“Best efforts,” “commercially reasonable efforts,” and “good faith efforts” are three of the most common performance standards used in contracts. For example, Party A may agree to use best efforts to market Party B’s products; Party B may agree to use commercially reasonable efforts to complete a task; or both parties may agree to use good faith efforts to discuss additional business opportunities. Unlike objective performance measures, these three performance standards are highly subjective. What are “best” efforts? What is considered “commercially reasonable?” How do you define “good faith?” Many view these subjective performance standards to be three different levels of performance on a spectrum (good/better/best). However, this perception differs from the reality in the courts where definitions of these standards can differ significantly from jurisdiction to jurisdiction.
Parties find these subjective performance standards convenient where they can’t or do not want to be too specific or objective as to the level of performance required. Contract negotiations can get bogged down when one party insists on a subjective performance standard to which the other party is opposed. Where parties can’t fully agree, a slightly vague subjective standard can be used to “bridge the gap” and let the parties finalize contract terms. However, that’s just papering over a failure to achieve a true “meeting of the minds” on the terms of the agreement. A later disagreement in how to define and apply a subjective performance standard can lead to a foundering of the business relationship, a contract dispute, allegations of breach, and/or litigation or arbitration. Understanding the differences between these subjective performance standards, and knowing when and how to best use them, is therefore critical.
In this article I’ll talk through the commonly perceived differences between these three key subjective performance standards, and cover things to look out for when using these terms. I’ll also discuss why it is important to consider on a case-by-case basis whether including a specific definition for a subjective performance standard or using an objective performance measure may be a better approach.
Defining “best efforts,” “commercially reasonable efforts,” and “good faith efforts”
There is not a lot of case law, or consistency in case law, from which to draw definitions. In other words, there are no universally accepted definitions for these subjective performance standards. Here is how I differentiate them:
Things to consider and watch for when using these standards
Isn’t a “good faith efforts” standard already implied? US contract law has long provided that the performance of every contract is subject to an implied duty of good faith and fair dealing. Given this, every performance obligation in an agreement requires good faith efforts, unless a higher standard for a particular obligation is expressly stated in that agreement. Since good faith efforts is the default, is there any reason to expressly include good faith efforts in an agreement? Yes. A non-breaching party to a contract will want the ability to assert the strongest claims possible. Instead of having to rely on breach of an implied duty as the basis for a claim, a party may prefer to be able to claim a breach of the express terms of the contract as well. If “good faith efforts” are expressly stated, a party may have multiple causes of action in the event of a failure to meet those efforts. Also, as noted above, some courts have held that an express good faith efforts requirement should be interpreted as a higher performance standard.
Consider whether it makes sense to try to add boundaries to a “best efforts” obligation. If your company is on the performing side of a “best efforts” obligation that the other party will not agree to remove, one way to address the uncertainty and subjectiveness of the performance obligation is to “box it” with additional language that puts some boundaries around the obligation and defines which stones must be left unturned. For example, if XYZ asks for language stating “ABC will use best efforts to market XYZ’s product,” consider seeking a revision to “ABC will use best efforts to market XYZ’s product, provided such efforts will not require ABC to incur costs or expenses not expressly contemplated herein which in ABC’s reasonable judgment may negatively impact its business operations and operating results.” This revised language makes clear that in performing to the “best efforts” standard, ABC is not required to incur costs and expenses that could negatively impact it. ABC could also consider whether to add a lower standard to a “best efforts” clause, such as “reasonable best efforts” or “good faith best efforts,” which could lead to a court interpreting the language as a lower standard than best efforts and which ABC can argue more realistically characterizes the efforts to be expended in compliance with that performance obligation.
Avoid using qualifiers which can enhance, or muddy, a subjective performance standard. Consider avoiding adding qualifiers such as “all,” “every,” or “diligent” to a subjective standard e.g., “diligent good faith efforts,” “all commercially reasonable efforts,” or “commercially reasonable efforts to [do x] as soon as feasible.” Qualifiers can add another layer of subjective complexity, and/or create a more onerous obligation than may have been intended. For example, if “commercially reasonable efforts” by definition does not require a party to leave no stone unturned and does not require continuous performance, requiring “all” or “diligent” commercially reasonable efforts may effectively convert it to a “best efforts” standard.
Subjective performance obligations may not play nicely with revenue recognition rules. Subjective performance standards like “best efforts,” “commercially reasonable efforts,” and “good faith efforts” may mean different minimum levels of effort to different parties. In order to evaluate performance under a contractual obligation, the parties must be able to (1) define the specific obligation to be performed, and (2) objectively measure whether that performance obligation has been satisfied. This is a core tenet of the new revenue recognition rules under ASC 606, which requires a contract to be broken into separate performance obligations so that revenue recognition occurs on a per-performance obligation basis when that performance obligation has been satisfied. Determining when a subjective performance obligation has been satisfied for ASC 606 purposes can be problematic as the parties may not agree when the obligation has been satisfied. It is advisable to try to use objective criteria, and not subjective performance standards, for performance obligations tied to revenue recognition.
Consider whether including a definition or an objective measure would work better
Parties should try to avoid ambiguity in contracts, and seek to use quantifiable and measurable obligations where possible. Using subjective performance standards such as “best efforts,” “commercially reasonable efforts,” and “good faith efforts” is often an easy way to agree on a performance obligation without being too specific on what level of effort is required to achieve it. There are times when using a minimum subjective standard instead of an objective one is a tactical approach in negotiation, such as where your company wants to be able to make an argument that its performance was sufficient without the need to demonstrate satisfaction of an objective measure.
> Consider using definitions. If you do use a subjective performance standard in an agreement, consider whether to include a definition of that standard in the agreement. By defining a standard such as “commercially reasonable efforts,” the parties are fencing in what is considered satisfactory performance of that standard, making it less subjective and easier to gauge performance if a dispute arises as to whether a party has satisfied the associated performance obligation.
> Consider whether an objective measure would work better. In a number of cases, an objective measure such as a maximum time period, a minimum required spend, a minimum number of generated leads or orders, or a minimum service level may make it easier for both parties to determine whether a party has minimally satisfied a performance obligation. Ask the other party what they would consider an acceptable result from the required efforts, and consider making that the contractual measure of minimum acceptable performance. For example, instead of saying that “ABC will use commercially reasonable efforts to generate sales leads during each term of the Agreement,” if the parties agree that 10 leads per year is the minimum acceptable performance, say “ABC will generate a minimum of ten (10) sales leads during each term of the Agreement.” If all ABC generates is 10 leads in a given year and the other party was hoping for more, the other party can choose to exercise its termination rights and find another partner.
Search your contracts and templates for subjective performance standards, and see if any can be replaced with objective measures – it could mean the difference in measuring satisfaction of performance obligations and avoiding costly contract disputes over subjective performance terms.
Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He is a corporate generalist who specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.