Best Efforts And Other Undertakings: What Do They Mean?

In many financing transactions, the day of closing arrives and it becomes clear that certain documents are not yet available or certain conditions precedent have not yet been satisfied. Whereas in many cases, the lender might simply delay funding until all conditions have been met, often neither the lender nor the borrower have control over the closing date. For example, when a borrower is using loan proceeds to complete a purchase transaction, the agreement of purchase and sale will govern the closing date and the seller may not be willing to grant an extension and the borrower could lose the deal.

In situations like this, a borrower may offer a post-closing undertaking to bridge the gap for some unavailable deliveries so that the scheduled closing date can be met. While lenders may not be keen on the idea, especially considering they lose much of their leverage when the advance is made, undertakings are often the compromise that gets everyone over the finish line. For those deliveries that are not completely within the control of the borrower, the undertakings will typically be couched in terms of the use of 'best efforts' or 'commercially reasonable efforts' to produce the outstanding deliveries or to make something happen. In agreeing to accept such undertakings, it is important for lenders to understand what those 'efforts' actually entail.

In short, 'best efforts' means something more than 'commercially reasonable efforts'. It signifies that the lender intends to hold the borrower to a higher standard in its endeavours to track down and deliver the post-closing items. In order to discharge their duty under a 'best efforts' undertaking, a borrower must take, "in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned."1However, while it imposes a higher standard than 'commercially reasonable efforts', keep in mind that a 'best efforts' undertaking is, of course, not a simple covenant. 'Best efforts' does not mean that the borrower must do everything possible; it is contextual, depending on the particular undertaking, its purpose, and the understanding between the parties.2 'Best efforts' does not require the borrower to sacrifice itself totally to the economic interests of the lender in chasing down the outstanding delivery, although the interests of the lender must predominate.3 'Best efforts' has also been enunciated as "[making] a genuine and substantial...