Are you meeting expectations? A Case for Benchmarking
The authors of a recent US article appearing in Corporate Counsel explored how efforts clauses – that is, contractual provisions that require one party to a contract to exercise some standard of effort to maximize the benefits to be received by the other party to the contract – may be improved. Their hypothesis is simple: parties often expend far too much time negotiating over the adjectives “reasonable” or “best” and far too little time drafting benchmarks into the agreement as an objective measure of how efforts are to be applied. Their conclusion is that open-ended benchmarking assists in ensuring parties understand the bargain they have struck and reduces the risk of disagreements over how an efforts clause should be interpreted. While this advice is sound in principle, and may hold true in other jurisdictions,1 the legal analysis in Canada is slightly more nuanced.
Reasonable vs. Best Efforts
The adjectives “reasonable” and “best”, as applied to efforts clauses, vary in meaning depending on jurisdiction. In Canada, the courts have concluded that the terms “reasonable” and “best” signify different degrees of diligence and the difference is material.
Best efforts holds the party to a higher standard,2 and has been defined as “taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned… doing everything known to be usual, necessary and proper for ensuring the success of the endeavour.”3 In agreeing to a best efforts clause a party is agreeing to spend a lot of their time and money to get the result desired, even if those efforts are not commercially reasonable.
In contrast, reasonable efforts “denotes a prudent and moderate measure of sustained diligence necessary to give business efficacy to the object of the parties' underlying agreement”.4
Given this stark distinction, is benchmarking of use in the Canadian context?
The case for benchmarking in a reasonable effort clause is a pursuasive one. We often see agreements which include a generic efforts clause, for example:
Party X agrees to use reasonable efforts in fulfillment of conditions.
Parties take time to negotiate the conditions to which the effort must be applied but the agreement often neglects to explain what “reasonable” means. This lack of clarity has led contracting parties to litigate when there has been a failure to agree on whether “reasonable” efforts have been employed. A recent example from Alberta demonstrates the point.
In 1092369 Alberta Ltd. v. Joben Investments Ltd.,5 the parties disputed whether Joben used reasonable efforts in satisfaction of contractual conditions. The contract in question included a generic efforts clause requiring Joben to “use reasonable efforts to satisfy the conditions”.6 In reaching its decision that Joben failed to use reasonable efforts, the Court considered many facts including the number of times Jobin met to discuss an issue, the level of oversight Jobin provided to the task, and even whether, subjectively, Jobin had an inkling that the condition would be not meet. Ultimately, the Court did not suggest what level of attention would meet the spectre of reasonable efforts. However, the takeaway from the case is self-evident: parties have the liberty to clearly indicate what level of effort they are expected to apply. If such levels of effort are not outlined in the agreement, and litigation results, the judiciary will be tasked with implying the term.
In order to avoid such a pitfall parties should consider defining what is meant when using phrases such “reasonable”, or “commercially reasonable”.
Party X agrees to use reasonable efforts in fulfillment of conditions. Reasonable efforts includes, but is not limited to, (i) expectation 1; (ii) expectation 2, and (iii) expectation 3.
A properly structured efforts clause which includes negotiated open-ended benchmarks ensures that there is a meeting of the minds on what actions, at a minimum, each party expects the other to take when attempting to fulfill contractual conditions. Clarity in the expectations of the parties avoids the potential for courts to imply terms should the matter be litigated.
The case for benchmarking in a “best efforts” context has less appeal. As mentioned above, in the Canadian context, best efforts requires a party to leave “no stone unturned” and providing benchmarks may muddy the waters as to what in fact each party expected of the other.
Are There Downsides?
Two downsides to benchmarking should be considered. First, where parties do include explicit terms related to their interpretation of “reasonable”, courts will be reticent to disturb the intent of the parties to the contract. Therefore, negotiating parties must ensure they are willing to be bound by the benchmarks set as the agreement will be binding even if the actions agreed upon look far less appealing down the road. Of course, as suggested above, an open-ended benchmark clause can mitigate some of this downside risk.
The second consideration is the increased time spent negotiating what benchmarks will be used. This potential increase in time and costs needs to be considered at the same time as the potential benefits of having a well drafted benchmark. On a cost-avoidance basis, a properly drafted benchmark clause should considerably reduce the risk of litigation and the uncertainty of an implied term into the contract should the dispute reach a court.
Next negotiation, consider adding benchmarks to your reasonable efforts clause; the clarity provided may pay dividends by ensuring more efficient compliance with the conditions to the agreement.
1 Broad generalizations are unhelpful when referring to US contract interpretation. For example, in Delaware, the courts have recognized a distinction exists between reasonable and best efforts. Whereas New York and Massachusetts are on the other side of the debate and have been loath to distinguish between the two.
3 Ibid at para 71. This test has been applied in Ontario in Dennis v Ontario Lottery and Gaming Corp., 2010 ONSC 1332 at para 112; OEB International v Leydon,  OJ No 1268 (Sup Ct), rev’d on other grounds  OJ No 1268 (ONCA).