Yoda was Wrong, at Least with Respect to Contracts—“I'll Give it a Try” Evidences an Affirmative Commitment After All

In what is perhaps one of the most famous lines in the Star Wars series, Yoda rebukes Luke Skywalker, for saying he would “give it a try,” with these immortal words:  “Do, or do not.  There is no try.”  When the goal is to raise a Starfighter out of a swamp using only your mind linked to the Force, a goal requiring absolute commitment to achieve complete control, Yoda’s advice may be correct.  But when the goal is to describe a contractual commitment that involves a matter over which the obligor does not and cannot have complete control, limiting your means of evidencing that commitment to simply “do, or do not” is problematic.  As a result, when a contractual obligor’s commitment involves obtaining a third party consent, approval of a governmental agency, financing, or the like, U.S. transactional lawyers have long used the term “efforts,” with various modifiers, like “best,” “reasonable,” “reasonable best,” or “commercially reasonable,” to convey the idea that the contracting party was agreeing to less than an absolute obligation to accomplish the specified objective. Consistent with the observation attributed to George Bernard Shaw that “England and America are two countries divided by a common language,” English transactional lawyers use a different term, “endeavors,” with similar modifiers, to convey the same meaning (but spelled “endeavours” of course).  In effect, the party undertaking to use its efforts or endeavors is agreeing to “try” to do something, rather than agreeing that it absolutely “will” do something.  How hard that party is willing to “try” is often heavily negotiated (purportedly by use of the various modifiers), but the understanding that the efforts or endeavors obligation is less than an absolute promise is seldom in doubt.

Efforts Covenants are Affirmative Obligations

Despite the common use of contract terms like “efforts” or “endeavors” to commit a party to “try” to accomplish an objective, there has been a fair amount of controversy over the years as to exactly what such an obligation entails and whether such an obligation is even enforceable, particularly when there are no objective criteria against which to judge the appropriate effort.  Indeed, there are some courts that, like Yoda, have suggested that when it comes to contract enforcement “there is no try.”[1] But, for the most part, the majority of cases confirm that these efforts obligations, however seemingly amorphous, are very much enforceable as affirmative obligations; and courts believe themselves equipped to judge whether a party has in fact put forth the required degree of effort.[2]

Mr. Justice Leggatt, in Astor Management AG v. Atalaya Mining Plc., [2017] EWHC 425, at para. 67 (Comm) (6 March, 2017), a recent English case involving an alleged breach of an obligation to “use all reasonable endeavours to obtain [financing],” clearly articulated why parties are well advised to take their efforts obligations seriously:

I would say that it should almost always be possible to give sensible content to an undertaking to use reasonable endeavours (or “all reasonable endeavours” or “best endeavours”) to enter into an agreement with a third party. There is no problem of uncertainty of object, as there is no inherent difficulty in telling whether an agreement with a third party has been made. Whether the party who gave the undertaking has endeavoured to make such an agreement (or used its best endeavours to do so) is a question of fact which a court can perfectly well decide. It may sometimes be hard to prove an absence of endeavours, or of best endeavours, but difficulty of proving a breach of a contractual obligation is an everyday occurrence and not a reason to hold that there is no obligation. Any complaint about lack of objective criteria could only be directed to the task of judging whether the endeavours used were “reasonable”, or whether there were other steps which it was reasonable to take so that it cannot be said that “all reasonable endeavours” have been used. Where the parties have adopted a test of “reasonableness”, however, it seems to me that they are deliberately inviting the court to make a value judgment which sets a limit to their freedom of action.

A Recent Delaware Decision—“Reasonable Best Efforts” and “Commercially Reasonable Efforts” Require Real Affirmative Efforts

The seriousness of the commitment to use one’s efforts to accomplish a specified objective is also illustrated by the recent decision of the Supreme Court of Delaware in The Williams Companies, Inc. v. Energy Transfer Equity, L.P., C.A. No. 330, 2016 (Del. March 23, 2017). In The Williams Companies, the Court, in a 4 to 1 decision, affirmed the Court of Chancery’s decision that an alleged breach of an obligation to use “commercially reasonable efforts” to obtain a tax opinion from Latham & Watkins, which was a condition precedent to the closing of a merger, had not in fact caused that tax opinion not to be delivered.  But in doing so, the Court held that the Court of Chancery had wrongly interpreted the obligations undertaken by Energy Transfer Equity (“ETE”) in agreeing to use its “commercially reasonable efforts” to deliver the required tax opinion and to use its “reasonable best efforts” to consummate the merger.  The Court of Chancery had suggested that, in order to prove that ETE breached its efforts obligations, Williams had to show that ETE had taken action that prevented the tax opinion from being delivered.  But the Court said that this was “an unduly narrow view” of the efforts covenants in the merger agreement and that “covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.” According to the Court, “[t]here was evidence, recognized by the Court of Chancery, from which it could have concluded that ETE did breach its [efforts] covenants.”  Among that evidence was the following:

ETE “did not direct Latham to engage earlier or more fully with Williams’ counsel, failed itself to negotiate the issue directly with Williams, failed to coordinate a response among the various players, went public with the information that Latham had declined to issue the 721 Opinion, and generally did not act like an enthusiastic partner in pursuit of consummation of the [Merger Agreement].”

Despite concluding that the Court of Chancery wrongly evaluated the nature of ETE’s efforts covenants in concluding that ETE had not breached those covenants, the Court held that Court of Chancery had determined that, even if ETE had breached its efforts covenants, ETE would have nonetheless met its burden of proof in establishing that its breach did not materially contribute to the failure of the transaction to close.  In other words, the Court held that the Court of Chancery had determined, as a matter of fact, that, even if ETE had done all it was required to do in fulfilling its efforts covenants, the required tax opinion would still not have been delivered; therefore, ETE’s breach, if any, did not actually cause the failure of the transaction to close. As a result, the Court affirmed the Court of Chancery’s decision, even while disagreeing with its approach to the nature of ETE’s efforts covenants.

Chief Justice Strine dissented in the Williams Companies case, agreeing with the majority that the Court of Chancery had wrongly interpreted the efforts covenants in the merger agreement, but disagreeing that the Court of Chancery’s decision should nonetheless be affirmed.  The Chief Justice suggested that ETE may well have breached its efforts covenants and, as a result, the Chief Justice would have “require[d] a new trial at which ETE would be required to prove that its breach did not materially contribute to the failure of the Latham Tax Lawyer to deliver the 721 Opinion.”   Among the many memorable statements by the Chief Justice in his dissent is the following excerpt, which should give pause to those who consider a “commercially reasonable efforts” covenant to be the least strong of the various efforts covenants:

The Merger Agreement imposed a specific duty on ETE in connection with the 721 Opinion, which was to use “commercially reasonable efforts” to obtain the opinion.  That is an affirmative covenant and a comparatively strong one.

The Recent English Case—“Best Endeavors” and “All Reasonable Endeavors” are the Same Thing

There is a continued controversy as to whether there is any real difference between the efforts required by a party depending on the modifier used to express an efforts covenant.  In common parlance, “I’ll give it a try” sounds like a relatively weak commitment, while “I’ll try my best” sounds stronger.  And certainly, “I’ll die trying” sounds really strong.  But regardless of the modifier applied to efforts covenants in contracts, most courts appear to hold parties to an objective standard of reasonableness in taking those actions that it can, without destroying the value of the deal to itself, in accomplishing the stated objective with respect to which the efforts covenant is being made.[3] Indeed, at least one commentator has forcefully declared that “most courts … in the United States don’t draw distinctions between different efforts standards.”[4]

In the English case of Astor Management, decided a few weeks prior to the Williams Companies case, the approach of overall reasonableness was evident, despite the seemingly strongest of efforts covenant—“all reasonable endeavors,” which the court equated with “best endeavors.”  According to the court, the obligation to use “all reasonable endeavors’ to obtain financing did not mean that the obligated party was required to obtain financing regardless of the cost.  The ability of the project to operate at a profit in light of the cost of the financing was a necessary ingredient in determining the reasonableness of the available financing.  If the anticipated revenue from the completed project would be insufficient to cover anticipated project costs after taking into account the cost of the financing, then obtaining such financing was not objectively reasonable.  On the other hand, the court noted that simply because it was better for the obligated party to avoid obtaining financing at all, and instead utilize equity contributions from its shareholders, was not a legitimate basis for not pursuing the financing when obtaining that financing was a condition to a payment obligation in favor of the beneficiary of the efforts covenant.  In this particular case, however, the court held that the plaintiff had failed to prove its case that financing was actually available on terms that would have permitted the project to remain profitable, despite whatever efforts may have been exerted by the obligated party.

Unlike the United States, where the difference between the various efforts standards seems to be more in the minds of practitioners than most courts, at least one English court has stated that there is a difference between “best endeavors” and “reasonable endeavors.”  According to Mr. Julian Flaux QC, in Rhodia International Holdings Ltd. v. Huntsman International LLC, [2007] EWHC 293, at para.33 (Comm.):

This is because there may be a number of reasonable courses which could be taken in a given situation to achieve a particular aim.  An obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable course, not all of them, whereas an obligation to use best endeavours probably requires a party to take all of the reasonable ones he can.

That seems to be the reason why the term “all reasonable endeavors” was treated as the equivalent of “best endeavors” by the court in the Astor Management case. But the point remains that regardless of the modifier there is a real obligation being undertaken by the obligor in any efforts covenant.

The Fallacy of Negotiating Solely on the Basis of a Supposed Hierarchy of Efforts Covenants

The common view among practitioners is that there is a pecking order or ranking of efforts/endeavors covenants, with “best efforts/endeavors” being the highest and most onerous (just short of being an absolute obligation), with “reasonable best efforts/endeavors”  being just a slightly less demanding standard, with “reasonable efforts/endeavors” being an even less demanding standard, and with “commercial reasonable efforts/endeavors” either being somewhere in the middle or being a more refined version of “reasonable efforts/endeavors.” Even if that ranking were accurate (and it is far from clear that it is based on the available case law and commentary), it begs the question as to what is actually required to be done by the obligor that agreed to exert any of those various efforts covenants.  Indeed, despite Yoda’s disgust at Luke Skywalker’s “I’ll give it a try,” Luke did in fact undertake an affirmative obligation to exert some effort in accomplishing the stated objective.  In the contract world, if you agree to “give it a try” (and feel free to equate that statement to whichever of the various efforts covenants you feel is appropriate) to obtain a consent or governmental approval, are you just agreeing to ask and nothing more?  Or are you undertaking to be “an enthusiastic partner in pursuit of [that consent],” agreeing to make modifications to the deal if required to get to yes (to the extent such modifications do not materially alter the benefits of the transaction to you)?  Are you agreeing to pay a consent fee of some amount, or to execute releases, or agree to some other specific undertaking in order to obtain that consent or approval?  The truth is that by using a vague efforts covenant you are asking a court to determine in retrospect what you were required to do to fulfill that otherwise vague undertaking.

Even when these vague terms are purportedly defined, there is still not a lot of clarity on what you are actually undertaking to do.  Below is an example of one such definition (and this definition could have easily been used for virtually any of the various efforts covenants):

“commercially reasonable efforts” means efforts by a reasonable Person in the position of a Party which are designed to enable a Party to satisfy a condition to, or otherwise assist in the consummation of, the transactions contemplated by, or to perform its obligations under, this Agreement and which do not require the performing Party to expend any funds or assume liabilities other than expenditures and liabilities which are customary and reasonable in nature and amount for transactions like those contemplated by this Agreement.

This is certainly better than no definition, but does it really answer the question of what the obligor is expected to actually do to accomplish the stated objective?  Certainly, some practitioners, without otherwise defining the meaning of the general efforts covenant, will include a provision stating which specific actions are expressly not required to fulfill the efforts covenant, or which specific actions are expressly required to fulfill the efforts covenant (this is particularly present in the anti-trust provisions of most merger agreements).  But many practitioners, in many other contexts, simply leave the efforts covenants general and vague.

Some Concluding Observations

Continued debates about the distinction between efforts covenants are truly beside the point.  These efforts covenants, even if you picked the supposedly lowest ranking one in the purported hierarchy, are all contractual undertakings with potentially serious impact on the obligor.  But if you are the beneficiary of an efforts covenant that uses the “best” modifier, do not assume that it means the obligor is required to take any and all actions necessary to accomplish the specified objective, even if those actions result in a loss to the obligor.  Similarly, if you are the obligor of an efforts covenant using one of the supposed lesser modifiers, do not assume that you really don’t have much of an obligation at all.

While deal dynamics sometimes dictate settling for vague efforts covenants, whenever possible, quantify whether and to what extent the obligated party is expected to spend money, negotiate changes to the deal, assume liabilities, assume additional undertakings to third parties, or the like, in order to accomplish the stated objective as to which the efforts covenant is being given.  In contract law, contrary to Yoda’s pronouncement, there is a try and it can have teeth—treat it accordingly.


Endnotes    (↵ returns to text)

  1. See Glenn D. West & Susan Y. Chao, Annual Survey of Texas Law:  Corporations, 56 SMU L. Rev. 1395, 1422 n. 202 (2003).
  2. See generally, Lou R. Kling & Eileen T. Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 13.06 (2016).
  3. See generally, Kenneth A. Adams. Understanding “Best Efforts” and its Variants (Including Drafting Recommendations), 50 Prac. Law 11 (2004); Shawn Helms, David Harding & John Phillips, Best Efforts and Endeavours—Case Analysis and Practical Guidance Under U.S. and U.K. Law, Jones Day Publications (July 30, 2007).
  4. Ken Adams, More Misinformation on “Efforts” (And Why I Care About Standards in the Marketplace of Ideas), Jan. 20, 2017, Adams on Contract Drafting.