A. Background
Commercial agreements often require parties to undertake 'best efforts', 'reasonable efforts' or 'commercially reasonable efforts' to fulfill their respective obligations. In M&A deals, such provisions are typically seen in the context of commitments by the parties to obtain regulatory approvals, fulfil conditions precedent, maintain confidentiality, ensure exit etc.
Indian jurisprudence offers limited guidance on the interpretation of 'best', reasonable' and 'commercially reasonable' efforts. However, international jurisprudence may provide helpful insights to understand the key distinctions between such terms and provide guidance for negotiations in commercial transactions.
B. The Indian Position
The Indian Contract Act, 1872 ("Act") requires parties to perform or offer to perform their respective promises under a contract (unless such performance is dispensed with by requirements of the Act or other applicable laws).1
In a 2022 judgement,2 the Hon'ble Calcutta High Court briefly examined the terms "every effort" and "best effort" in the context of a dispute resolution clause in a partnership deed, which required the parties to make "every effort" to settle the dispute by arbitration before approaching the Court. The Court relied on a literal interpretation of "every effort" and held that "every effort" goes beyond the scope of "best effort".
The Calcutta High Court relied on the 2007 English judgement in Rhodia International Holdings Ltd. & Anr. V. Huntsman International LLC3, wherein it was held that a reasonable endeavours clause may require a party to take only one reasonable course of action, but a best endeavours clause would likely impose a higher standard on the party to take all reasonable efforts.
"...there may be a number of reasonable courses which could be taken in a given situation to achieve a particular aim. An obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses he can. In that context, it may well be that an obligation to use all reasonable endeavours equates with using best endeavours..."
Indian courts have relied on international jurisprudence on matters relating to interpretation of contracts, and therefore, the interpretations from other common law jurisdictions would be relevant while drafting Indian law governed contracts.
C. Common Law Jurisprudence
While the common law jurisprudence on interpretation of efforts clauses continues to evolve, English and Canadian courts have laid down the following key principles across various judgements:
1. Interpretation of Best Efforts:
- "Best efforts" imposes a higher obligation than "reasonable efforts".4 A "best efforts" obligation requires a party to take all steps possible which a prudent, determined and reasonable obligee, acting in its own interests and desiring to achieve that result, would take.5
- To undertake "best efforts" means doing everything known to be "usual, necessary and proper" and "leaving no stone unturned."6 Financial cost does not absolve a party from a best efforts obligation.7
- The "best efforts" obligation is not unlimited and must be interpreted in light of the specific contract, the parties to it and the contract's overall objective reflected in its language.8
- A "best efforts" undertaking does not require a party to sacrifice itself totally to the economic interests of the party to whom the duty is owed, although the interests of that party must predominate.9
2. Interpretation of Reasonable Efforts:
- A 'reasonable efforts' obligation would be deemed as performed if one reasonable course of action is taken.10 Reasonable efforts describes the effort that a reasonable person, committed to achieving the objective, would have undertaken.11
- An 'all reasonable efforts' obligation requires "all reasonable paths and obligations to be exhausted"12, but not at the cost of the party's commercial interests (unless specifically stipulated in the contract).13 An "all reasonable endeavours" obligation requires active efforts by the relevant party, with passivity/inactivity construed as likely grounds for a potential breach.14
- It is up to courts to determine what course of action would be considered "reasonable" in substantively achieving a desired result.15
There is also jurisprudence in the US which treat "reasonable efforts" and "best efforts" at par, in each case imposing an obligation "to act with good faith in light of one's own capabilities".16 However, other jurisdictions (as set out above) impose greater burden on "best efforts" undertakings.
Conclusion
A best effort provision generally implies a stricter obligation to perform and may require the party to undertake all possible steps which a reasonable, prudent person would undertake to meet the obligation. A reasonable efforts provision on the other hand is less onerous and would require the party to undertake reasonable actions, without prejudicing the party's own commercial interest.
However, if such terms are used interchangeably in contracts and there appears to be no commercial basis/rationale for differentiating the same, the courts could also adopt an approach of not differentiating the terms. Therefore, the use of such terms in contracts should be carefully thought through and evaluated, to ensure that commercial intent may be enforceable.
Footnotes
1 Section 37, Indian Contract Act, 1872.
2 Manika Sett v. Sett Iron Foundry and Others (2022) 2 Cal LT 266.
3 Rhodia International Holdings Ltd. & Anr. v Huntsman International LLC [2007] EWHC 292 (Comm).
4 Atmospheric Diving Systems Inc. v. International Hard Suits Inc (1994) CanLII 16658 (BC SC).
5 IBM United Kingdom Limited v Rockware Glass Limited CA [1980] FSR 335.
6 Jet2.com Ltd v Blackpool Airport Ltd. [2012] EWCA Civ 417
7 Supra Note 6
8 Supra Note 6.
9 Eastwalsh Homes Ltd v Anatal Developments Ltd 1990 Carswell 532
10 Supra Note 5.
11 1092369 Alberta Ltd. v. Joben Investments Ltd. et al. [2013] A.R. TBEd. MY.163.
12 Brooke Homes (Bicester) Limited v. Portfolio Property Partners Limited (2021) EWHC 3015 (Ch). at para 98.
13 Supra Note 3 at Para. 35.
14 Supra Note 12 at Para. 98.
15 Supra Note 12.
16 Soroof Trading Dev. Co. v. GE Fuel Cell Sys., LLC (2012) 842 F. Supp. 2d 502, 511 (S.D.N.Y. 2012).
Originally Published 16 January 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
