bounds.

Under this standard, you cannot decline to pursue an action merely because it is expensive or inconvenient. Best efforts may require you to sacrifice your own interests to achieve the objective, at least within reason. The precise boundaries are unclear, but best efforts is universally understood as a demanding obligation.

Commercially Reasonable Efforts

Commercially reasonable efforts is somewhat less demanding. This standard allows a party to consider their own business interests when deciding what steps to take. You must do what a reasonable business person in your position would do, but you need not sacrifice your own commercial interests entirely.

This standard acknowledges that business decisions involve trade-offs. A party can balance the cost of pursuing an objective against the likelihood of success and the value of achieving it. Commercially reasonable efforts does not require unlimited expenditure or suicidal business decisions.

Reasonable Efforts

Reasonable efforts is sometimes treated as equivalent to commercially reasonable efforts, sometimes as something less. The term lacks a single clear definition. In some jurisdictions, reasonable efforts means what a reasonable person would do under the circumstances, which may or may not include consideration of the obligor's self-interest.

Because reasonable efforts is ambiguous, sophisticated drafters often avoid it in favor of more precise language. When you encounter reasonable efforts in a contract, be aware that its meaning may be contested. The governing law in contracts determines which interpretation applies in your jurisdiction.

Good Faith Efforts

Good faith efforts requires honesty and fair dealing but may not require specific actions. A party satisfies this standard by genuinely trying to achieve the objective without bad faith or self-dealing. Good faith efforts is generally the least demanding standard, though it still requires more than mere passive acceptance of failure.

What Courts Look For

Objective Assessment

Courts evaluate efforts objectively. They ask what a reasonable person or company would do under the circumstances, not what this particular party thought was appropriate. Your subjective belief that you tried hard enough is not determinative. The question is whether your actual conduct meets the applicable standard.

This objective approach means you cannot satisfy an efforts obligation merely by claiming good intentions. You must demonstrate that you took appropriate actions. Courts examine the actions you took, not just your intentions or the resources you devoted.

Context Matters

The required efforts depend on context. What actions are customary in the industry? What resources does the party have available? What obstacles exist? How likely is success? Courts consider all relevant circumstances when evaluating whether efforts were sufficient.

Context includes the overall contract relationship. Contract terms for payment, the value of the deal, and the relative sophistication of the parties all provide context for what efforts were appropriate. A small transaction between unsophisticated parties may warrant different efforts than a major deal between large corporations.

Self-Interest Limitations

A key question in efforts disputes is whether the obligor can consider their own interests. Under best efforts, consideration of self-interest is generally prohibited or severely limited. Under commercially reasonable efforts, self-interest can be considered within reason. The applicable standard determines whether a party can decline costly actions that would achieve the objective.

Courts examine whether the obligor prioritized their own interests over the objective. If a party declined to take actions that would have achieved the goal because those actions would have been costly or inconvenient, that may constitute breach under best efforts but not under commercially reasonable efforts.

Documentation and Process

Parties who can document their efforts fare better in disputes. What actions did you take? When? Why did you choose those actions over alternatives? What obstacles did you encounter? Documentation of decision-making process helps prove that efforts were appropriate.

Courts are skeptical of parties who cannot explain what they did or why. If you claim to have used best efforts but cannot describe specific actions taken, that claim loses credibility. The burden of proving adequate efforts typically falls on the obligor.

Common Problem Areas

Regulatory Approvals

Many contracts require parties to use efforts to obtain regulatory approvals. These provisions generate frequent disputes because regulatory processes are uncertain and often outside the parties' control. What must a party do when the regulator is unresponsive, imposes unexpected conditions, or simply denies approval?

Best efforts may require pursuing all available avenues, including appeals and alternative approaches. Commercially reasonable efforts allows consideration of whether continued pursuit makes business sense. The stakes of the approval and the costs of continued effort both factor into the analysis.

Marketing and Sales

Distribution and licensing agreements often require efforts to market products or achieve sales targets. Disputes arise when sales disappoint. Did the distributor use required efforts, or did they prioritize competing products and let your product languish?

These disputes often involve questions of resource allocation. The limits of liabilities in such agreements may cap exposure for inadequate efforts, but proving what efforts were required and whether they were provided remains contentious.

Third-Party Consents

Obtaining consents from third parties, such as landlords, lenders, or contractual counterparties, often requires specified efforts. The problem is that the third party may refuse despite genuine efforts. What more must the obligor do?

Best efforts may require exploring alternatives, offering concessions, or pursuing legal remedies against the third party. Lesser standards allow the obligor to accept refusal without exhausting all possibilities. The appropriate standard depends on the contract language and governing law.

Closing Conditions

Merger and acquisition agreements condition closing on satisfaction of various requirements, with parties obligated to use efforts to satisfy those conditions. Disputes arise when deals fail to close. Did the selling party fail to use required efforts, entitling the buyer to remedies? Or were conditions genuinely unsatisfiable despite appropriate efforts?

These disputes often involve substantial damages and are heavily litigated. Courts closely examine what the obligor did and did not do, what alternatives existed, and whether self-interest influenced decisions.

Drafting Considerations

Choose Your Standard Carefully

Do not use efforts language casually. Best efforts is substantially more demanding than commercially reasonable efforts. Understand what standard you are accepting and whether you can realistically satisfy it. If best efforts would require sacrifices you are unwilling to make, negotiate for a lesser standard.

Consider the specific context. What actions might be required to satisfy the obligation? Are you willing to take those actions? If the costs of compliance exceed the value of the deal, the efforts standard may need adjustment.

Define What Efforts Require

Vague efforts language invites disputes. Consider specifying what efforts are required: particular actions to be taken, resources to be devoted, time frames for action, and criteria for determining whether efforts have been exhausted.

Some contracts include lists of required actions that constitute adequate efforts. Others specify minimum resource commitments. These definitions provide clarity that generic efforts language lacks.

Address Self-Interest

Clarify whether the obligor can consider their own interests when determining what efforts to make. If commercially reasonable efforts applies, can the obligor decline actions that would harm their own business? Under what circumstances?

Consider specifying that efforts do not require breach of other agreements, violation of law, or actions that would be harmful to the obligor's legitimate interests. These carve-outs provide protection without eliminating the efforts obligation.

Termination Rights

What happens if efforts fail to achieve the objective? Can the parties exit the contract? Under what circumstances? Efforts provisions should work with termination clauses to create a coherent framework for handling failure.

Consider including timelines for effort and triggers for termination. If the objective is not achieved within a specified period despite required efforts, either party might be entitled to terminate. This approach provides an exit while preserving the efforts obligation.

The Role of Other Contract Terms

Relationship to Damages

If efforts are inadequate, what damages result? The contract terms for payment and damage provisions determine the consequences of breach. Liquidated damages clauses may specify predetermined damages. Limitation clauses may cap liability regardless of the nature of the breach.

The limits of liabilities in your contract may affect the practical consequences of efforts disputes. If damages are capped at a low amount, the other party may have limited recourse even if you fail to use required efforts. This affects the economics of compliance and dispute.

Relationship to Representations

Efforts clauses sometimes work with representations and warranties. A party may represent that they will use best efforts to achieve an objective. Breach of this representation may have different consequences than breach of a covenant, depending on the contract structure.

Understand whether your efforts obligation is structured as a representation, a covenant, or both. The distinction affects remedies and may affect whether the obligation survives closing or other contract milestones.

Relationship to Conditions

Efforts may be required to satisfy closing conditions or other contractual prerequisites. The failure to use required efforts may prevent conditions from being satisfied, excusing the other party from performing. Conversely, efforts that fail despite compliance may still satisfy the condition.

Carefully analyze how efforts obligations interact with conditions in your agreement. The relationship between these provisions determines what happens when objectives are not achieved.

Jurisdiction-Specific Considerations

State Law Variations

Different states interpret efforts language differently. Some jurisdictions treat best efforts and reasonable efforts similarly. Others draw sharp distinctions. Some states imply additional requirements not present in the contract language. Governing law in contracts determines which interpretation applies.

Delaware, New York, and California are common choices for governing law in commercial contracts. Each has developed case law on efforts standards. Consider which jurisdiction's interpretation best matches your expectations when selecting governing law.

UCC Influences

For contracts involving the sale of goods, the Uniform Commercial Code provides context for efforts obligations. The UCC's good faith requirement and its treatment of output and requirements contracts inform how efforts standards are understood.

UCC-governed contracts may face additional implied obligations that supplement express efforts language. Understanding these UCC provisions helps interpret efforts clauses in goods transactions.

Common Law Background

Common law principles, including the implied covenant of good faith and fair dealing, provide background for efforts interpretation. Even if a contract does not specify a particular efforts standard, courts may imply obligations based on general contract principles.

This background means that efforts obligations may extend beyond the literal contract language. Parties must consider what courts in their jurisdiction might read into the agreement even if it is not expressly stated.

Practical Recommendations

During Negotiation

Negotiate efforts language carefully. Understand the standard you are accepting. Push for carve-outs that protect your legitimate interests. Specify what actions are and are not required. Clarify what happens if efforts fail.

Consider the practical implications. Can you actually satisfy best efforts? What would that require? If the requirements seem unrealistic, negotiate for a more achievable standard or additional protections.

During Performance

Document your efforts. Keep records of what actions you take, when, and why. Note alternatives you considered and why you chose particular approaches. Create a paper trail that demonstrates compliance.

If you encounter obstacles, document them and your response. Show that you escalated problems, sought solutions, and did not simply give up. The contemporaneous record of your efforts will be critical if disputes arise.

When Disputes Arise

Gather evidence of the efforts made and the obstacles encountered. Engage experts who can testify about industry standards and what reasonable companies do in similar circumstances. Be prepared to demonstrate objective compliance with the applicable standard.

Consider whether liquidated damages provisions or limits of liabilities affect your exposure. The economic value of disputing efforts compliance depends on the damages at stake and the costs of litigation.

Conclusion

Efforts standards are among the most commonly disputed contract provisions. The difference between best efforts and commercially reasonable efforts can determine whether you have breached your contract. Understanding these standards helps you negotiate appropriate language, perform your obligations, and assess disputes.

When drafting, choose your efforts standard deliberately. Define what efforts require. Clarify the role of self-interest. Address what happens if efforts fail. The governing law in contracts determines how courts will interpret your language, so consider jurisdictional variations.

During performance, document your efforts carefully. Courts evaluate compliance objectively based on what you actually did, not your subjective intentions. A clear record of your actions and decision-making process supports your position if disputes arise.

Efforts obligations interact with other contract terms including liquidated damages provisions, limits of liabilities, and contract terms for payment. Understand how these provisions work together to create the overall risk allocation. A holistic view of the contract helps you assess what efforts are required and what the consequences of breach might be.

Do not treat efforts language as boilerplate. These provisions create real obligations with real consequences. Taking them seriously during negotiation and performance protects you from the disputes that careless efforts language so often generates.