Originally published by the Daily Journal of Commerce on May 18, 2023.
You will often see in construction contracts terms directing the contractor to use “best efforts” or “reasonable efforts” or “commercially reasonable efforts,” but what do they mean?
Take as an example a project that is past the preliminary hurdles. The project is progressing in good faith, although not perfectly, on the critical path. Everyone wants to “make it work.” But as often happens, not everything in the supply chain and schedule works as the best laid plans outlined, let alone perfectly. In fact, the project is delayed. Where the cause of the delay is not force majeure, or other excusable delay by the contractor, and where the contractor has some fault, what types of actions must the contractor take to satisfy the ‘efforts clause’ under the contract?
First, it depends which jurisdiction governs the contract. Some courts do not distinguish between “best efforts” or “reasonable efforts” or even “commercially reasonable efforts,” while other jurisdictions do make distinctions. Therefore, evaluate the case law in the jurisdiction in which you are trying to enforce your terms.
Second, is your jurisdiction one that has concluded that “best efforts” language alone does not create a fiduciary relationship between the parties, or does it view that language as approaching or reaching a heightened obligation of performance by the contractor? And in what context will the court evaluate the contractor’s obligations?
For instance, courts will often evaluate a variety of factors, such as whether the contractor is a specialist, whether it’s financially strong enough to “do more” than another or even average contractor, whether it holds a particular expertise in the locale or subject matter, the material costs associated with expected performance versus the original benefit of the contract, whether additional performance is available in a reasonable time frame and cost, whether there are any “industry” or locale expectations or practices, whether the issue has arisen for this contractor in the past such that an expectation of performance is warranted, and whether any discussions of the subject performance or other negotiations by the parties occurred prior to the contract execution.
Many courts will very specifically evaluate the circumstances of the project and the parties’ positions, and not constrain interpretation to the express terms of the contract. Know if your jurisdiction views its analysis more broadly or will hold the parties to the corners of the contract in a more limited manner. Of course, as with any contract, even the “best efforts” or “reasonable efforts” or “commercially reasonable efforts” clause must be reconciled with other clauses in the contract, to the extent possible for a reasonable reading of the terms.
Third, courts have acknowledged that these clauses do not mean that the contractor must use every conceivable effort to perform, and most courts do not determine that a contractor must ignore its own interests or perform itself into bankruptcy just to satisfy its contractual terms. Contractors should be aware that diligence is absolutely required, but it is typically evaluated within the parameters of reasonable conduct for that contractor, for the project it agreed to perform. Or in the case of “commercially reasonable efforts,” a more objective standard may be used to evaluate the contractor’s performance.
Finally, most courts will also evaluate whether the contractor performed its own evaluation in “good faith” to meet the efforts clause requirements. Was the contractor objectively evaluating its performance and not taking any action that would undermine the owner’s benefit of the bargain? Though the contractor is not a fiduciary, it must do more than just promise to act in good faith; it usually must take demonstrative action to fulfill the contractual duties. The bottom line: Any dispute arising out of such efforts clauses is a question of fact for the arbitrator/judge or jury. If your contract includes any efforts clauses, consider including in the contract reasonable benchmarks to define the efforts each party is expecting of the other.