The Contract Adviser

In my previous column, I discussed the impact of revising the following contract clause with a “good faith efforts” qualifier.

“The Manufacturer shall deliver to the Company the Prototype no later than June 30, 2009.”   

Once again, as revised…

“The Manufacturer shall use good faith efforts to deliver to the Company the Prototype no later than June 30, 2009.” 

We discovered how "good faith efforts" only requries the obligor to make an honest effort to meet its obligation.  There is no requirement to even put in a "reasonable effort" to meet the deadline - click here to see my column on "reasonable effort" . 

Today, let’s take a look at what happens if the Company successfully negotiates to insert a “best efforts” qualifier instead.  (Note how unlike in the other columns, I say if the "Company" successfully negotiates, instead of the if the "Manufacturer" successfully negotiates... read on to see why...)

“The Manufacturer shall use best efforts to deliver to the Company the Prototype no later than June 30, 2009.”

To the layperson, "best efforts" sounds alot like the "good faith efforts" advice a coach would give to a young ballplayer - "Just do your best."   But "best efforts" and "good faith efforts" are not the same.  In fact, many lawyers would place them at opposite ends of the spectrum.

Of the three qualifiers discussed (i.e., good faith efforts, reasonable efforts, and best efforts), best efforts is the strictest.  It requries the obligor (in this example, the Manufacturer) to meet its obligation even if it has to pay more to do so.  Let's say that because of internal delays, the Manufacturer can't ship the Prototype until the day before the deadline.  Many lawyers would argue that "best efforts" would require the Manufacturer to ship the Prototype using overnight delivery service, even if the cost of doing so would wipe out the planned profit margin for the transaction.

To summarize,

Unqualified - “The Manufacturer shall deliver to the Company the Prototype no later than June 30, 2009.” - There is an absolute obligation to deliver by the deadline.

Qualified language - 

Best efforts qualified language - “The Manufacturer shall use best efforts to deliver to the Company the Prototype no later than June 30, 2009.”  This is the strictest of the qualified choices.

Reasonable efforts qualified language - “The Manufacturer shall use reasonable efforts to deliver to the Company the Prototype no later than June 30, 2009.”  This the next on the spectrum.

Good faith efforts qualified language - “The Manufacturer shall use good faith efforts to deliver to the Company the Prototype no later than June 30, 2009.”  This is the most lenient standard.

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In yesterday’s column, I discussed the impact of revising the following contract clause with a “reasonable efforts” qualifier.

“The Manufacturer shall deliver to the Company the Prototype no later than June 30, 2009.”   

Once again, as revised…

“The Manufacturer shall use reasonable efforts to deliver to the Company the Prototype no later than June 30, 2009.” 

Today, let’s take a look at what happens if the Manufacturer successfully negotiates to insert a “good faith efforts” qualifier instead.

“The Manufacturer shall use good faith efforts to deliver to the Company the Prototype no later than June 30, 2009.”

This is a dream come true for the Manufacturer because all it has to do to fulfill its obligations is to make an honest attempt to meet the deadline.  That’s it.  It doesn’t matter if a reasonable person under similar circumstances would have taken a couple of extra steps to try to meet the deadline.  As usual, no language, no matter how one-sided, is a vaccine against costly litigation – in a contract dispute, the Company will likely try to couch the facts in a way to show that the Manufacturer did not, in fact, exercise good faith efforts.   

It’s a good idea for a contract obligee* to reject any attempt by the contract obligor* to weaken the obligor’s obligations with a good faith efforts qualifier, especially if the obligation is important or key to the transaction.  This is common sense.  An obvious example… a manufacturer shouldn’t grant exclusive distribution rights to a distributor who won’t agree to exercise anything more than good faith efforts to meet minimum purchase targets.

In my next column, I’ll discuss the “best efforts” qualification. 

* In contract parlance, the obligor is the party with the duty to perform.  The obligee is the party with the right to receive performance.

For information about me, or to contact me directly, please leave a post or visit http://www.contractadviser.com/index.html

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“[Party A] shall deliver to [Party B] the _________ no later than [date].”

This is a simplified version of a provision in a business contract that requires Party A to deliver something [you fill in the blank] to Party B by a certain deadline.  If you are Party A, how much wiggle room will you have in terms of meeting the deadline?

To help analyze this question, let’s put some real contract parties in there, and fill in the blanks.

“The Manufacturer shall deliver to the Company the Prototype no later than June 30, 2009.”

Let’s assume for purposes of this discussion that the term “Prototype” is already defined elsewhere in the contract as having to meet certain detailed specifications.  In other words, let’s assume that there’s no loophole in the contract that allows the Manufacturer to slap together a slipshod thingamajig, declare it a “Prototype” and then argue that it’s satisfied the contract. 

As drafted, there is no wiggle room; the Manufacturer will be in default if it doesn’t deliver the Prototype by June 30^th.

Here are some ways to build some wiggle room into the contract… 

Reasonable efforts 

“The Manufacturer shall use reasonable efforts to deliver to the Company the Prototype no later than June 30, 2009.”

By inserting the underlined language, the Manufacturer will have the obligation only to use reasonable efforts to deliver the Prototype by the deadline.  There is no requirement that the Manufacturer break the bank or go beyond the call to meet the deadline.  While this buys some wiggle room for the Manufacturer, contract qualifiers such as “reasonableness” introduce uncertainty into the contract's interpretation.  The threshold for “reasonableness” and whether the Manufacturer has done enough to reach that threshold are typical fodder for litigation.

The Company in this example may have legitimate business reasons for rejecting the revision.  The Company may need the Prototype by the deadline so that it can meet its own deadlines and commitments.  If the only way for the parties to move forward is to add “reasonable efforts”, then the Company will need to find other ways to add some teeth to the agreement, perhaps by backloading the milestone payments, or introducing the payment of liquidated damages (a kind of "penalty", but don't call it that in the contract because "penalties" are mostly unenforcable) for each day the delivery is delayed.  Remember, this is tricky too because any time you introduce a financial penalty into a contract, you risk that a court might interpret the penalty as the exclusive remedy, thus foreclosing other remedies that might otherwise be available.  It's also tricky because depending on how the liquidated damages language is drafted, and depending on the interplay between that clause and any limitation of liability or cumulative remedies provision, the Manufacturer might find itself liable for more than just the fixed penalties he thought he negotiated.

There are other ways to qualify this provision – “good faith efforts” and “best efforts”.  They sure sound innocuous, but have pitfalls that I’ll discuss in upcoming columns.

For more information about me, or to contact me directly, please leave a post or visit ContractAdviser.com

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