"Best Efforts" versus "Reasonable Efforts" - Is there a difference?

There was a very interesting article in a recent issue of "les Nouvelles" (the Journal of the Licensing Executives Society International). In it, Shawn Helms (a Houston attorney) argues that the idea that a “best efforts” standard in contracts is different from a “reasonable efforts” standard is, at least in front of most courts, false.

Most lawyers (myself included) will try to either obtain or avoid (depending on which side of the contract we are on), a “best efforts” standard for the performance of certain contractual obligations. The theory is based on belief that a “best efforts” standard is one that may be construed by a court as being “extraordinary efforts.”

Mr. Helms’ survey of statutes, cases and literature seems to indicate that this is not the case. He points out, for example that Article 2 of the Uniform Commercial Code (UCC), which establishes the default rules for transactions involving the sale of goods) itself is not immune from confusion between “best efforts” and “reasonable efforts.” (For example, Section 2-306(2) of the UCC indicates that in certain exclusive dealing situations a “best efforts” standard is expected, but the official commentary to the section indicates that is means that the parties are expected to use “a reasonable effort and due diligence” to meet their obligations.)

Courts for their part have tended to view best efforts and reasonable efforts as the same. Thus, a federal district court decision here in Madison, Wisconsin (home of the Federal District Court for the Western District of Wisconsin; incidentally a “rocket docket” for those of you that may be able to take advantage of it) stated that “[t]he duty to use best efforts requires [the party] to use reasonable efforts and due diligence.” Helms cites a 2005 U.S. District court decision from Kansas that indicates that “[b]est efforts does not mean perfection and expectations are only justifiable if they are reasonable” and also cites a case out of the Southern District of New York stating that “New York courts use the term ‘reasonable efforts’ interchangeably with best efforts.” (If you need the citations, drop me a note.)

Not surprisingly, there are cases (Helms mentions two) that have differentiated between the “reasonable” and “best” efforts, but Helms dismisses these cases because neither decision rested on the distinction between the levels or effort nor did either case provide any authority to back up the asserted distinction.

One way to avoid and potential problems with the meaning of these terms is to use them consistently in an Agreement and define them in the Agreement to explain how they are different. It is obviously confusing when both “reasonable” and “best” efforts standards are used and drafter has given no guidance as to what differentiates the standards (often they are used interchangeably, making it impossible to discern the drafter’s intentions). At least if the contract drafter has defined the terms and how they differ, the parties (and if needed, a court) will understand that a real difference in meaning is intended and what that difference is.

Thus, if you really want “best efforts” to mean a higher level of effort than “reasonable efforts,” your contracts should say so. One possible definition that can be used is the following: “Best Efforts” means a greater effort than “reasonable efforts” in terms of doing what is within the party’s power to accomplish the task regardless of the financial obligations this may entail.”

When Substantial Isn't Enough

Your vendor has warranted that it will provide its goods/services "substantially" in accordance with the "specifications/documentation" (as applicable). Sounds pretty good doesn't it.

Generally speaking it is not. Substantial conformance/compliance can be read to mean something akin to a percentage of performance. It implies that the quantity of the performance is more significant than the quality of the performance. A product may perform with 99% of the functionality that you are looking for and yet still be a huge disappointment because it was the missing 1% that you were counting on.

What you are looking for in a warranty is that the goods/services "will performance in all material respects" in accordance with the documentation/specifications (as applicable).

Next: "Best Efforts" versus "Reasonable Efforts" -- Is there really a difference.

Making Your RFP Work Harder for You

So you've gone through the exercise of getting an RFP out to your vendors. You've received the responses and narrowed your choice down to one (or better yet) two vendors. Great, but how do you know that you are actually going to get the functionality indicated in the response to the RFP. If the functionality doesn't exist in a product today (one that has been on the market for a reasonable period of time), you probably don't. But you increase your chances significantly by making the RFP response a part of your contract with the vendor.

Before you do this, make sure the vendor's RFP responses are really responses to the questions you asked. Keep in mind that the people who respond to RFPs for your vendors are experts at camouflaging what they don't want you to know (I like these people, but they like magicians -- very good at misdirection). So if your RFP asks: "Does the Software provide XXX functionality?" The response might be "Yes. It will support this functionality." Of course the answer isn't an answer to the question asked.

Assuming that you have actually received solid and satisfactory answers to the questions you've asked in your RFP, the easiest way (usually) to make the RFP responses a contractual commitment is to add "Response to RFP dated ______, attached to and hereby made a part of this Agreement as Exhibit __" to the definition of "Documentation" in the contract. All sorts of good things can flow from this approach because "Documentation," as a defined term in the Agreement is often the standard against which is measured the performance of the Software. Thus, if you are licensing the Software because of certain functionality you have been told (in the RFP) that the Software has, a warranty that the Software will perform in all material respects in conformance with the Documentation (that now includes the RFP response) brings your specific concerns into the warranty. If your specific concerns aren't in writing in the Agreement (or aren't addressed in the vendor user manuals, etc.), there is usually a clause towards the end of the Agreement that says something to the effect that "if it isn't in writing here, it doesn't count." While that clause doesn't necessarily end the inquiry, it sure makes it harder to argue that the Software you licensed that didn't contain the fuctionality you wanted (but that functionality isn't mentioned anywhere in the Agreement) didn't perform as sold and thus you deserve some kind of remedy.

Next: What's wrong with a warranty that says the Software will perform substantially in accordance with the Documentation?

Question - Good Contract with Questionable Vendor or Less Desireable Contract with More Established Vendor

The dilemma posed above is one that often faces purchasers of IT products and services. There are pros and cons, but the key is for the purchaser to weigh the risks carefully. An excellent contract with all of the remedies in the world will be of small solace if vendor problems abound and (even worse) if the vendor isn't willing or able to meet its contractual commitments. While a less favorable contract with a solid vendor has often appeared to be the better choice, businesses need to remember that times change (once solid companies have changes in personnel, are sold or run into previously unseen problems). The best IT contract is a contract that protects a business' interests without being unduly harsh on the vendor (who, after all, you want to be around working hard for your benefit). Strong IT vendors will often present challenging contracts because they are very protective of their businesses. It is important for the purchaser to know what is reasonable and what is not. It is (in my opinion) reasonable for the vendor to be able to use the IP it creates during the performance if its services for future customers (reasonable parameters on where and how the IP is used are worth negotiating). It is not being unduly harsh to build in reasonable safeguards on performance (e.g., milestones and holdbacks for payment).

One area that is worth carefully evaluating is whether the agreement should contain any "private" statute of limitations (the time period during which actions under the contract can be brought). If there is to be one it, it should ideally begin when a problem is discovered (not starting from the effective date of the agreement) and the existence of the time period must be remembered should problems arise. Very short periods of time (one year or under) are unreasonable and the best practice is to avoid any special times periods if possible.

Some caps on liability are typical, but the caps should take into account the risks involved in the ongoing relationship (vendors who are not offering cutting edge IP or who are not getting access to confidential information are likely to present less risk than other vendors, and limitations of liability are usually of less concern when dealing with those vendors). When a business is purchasing a proven product from a proven vendor (and the business has done all of the due diligence that is reasonable given the nature of the project), it is not unusual for a business to accept greater risk in those contractual relationships.

All of this said, what do you think.

Next: The Value of RFPs

Who Owns Software (or other IP) Developed for Your Company

One of the thorniest issues businesses often face is that they have not properly arranged for ownership of the intellectual property in the software (or a variety of other IP, like brochures, photos, even music) that they paid to have developed. This happens so often, that I decided to post one of my old articles on the subject to this blog to help educate business owners on getting the ownership of IP sorted out early in such situations. I hope you find it helpful: http://wistechnology.com/article.php?id=2194

Welcome to the IT and IP Blog

Welcome to my blog on legal issues related to information technology (IT) and intellectual property (IP). By the way, I AM NOT A PATENT ATTORNEY (though I do know something about patents and licenses for all types of IP, most of my IP "prosecution" work relates to trade secrets, trademarks and copyrights).

The combination of IP and IT may seem a little strange, but intellectual property is what brought me into the world of IT. When I graduated from law school, I knew I wanted to work with intellectual property because in a prior career where I was a marketing manager I had become interested in issues concerning copyrights and trademarks. Fortuitously, in my prior career, I also had hands on IT experience as a “team leader” during a large (and very painful) software implementation of what is now known as an ERP system. I also had a great deal of interest in computers. I had owned personal computers since I bought my first luggable Kaypro (with the CP/M operating system) in the 1980s.

Based on my background, my first law firm quickly decided that I was the person to turn to when software licenses and similar kinds of agreements needed to be drafted, reviewed and negotiated. This is because (1) I could talk the talk with the computer guys, (2) most software licenses implicated copyright issues in some way, and (3) my business background and real world experience gave me a head start in representing clients. This was back in the "old" days (almost pre-Internet) when Mosaic referred to a type of art and, as a gateway to the "Internet," had just barely been disgorged from the bowels of the National Center for Super Computer Applications (see the Wikipedia entry: http://en.wikipedia.org/wiki/Mosaic_(web_browser)).

From day one I approached IT contracts with caution born of experience with what can go wrong during an implementation. After several years of practice, one of my fellow "associates" came up to me one day waving a local bar bulletin that advertised a job that she said "was me." The ad was looking for an in-house corporate counsel to work on drafting and negotiating software licenses and to work on other intellectual property issues. I wasn't actually looking for a job, but the ad indicated the job was paying on a "big city" scale (which is not what I was earning) so I applied.

Somewhat to my surprise (I had a ruptured disk in the midst of this process, which also included – during my first interview – a major adverse reaction to some drugs I was taking for the disk problem), I got the job and headed off to work as in-house counsel for a major vendor of health care-related software. I worked there as corporate and then General Counsel for several years before heading back to private practice. I have thus had the good fortune to see IT implementations from both the real-life customer side as well as from the real life vendor side, which has given me an unusual perspective as an attorney representing clients in the IT world. My clients appreciate my desire as a business person to get the deal done, but also appreciate my desire to take the care needed to make sure the job is done right.

While I truly like working on IT contracts (it takes all kinds in this world), I have kept my fingers in the IP world too. This is partially because IP is always involved in IT transactions and partially because I just like IP (where else can you get the Supreme Court of the United States to opine about Victoria's Secret?(http://www.supremecourtus.gov/opinions/02pdf/01-1015.pdf)).So in this blog you'll be getting occasional comments on noteworthy IP developments along with thoughts on IT issues.

I hope you enjoy this blog and I look forward to learning from and with you.