TOP TEN PITFALLS IN NEGOTIATING AND DRAFTING BUSINESS CONTRACTS – PART VII (“BEST EFFORTS”)

Welcome to the seventh of my ten-part series that can show you how simple-looking parts of a business deal, or overlooked parts of a business deal, can come back to haunt you. Thank you for visiting, and please also read my previous installments in this series on how to avoid getting into trouble now, instead of getting out of trouble later.  They can be found elsewhere in this blog, and they discuss letters of intent, due diligence, noncompetition clauses, automatic renewal clauses, sales tax, and intellectual property. I have published an abbreviated version of this whole series in the January 2014 issue of Nevada Business magazine. Here is the link, but with fair warning – it is so abbreviated that it only has seven pitfalls, and there is much more to beware of than what you will see in that article! http://www.nevadabusiness.com/2014/01/seven-pitfalls-avoid-negotiating-business-contracts/

And by the way, I’ve moved.  I’m now with Kolesar & Leatham – a full-service, well-staffed law firm with a proud 25-year history in the State of Nevada.  My new contact information:  rgalin@klnevada.com; (702)362-7800; Kolesar & Leatham, 400 S. Rampart Boulevard, Suite 400, Las Vegas, Nevada  89145.

“Best Efforts”

When we use this phrase in casual discussions, we think we know what it means.  (Or maybe we really don’t know what it means, but it sounds good.)  But when you use this phrase in a contract, beware – a court might interpret it as meaning much more than you intended.

When you agree in a contract to make “best efforts” to do anything, “best” might mean expending sums of money you had no intention to expend, or spending all of your time on those efforts to the exclusion of everything else (think evenings, weekends and holidays here).  After all, anything less than everything you can possibly give or do is arguably not your best effort.

For example, think about promising to make best efforts to accomplish any of these:

  • get financing to buy a business or property – does “best efforts” mean paying exorbitant loan fees and outrageous interest rates to get the financing?
  • obtain your landlord’s or other third party’s consent to do your business deal – will the sky be the limit on the fees you pay to get their consent?
  • complete construction or production by a certain date – how much overtime expense, premiums for special deliveries, special permit fees, etc. are you willing to pay to meet the deadline?
  • obtain governmental approval or licensing – what conditions might the government impose on you as part of its approval or licensing?

If you really mean “reasonable” or “commercially reasonable” best efforts, your contract had better say so.  If you really mean best efforts as long as you don’t have to pay more than $1,000 to achieve the desired result, or best efforts as long as you can continue to run your business and your life in the normal course, you had better say so.  Don’t count on a court to read limitations into your best efforts obligations, if you didn’t see the need for them when you signed the contract.  To be on the safe side, think of “best efforts” as the closest thing to a guarantee, and if you are not prepared to guarantee something, reduce your best efforts obligation to one of reasonable or commercially reasonable best efforts. Otherwise, “best” might turn out to be worst for you.

 

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