Legal Definitions - best-efforts contract

A best-efforts contract is a type of agreement where one party commits to using their utmost diligence and good faith to achieve a specified objective, rather than guaranteeing that the objective will be met. The obligation is to exert reasonable and diligent effort, typically comparable to what a prudent person in a similar situation would do, to pursue the goal. It focuses on the process and level of effort expended, not on the successful outcome itself.

Here are some examples to illustrate this concept:

• Imagine a small technology startup that hires a marketing agency. The contract states that the agency will use its "best efforts" to increase the startup's brand visibility and drive traffic to its website. This means the agency must diligently develop marketing strategies, execute campaigns, optimize advertisements, and analyze performance data. However, the agency does not guarantee a specific number of new customers or a particular sales revenue increase. If, despite the agency's diligent work, market conditions shift or the product faces unexpected competition, the agency has still fulfilled its contractual obligation by applying its best efforts, even if the desired sales targets are not met.

• Consider a company seeking to raise capital from investors. They engage an investment bank under a "best-efforts" agreement to help them find potential investors and secure funding. The investment bank is obligated to actively market the company to its network, prepare offering documents, and negotiate with interested parties. However, the bank does not guarantee that the full amount of capital will be raised or that any specific number of investors will commit. If the bank diligently pursues all reasonable avenues but cannot secure the desired funding due to broader economic conditions or a lack of investor appetite, they have still met their "best efforts" obligation.

• A pharmaceutical company might license a new drug compound from a university research lab. The licensing agreement could include a clause stating that the pharmaceutical company will use its "best efforts" to develop and commercialize the drug, which involves conducting extensive clinical trials and seeking regulatory approval. This means the company must allocate significant resources, conduct research ethically and thoroughly, and pursue all necessary regulatory steps. If, after diligent effort, the drug fails clinical trials or cannot gain approval due to unforeseen side effects, the company has still honored its "best efforts" commitment, as it was obligated to try its best, not to guarantee the drug's ultimate success.