Aligning Foreign Investment Approvals with Joint Venture Closing Conditions
Cross-border joint venture agreements must tie closing mechanics directly to sovereign regulatory clearance timelines using explicit efforts caps and break fees.
Efforts Standard
Meaning
A contractual benchmark used to define the level of diligence and resource commitment required of a party in fulfilling an obligation does not guarantee a specific outcome. Incorporating an efforts standard into a transaction agreement allows the parties to allocate risk when the achievement of a goal, such as obtaining regulatory approval, depends on third parties or external factors. It establishes a measurable expectation of how hard a party must work to accomplish the task, protecting the performing party from being in breach if the goal remains unmet despite their diligent attempts.
Contractual Hierarchy
The terminology chosen by the parties defines the intensity of the obligation, ranging from reasonable efforts to best efforts. A best efforts standard is the most demanding, requiring the performing party to take all possible steps that a prudent and determined person would take, even if it incurs substantial cost. In contrast, a reasonable efforts standard is more balanced, requiring the party to act in a commercially sensible manner without being forced to exhaust all resources or compromise its own financial health.
Practical Application
In major transactions, the selected efforts standard is applied to tasks like securing antitrust clearance or satisfying conditions precedent. For example, if a seller must use reasonable endeavors to obtain a landlord’s consent for a lease transfer, they must make a timely application and provide the necessary documents. If they do so and the landlord still refuses, they have met the standard and are not liable for the failure to transfer the lease.
In contrast, if the contract demanded a best efforts standard, the seller might be required to appeal a negative decision or offer financial guarantees to the landlord to secure the consent, illustrating how the choice of standard directly alters the required financial and operational commitment of the performing party.
Dispute Resolution
Courts and tribunals evaluate compliance with this benchmark by looking at the actions of similarly situated businesses in the same industry. Because the term can be subjective, dispute resolution in these cases requires a detailed examination of the correspondence, board minutes and internal reports of the performing party. This analysis helps determine whether the party acted with the required level of diligence or if they abandoned their obligations too early when difficulties arose.