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Beware the “Best Efforts” Consultants

If you are a business seeking a consultant to assist your company in any number of difficult undertakings, odds are it won’t be long until you encounter the term ‘best efforts’ in an engagement agreement or services contract.  This phrase appears in many contracts for consultants who assist businesses with

(1)  Debt restructuring;

(2)  Identification and reduction of business liabilities;

(3)  Marketing or distribution;

(4)  Identifying and assisting in obtaining investment capital;

(5)  Improving business revenue; and

(6)  Other business services related to efficiency or streamlining your operations;

“Best efforts,” clauses come in all shapes and sizes, but invariably they all contain language indicating that under the terms of the agreement being entered into, the party who’s performance is being sought will use their ‘best efforts’ or ‘reasonable best efforts’ to perform under the terms of the contract.

Why do “Best Efforts” clauses exist?

This is actually a really good question.  Why is there ever a need for one party to provide language indicating that they intend to do their best to perform under the terms of a valid contract?  Let’s remember, of course, that every contract comes with the inherent presumption of “good faith and fair dealing,” which is to say that it is presumed that whenever a contract is formed between two parties, those parties are entering into that contract in good faith, with every intention of performing their obligations under the agreement.  So realistically, what need would there be to insert additional language into a contract that says, in effect, “no really – we are absolutely going to try and perform under this contract.”

The answer to this question, in my eyes, is dissatisfying.  Ultimately, a consultant seeking a “best efforts” clause does so to protect their company from any argument that they did not perform, or reasonably attempt performance, under the terms of their engagement.  Thus, if they are unsuccessful in carrying out their stated objective (be it identifying potential investors or assisting with marketing and revenue increase), or are unable to reach certain performance goals, the consultant will still be able to seek payment for time spent – under the argument that they put forth “best efforts” in attempted performance.

What does “best efforts” really mean?

You may be surprised, and somewhat disappointed, to learn what courts have opined about “best efforts,” clauses when asked to interpret their meaning.  Let’s take a look at two oft cited court cases.  In Hinc v. Lime-O-Sol Co.[1], the seventh circuit stated, “‘Best efforts,’ as commonly understood, means, at the very least, some effort. It certainly does not mean zero effort.”  This is not very reassuring.    In another case, Bloor v. Falstaff Brewing Corp., the second circuit held,  “Under New York law a ‘best efforts’ clause imposes an obligation to act with good faith in light of one’s own capabilities.”[2]  As discussed above, every contract already comes with the inherent presumption of good faith and fair dealing in its formation, so this language further requiring good faith in ones actions appears duplicitous.

While there is a mountain of legal analysis about “best efforts” clauses out there, the examples set forth above should let anyone know just what a slippery slope this area is legally.  Courts have held that “best efforts” mean “some effort” and that they mean “good faith,” which is great, but if you have hired a consultant on a best efforts basis and they have run up a huge bill spinning their wheels – where does that leave you?  Are you stuck paying them?  If they were putting forth some energy – and trying to get things done – then the answer appears to be yes.

Why “Best Efforts” should be a red flag

While there are certainly service providers and consultants out there who enter into ‘best efforts’ contracts with good intentions, and who take care not to abuse their relationship, the bottom line is that anytime you enter into a ‘best efforts’ contract – you are rolling the dice.

Any consultant can take that language as a green light to create the appearance of being busy, bill a lot of hours in the process, and then apologize when things don’t work out and present you with their invoice for time spent.  In such a circumstance, you will be hard pressed to find a legal reason not to pay the amount billed.  If the consultant can show that they were out putting forth effort, regardless of results – then proving that they did not use ‘best efforts’ under their engagement will be very difficult.

What are your Alternatives to Best Efforts?

The next time you are faced with a consultant seeking engagement on a “best efforts” basis, you’d be wise to push back a little.  Remove that language from the engagement in lieu of a more structured and results based contract.  Or, in the alternative, limit the amount of money that the consultant is allowed to bill at any one time before providing you with notice (for example – insert language which requires the consultant to keep you informed on their billings for every $1000 they bill, and which limits the maximum amount they can bill in any one billing cycle).  That way you will know if they are running up a large bill, because you will be getting notices from the consultant often regarding their bill, giving you a chance to determine if the money you are spending is garnering the anticipated results.  By doing this, you will protect yourself from getting an inordinately large invoice unexpectedly, and make the consultant accountable to you for the time they are billing your company.

If, for any reason, a consultant refuses to negotiate on these points – consider that another red flag.  There is no reason why anyone who is ostensibly trying to help your company’s bottom line would be upset with a management team that is results oriented and who responsibly keeps tabs on their financial obligations.  Any consultant who objects to transparency in the relationship likely doesn’t want you to see what they are doing on their end, which is unacceptable.

Ultimately, as your company grows you will likely need to bring on consultants from time to time to assist with various aspects of your business.  Make sure that these consultants result in a net positive for your company, and don’t take advantage of their position to put you in a position of financial hardship.  By refusing to engage on a “best efforts” basis and capping billing (or requiring notice if billing hits certain benchmarks) you can remove any confusion regarding the results you are seeking, and avoid being hit with a giant liability that you can’t afford.

For more information on this subject click here.

[1] 382 F.3d 716, 721 (7th Cir. 2004)

[2] 601 F.2d 609, 613 (2d Cir. 1979)

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