It has become common practice for parties to an agreement to use efforts standards when imposing obligations on one another. The agreements in which the efforts standards are imposed range from shareholders agreements and sale of business agreements to general commercial agreements, and have been used frequently in M&A transactions in recent years, particularly in relation to earnouts.
The use of the efforts standards are also not confined to a particular jurisdiction, and often also makes its way into cross-border transactional agreements where the parties are from multiple jurisdictions.
Within the South African jurisdiction, the efforts standards that are commonly used in agreements are “best efforts”, “best endeavours”, “reasonable efforts” and “reasonable endeavours”. Despite the frequent use of the aforementioned terms, the question that remains unanswered by the South African courts is what level of commitment must a party meet in executing obligations linked to efforts standards.
Notwithstanding the failure by the South African courts to finally pronounce on this issue, the commercial industry has adopted a generally accepted meaning for the standards, as briefly summarised below.
“Reasonable efforts” and “reasonable endeavours”
The terms “reasonable efforts” and “reasonable endeavours” are used interchangeably and are generally accepted as imposing an obligation on a party to do what is reasonable in order to fulfil the obligation imposed. This means that a party should only do what is reasonable given the circumstances in which the parties find themselves and need not take any drastic measures to fulfil their obligations.
Some academics have interpreted the terms “reasonable efforts” and “reasonable endeavours” to mean a party can take one reasonable course of action to fulfil an obligation but need not take every course of action.
“Best efforts” and “best endeavours”
The “best efforts” standard is generally accepted as a higher/more onerous standard or burden, requiring a party to do more than what would be practical under the “reasonable efforts” standard. The term “best efforts” is commonly used interchangeably with the term “best endeavours”. Some academics take a view that this standard requires a party to take all steps as may be necessary to fulfil the obligation, thereby “leaving no stone unturned”. The “best efforts” standard also requires the burdened party to subordinate its own interests for the interests of the other party. It may even require a party to incur some costs to fulfil the obligations imposed or change its strategy in how the business is operated.
General
Additionally, and as with the interpretation of any clause in an agreement, the South African courts would also consider the rules of interpretation in determining the meaning of the above terms. This would include the following:
- interpreting the words using its ordinary grammatical meaning;
- interpreting the terms in the context of the whole agreement, and taking into account the nature and purpose of the agreement – the court would give a sensible, businesslike meaning as opposed to one which undermines the purpose of the agreement;
- considering the language used in conjunction with the above terms, e.g. pre-emptive words such as “shall” and “must” can be interpreted as obligatory, whereas the pre-emptive word “may” can be interpreted as discretionary.
Having regard to the above-mentioned uncertainty and unpredictability in South African law relating to the efforts standards, parties to an agreement must be cautious about using the efforts standards to impose obligations on each other. While it may seem apparent from commercial acuity that “reasonable efforts” and “reasonable endeavours” is a less burdensome/onerous level of commitment on a party to perform, these terms will need to be considered in light of the whole agreement, taking into account the nature and purpose of the agreement, and the language used.
While it largely depends on the context of the transaction at hand, it would appear beneficial for the parties to an agreement to define the terms “best efforts”, “best endeavours”, “reasonable efforts” and “reasonable endeavours”, than to leave the interpretation of those terms in the hands of the judiciary who may not have insight into the negotiations that took place before signing the agreement and the intention of the parties at the time of signing the agreement.
Alternatively, if the transaction permits, more certainty could be created if the parties agree to properly defined steps that the obligor need to take in order to satisfy the obligation concerned, instead of relying on efforts standards. As a means to conclude this “cautionary tale”, parties to any transaction are encouraged to use clear and unambiguous language when negotiating the performance standard they wish to rely on so as to avoid the potential of legal and contractual uncertainty that could lead to contractual disputes.
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.