Drafting “Efforts” Clauses: Is There a Hierarchy of Efforts?
San Diego business contracts sometimes contain what are generally called “efforts clauses.” Often, these clauses are connected to some approval or resource that one party to the contract must obtain and generally refer to some activity or event that is to occur after the contract is signed. For example, a typical “efforts” clause might be something like this: “Party A will use its best efforts to obtain permitting approval from CITY.”
There are many problems and “red flags” with “efforts” clauses. They are inherently vague and are among the more commonly litigated provisions. See, for example, the case of Clement v. Solta Medical, Inc., Case No. A139965 (Cal. App. 1st Dist. 2014) where the parties litigated whether a “reasonable best efforts” clause required one party to make efforts to market and sell a certain dermatological cream used for acne treatment. The case involved a merger agreement and the shareholders of the target company were unhappy that the acquiring company did not market and sell the anti-acne cream. The shareholders would have been entitled to additional compensation had the cream been marketed and sold. The litigation was expensive for both parties. The legal lesson from that case is that careful attention must be paid “efforts” clauses. Otherwise, the parties can easily end up in costly litigation. An experienced San Diego corporate attorney can provide advice and counsel if you are wanting to insert such clauses into your contracts or if you are being asked to sign a contract with an “efforts” clause.
As noted, “efforts” clauses are inherently vague since contracts do not generally define what actions are required. This inherent vagueness is not alleviated by the use of adjectives. There are many variations used including “best efforts” — as in our example above — “reasonable best efforts,” “reasonable efforts,” “commercially reasonable efforts,” and “good faith efforts.” Some have suggested that there is a hierarchy of effort. That is, some argue that “best efforts” is the highest standard and imposes the highest obligation while “good faith efforts” are at the lowest end. This is the position of the American Bar Association in its best-selling book Model Stock Purchase Agreement. By contrast, some have argued that American courts do not recognize a hierarchy of effort, that “efforts” provisions are all essentially equivalent and are to be interpreted based on the facts of the particular case.
Whether there is a hierarchy or not, it should be self-evident that all of the “efforts” clauses are vague regardless of the adjective used. Without more, there is nothing in the contracts that explain to the parties (or to the judges) what actions are expected. Thus, whatever adjectives are used, the better contract-drafting strategy is provide as many details as possible with respect to the efforts to be taken, along with a timetable. For example, if a zoning variance is needed, a list could be inserted into the contract like this:
- An application for zoning variance shall be prepared (by a date certain)
- Shall be filed (by a date certain)
- Shall be amended as required
- Party B shall attend meetings with zoning officials as scheduled
- And more
By providing at least some details, an “efforts” clause becomes less vague and the risk of litigation decreases.
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For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” for four years running by SuperLawyers.com. Mr. Leonard provides a full panoply of legal services for businesses and proudly serves the San Diego business community. Like us on Facebook.