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What do "Best Efforts" and "Reasonable Commercial Efforts" mean?

By Aaron Singer         April 4, 2003

You regularly see the phrases "best efforts" and "reasonable commercial efforts" in contracts but like most people you probably have not considered the significance of these standards. You should, because they may impose significantly different obligations on the party whose efforts are required. Moreover, their inherent ambiguity can lead to costly litigation over their proper interpretation.

Not surprisingly, case law has established that an obligation to use "best efforts" imposes a higher standard than an obligation to use "reasonable commercial efforts". That is good and fine but what types of efforts are required to discharge an obligation to use "best efforts" or "reasonable commercial efforts"?

Express Best Efforts

A contractual obligation to use "best efforts" can impose a very demanding burden on the party whose best efforts are required. In Atmospheric Diving Systems Inc. v. International Hard Suits Inc., the leading British Columbia decision on the interpretation of "best efforts", the British Columbia Supreme Court found "best efforts" to require, among other things, "taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion, leaving no stone unturned". The court noted that courts routinely imply a term in contracts that parties will make "reasonable efforts" to fulfil their respective contractual obligations and therefore where parties include a "best efforts" clause in a contract they must surely intend that something more than "reasonable efforts" be used.

Over the years, courts in British Columbia and elsewhere in Canada have interpreted "best efforts" provisions in a variety of commercial situations. Generally speaking, the courts tend to interpret best efforts as "leaving no stone unturned" and, as you would expect, place the burden of proof on the party alleging a failure of "best efforts".

In K.W. Wall & Associates Ltd. v. Labourer’s Pension Plan of British Columbia, a decision involving the purchase of a commercial property, the plaintiff acquired a right to purchase a property in foreclosure. The plaintiff paid a $50,000 deposit toward the purchase but was unable to raise the balance of the purchase proceeds. In an attempt to salvage something out of its purchase interest, the plaintiff entered into a contract with the defendant to sell its position to the defendant for $62,000.

The contract contained a number of conditions precedent in favour of the defendant. One of the conditions was that the defendant obtain valid, binding and enforceable offers to lease from Petro-Canada and from the local franchisee for Dairy Queen Restaurant before December 31. The defendant agreed to use its "best efforts" to secure and settle the terms of the offers to lease "as quickly as possible" on the terms which the parties had agreed to.

The lease with Dairy Queen was secured by the deadline but, due to an innocent misunderstanding about rental rates, the Petro-Canada lease was not secured until well after the deadline. The defendant relied on the condition precedent to withhold payment to the plaintiff. The plaintiff sued arguing that the defendant had not used best efforts in securing the lease from Petro-Canada as quickly as possible. The court agreed with the plaintiff.

The court found that if the defendant had acted promptly in clarifying the misunderstanding with Petro-Canada, the defendant could have finalized the lease well before the deadline. By not doing so, the defendant had failed to use its best efforts and therefore could not rely on the condition precedent to avoid paying the plaintiff. The court ordered payment of the $62,000.

In K.W. Wall it is likely the plaintiff would have succeeded even if the subject condition had provided for "commercially reasonable efforts" to be used. Acting promptly to clear up a misunderstanding is, after all, a commercially reasonable thing to do. While the consequences in this case were not all that significant, the point to be taken is that in order to satisfy a "best efforts" obligation considerable effort and money may need to be expended.

Implied Best Efforts

While courts routinely imply a term into contracts that parties will use "reasonable efforts" to fulfil their obligations, in some circumstances courts will imply a "best efforts" standard. For example, in residential real estate purchases courts have held that the frequently employed condition precedent in favour of purchasers with respect to obtaining satisfactory financing includes an implied obligation on the purchaser to use "best efforts" in satisfying the condition. In commercial acquisitions, courts have implied the "best efforts" standard in connection with conditions precedent relating to zoning and other municipal approvals.

In Griffin v. Martens, the British Columbia Court of Appeal stated that a subject condition in respect of satisfactory financing readily supports the interpretation that the purchaser is committed to using "best efforts" to obtain financing that is satisfactory. Words that indicate the clause was for the sole benefit of the purchaser did not release the purchaser from the requirement that the purchaser use "best efforts" to obtain satisfactory financing. Incidentally, the court in Griffin interpreted "satisfactory" to mean "satisfactory to a reasonable person with all the subjective but reasonable standards of the particular purchaser".

The Griffin decision was recently followed by the British Columbia Supreme Court and Court of Appeal in Wu and Chiang v. Gordic, a case involving the purchase of a residential property for a price of $456,000. The agreement in Wu contained the following subject condition:

"Subject to a first mortgage being made available to the purchaser by October 3, 1996 in the amount of $150,000 at an interest rate not to exceed 6.125 percent per annum calculated semi-annually not in advance with a 25 year amortization, one year term and repayable in blended payments of approximately $975.00 per month including principle and interest plus 1/12th the annual taxes if required by the mortgagee. This condition is for the sole benefit of the purchaser."

Obviously, this clause is much more specific than the simple "subject to satisfactory financing" provision that is routinely found in a residential purchase agreement. Nevertheless, the purchaser claimed he did not read the contract and did not know the financing amount in the subject condition. The purchaser applied for a $250,000 mortgage rather than the $150,000 set out in the condition.

The appraisal prepared for the lender estimated the property as having a value of between $425,000 and $440,000, an amount sufficient for the purposes of the $250,000 mortgage. The purchaser, however, was not at all pleased that the appraisal came in lower than the purchase price and, through the realtor, tried to renegotiate the purchase price with the vendor. The vendor quite properly refused to entertain such discussions. In the meantime, the purchaser’s lender left a message that the purchaser should contact the lender to clarify some questions the lender had before issuing the mortgage approval. The purchaser seized this opportunity and took no steps to contact the lender and clarify its concerns. The financing was not provided and the purchaser terminated the agreement on the basis that the condition was not satisfied.

The vendors eventually sold their property for $400,000 in a falling market and sued the defendant for $68,428, representing the $56,000 deficiency in the sale price and certain costs. The court found, among other things, that the financing was not approved because the vendor failed to use best efforts to clarify the questions of the lender. The court held for the vendor and the decision was upheld on appeal.

The purchaser seemed to underestimate what was required in terms of fulfilling the financing condition precedent. By not calling the lender back, the purchaser deliberately prevented the condition from being satisfied. The Purchaser's conduct was far from the "best efforts" required.

In real estate acquisitions, both residential and commercial, courts tend to imply the more onerous "best efforts" standard where a person is required to undertake steps within the person's control to satisfy a condition precedent to the transaction completing. In such circumstances, the parties may wish to avoid the uncertainty of the "best efforts" standard by clarifying exactly what steps must be taken to satisfy the condition.

Limits On Best Efforts Requirements

In Atmospheric Diving, the court noted that "best efforts" is not boundless and that "it must be approached in the light of the particular contract, the parties to it and the contract's overall purpose as reflected in its language".

The application of this limit on "best efforts" is illustrated in Wentworth Developments Inc. v. Calgary. In Wentworth the plaintiff commenced proceedings against the City of Calgary claiming damages for loss of revenue in the amount of $1,250,000. In constructing its light transit system, the City of Calgary passed a bylaw closing vehicle access to the street leading to the plaintiff’s parkade. The bylaw also authorized the Director of Transportation for the City to negotiate and finalize any agreements necessary to move, remove or alter any means of access affected by the closure.

The plaintiff and the City negotiated and entered into a restrictive covenant agreement compensating the plaintiff for loss of access and providing for access to the parkade through a lane. The City agreed to "undertake to use its best efforts to enforce its bylaw relating to access in the laneway".

The plaintiff submitted that during negotiations the City had made representations that the lane would be paved, treated like a street, and that it would be adequately policed and maintained so as to provide continuous alternate access. The City paid the costs of creating and constructing the lane access to the parkade. Soon thereafter, the plaintiff made numerous complaints to the City regarding a variety of obstructions in the lane that were impeding access to the parkade, including obstruction caused by garbage containers. The City investigated and attempted to correct some of the problems, but eventually advised the plaintiff that it had no obligation to ensure that access was unimpeded.

One issue the court addressed was whether a "best efforts" obligation fetters the City's discretion to act in the public interest thereby making the restrictive covenant illegal for being contrary to public policy. The court considered the argument that a "best efforts" provision prevents the City from exercising its discretion in favour of not enforcing the bylaw because it will be faced with liability or the possibility of a lawsuit. The court acknowledged that this argument would be correct if the "best efforts" requirement afforded the City absolutely no option but to enforce the bylaw. However, the court found that was not the case because the use of a "best efforts" provision "does not mandate certain behaviour at all costs, rather it implies a degree of flexibility which would allow public policy concerns to supersede enforcement of its bylaw." The court held that this flexibility allowed the City to fulfil its public interest duty and its "best efforts" contractual obligations. Accordingly, the restrictive covenant survived the challenge that it is against public policy.

The court then considered whether the City had in fact used its best efforts. In keeping with its finding on the public policy issue, the court held that in determining the limits of the City's obligations it is critical to bear in mind that the City also has the duty to discharge its public interest duty which may conflict with its contractual obligations. The court found that what the City is required to do in fulfilling the "best efforts" requirement does not extend to the point of interfering with its public interest duty.

The court used the garbage containers that were impeding access to the parkade as an example of how the City's public interest duty trumps its contractual obligations to use best efforts. If best efforts were required, the City would have had to remove the garbage containers from the lane. However, evidence was put forward that such a removal would result in a severe litter problem and, therefore, best efforts in this particular case did not require the City to overlook its public interest duty in order to comply with its contract with the plaintiff. Instead of removing the garbage containers, the City worked with the disposal companies to achieve a compromise that met the plaintiff's needs within the framework of serving the public interest. In doing so, it acted with best efforts.

The limitation on "best efforts" that results from a public interest duty is something to keep in mind when contracting with municipalities and other governmental bodies. Again, in some circumstances it may be appropriate to specifically set out performance requirements. When contracting with municipalities, you will have to be careful not to impose requirements that fetter the discretion of the municipality so as to make the contract unenforceable for being contrary to public policy.

Reasonable Commercial Efforts

There are very few Canadian cases dealing with the interpretation of "reasonable commercial efforts" and fewer still involving commercial real estate. In 364511 Ontario Ltd. v. Darena Holdings Ltd., an Ontario Court of Justice (General Division) decision, the plaintiff and defendant entered into an offer to lease that was conditional on the plaintiff receiving necessary approvals and licences to legally operate a bingo hall from the premises. The plaintiff was to use "reasonable commercial efforts" to satisfy the condition within 60 days.

The plaintiff made formal application to the City of Mississauga and to the Ontario Gaming Commission to relocate its bingo hall. The plaintiff was not aware that the City had previously decided not to approve any additional bingo halls at that time and that the surrounding community was against any type of evening entertainment activities going on in the premises. Soon after the application was made, it became very apparent that the City, the local Councillor, the community and certain other parties were strongly opposed to the application. Nevertheless, the plaintiff took steps to ready the premises for the proposed bingo hall and obtained a construction permit and an occupancy permit. It had achieved all that it could except for the resolution of opposition from the City, the local Councillor, the community and others.

Given the widespread opposition, the plaintiff was reluctant to hold a public meeting or to put the application formally before council. Instead, the plaintiff met with the City and other opponents. The parties agreed that the plaintiff would pursue alternate locations for its bingo hall. Shortly thereafter, the plaintiff found suitable alternative premises that were approved by the City and others who had opposed its original application. The plaintiff requested its deposit back from the defendant on the basis that the licence condition had not been satisfied and that the offer to lease was terminated. The defendant refused arguing that the plaintiff did not use "reasonable commercial efforts" to satisfy the condition even though the defendant made no such allegations when the application process was underway.

The court noted that counsel could not refer it to case law for an interpretation of "reasonable commercial efforts" and that its own research was unproductive. The court looked to the dictionary for assistance and found that the word "reasonable" implies sound judgment, a sensible view, and a view that is not absurd and that "commercial" means having profit or financial gain as opposed to loss as a primary aim or object.

The court emphasized that these words do not impose a standard of "best efforts", which might require the plaintiff to take the application to a decision regardless of the very negative circumstances. The court stated that reasonable commercial efforts allowed the plaintiff, if it had a doubt from the efforts made that the approval would be granted, to be free to conclude that its efforts would not be successful. The court found that the plaintiff was aware that the approval of its application was remote, notwithstanding that no formal application had gone before municipal council and no public meetings were held. On that basis the court concluded that the plaintiff made reasonable commercial efforts to obtain the required approval and that the plaintiff's refusal to hold public meetings and to put the application formally before council did not negate that finding. The defendant appealed.

The Ontario Court of Appeal upheld the trail judge’s decision; however, it did not completely agree with his interpretation of "reasonable commercial efforts". In particular, the Court of Appeal did not agree that "commercial reasonable efforts" allowed the plaintiff, on the basis of a doubt, to be free to conclude that its efforts would be unsuccessful and on that basis withdraw from the transaction. A simple doubt, the Appeal Court held, would not suffice. The Appeal Court stated that "uncertainty that made it commercially unreasonable to proceed was required". The Appeal Court held that there was enough evidence to conclude that there was such uncertainty and that the plaintiff had complied with the terms of the offer.

The Appeal Court decision was clearly a triumph for common sense and certainty. The accepted evidence went well beyond establishing mere doubts. It was clear, as the trial judge indicated, that approval of the application was remote. In these circumstances, any reasonable businessperson could see that pursuing the application would almost certainly be a waste of time and money.

Conclusion

The cases demonstrate that an express "best efforts" clause can create very onerous and enforceable obligations. Had the defendant in the Wentworth decision not been a municipality, it is likely that the court would have found that the "best efforts" standard was not met and that the plaintiff was entitled to damages for lost profits. With this sort of risk in mind, a party agreeing to use its "best efforts" would be prudent to set out exactly what the term means rather than leaving the interpretation to the courts. Similarly, when dealing with provisions where a "best efforts" standard could be implied, as occurred in the Wu decision, it may be prudent to specifically set out what actions will be required to fulfil an obligation. If the parties to a contract are serious about a "best efforts" covenant, they should be willing to negotiate its meaning. By doing so, the parties may avoid the inherent uncertainty of "best efforts" and costly litigation.

The same can be said for "reasonable commercial efforts". While the standard is less onerous than "best efforts", it too can result in unanticipated liability. When possible, parties would be prudent to address in a very specific way the steps that will be taken to fulfil an obligation. When dealing with a municipality or other government agency, be careful not to impose requirements that fetter the discretion of the agency so as to render the contract unenforceable. In some circumstances it may be better to require the agency to use "best efforts" and allow a court to read limitations into the standard for the public interest duty.

 

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