What’s the difference between “best efforts” and “reasonable commercial efforts”?

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This morning, as I was contemplating what to write about for today's article, I received an email from a client who red lined an offer from a health plan for the new Medicaid Managed Care initiative in Illinois. It seems the payer did not want to accept the proposed revision to change from "use best efforts" to "use reasonable commercial efforts".

The two may sound very similar, but they aren't.

For one thing, the difference in the language can become a source of a dispute after the contract is implemented. Dispute resolution usually costs money and someone wins and someone loses, based on the decision of an arbiter (or a panel of three arbiters) not present when the deal was originally negotiated.

In my managed care master classes and workshops, I discuss this often contentious topic and describe how the language of best efforts and its variants works, how you can get into trouble if you don't fully appreciate the risks of using best efforts and its variants when not defined in the contract; and how courts or arbiters go about determining whether a party has made the required efforts. Even then, people who have taken the course with me are still not completely comfortable with their grasp of the subtle difference - until something goes sideways.

When a party to a contract (usually a payer) provides in a contract that your clinic, hospital or service is subject to an efforts standard, that standard should be defined in writing as to what sort of actions would satisfy that requirement.  The word "best" being a superlative, is where the problem originates. It is defined as an adverb meaning "to the highest degree; most". Where does it end? That's the crux of the matter.

Contracts impose an efforts standard in connection with many different obligations, such as an obligation to cause a payment to be made, or to fill in a form for credentialing and privileging, to bill only the amount allowed in the contract fee schedule and not send out balance bills, or to maintain insurance, or to be open for business according to a schedule, or to comply with laws, regulations and contract terms, for example. When accomplishing a certain goal might be at the care and control of a physician, and not entirely within a hospital or ambulatory surgery center's control, the hospital or ambulatory surgery would generally not be willing to enter into a contract that makes it the hospital's or ambulatory surgery's absolute duty to accomplish that goal—because doing so would pose undue risk of future liability for nonperformance. How far would the hospital be expected to make such efforts? Well probably, no more than another reasonably prudent hospital or ambulatory surgery center anyplace else in the community. In such situations, the parties might instead agree that the hospital or ambulatory surgery is to use best efforts, or some other level of effort, to accomplish that goal. In healthcare, doctors practice medicine within the bricks and mortar of the facility. But when the two are contracted jointly,  an efforts standard that a court could impose might be interpreted as requiring that the promisor actually achieve a specific result. Since bricks and mortar do not "practice medicine" the more appropriate choice of language would be "use reasonable commercial efforts".

While "best efforts" is commonly encountered in managed care agreements, use commercially reasonable efforts, reasonable best efforts, and reasonable efforts are, in the aggregate more so than best efforts. Good-faith efforts, commercially reasonable best efforts, and diligent efforts are encountered less frequently, while good-faith best efforts, every effort, and an oddity, commercially reasonable and diligent efforts, are also encountered in many documents. Since medicine is not an exact science, however and sometimes the party signing the contract is not actually "practicing medicine". Best efforts as a superlative without limitation is problematic. How "best" is best?

It may surprise you to learn that the conventional wisdom among corporate lawyers is that best efforts is the most onerous of the efforts standards—because the contract drafter is putting the the hospital or healthcare provider in a position that they are expected and required to do everything in its power to accomplish the goal, even if it bankrupts itself in the process. If the drafter can make a case that they didn't, then in the dispute, the arbiter can award damages for any breach caused by the lack of reaching "best" efforts and specific performance of accomplishing the goal.

The courts have interpreted this differently in past cases. The case law, however, paints a different picture. Courts have not required that a party under a duty to use best efforts to accomplish a given goal make every conceivable effort to do so, regardless of the detriment to it. 

A deal struck in good faith has honesty and transparency at its core. While good faith is defined as "A state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage”, many times, the court has held that good faith and "best efforts" are different. The net effect of the “best efforts” clause at issue in managed care agreements is “to expand extra-contractual damages beyond a mere good faith requirement”, and there's case law to support this position. So if you are just starting out in a relationship with a payer, don't you want to color the relationship and the expectations clearly rather than let the courts or arbiters decide later on? That's too much of a crap shoot for my comfort. Especially given the potential cost for the damages that could be awarded.

That's why I prefer, as an alternative to a good faith standard, or a best efforts standard, that the contract be modified to reflect a reasonableness standard using a reasonableness test. I view the term best efforts as extravagant, and don't want my clients exposed to this additional risk on general principle.

When the rubber meets the road in a dispute, how will the courts or the arbiter determine whether or not the provider has made sufficient effort? I was trained that if a word or phrase is capable of having two or more inconsistent meanings, it is ambiguous; if instead it does not have a precise meaning—which is the case with efforts terms—then it is vague. The result of this vagueness is that determining whether a party has made sufficient efforts necessarily depends on the circumstances of the case, with all the uncertainty that entails. Best efforts “cannot be defined in terms of a fixed formula; it varies with the facts and that's too risky for me when the risk could be further mitigated by a different expectation or standard that compares one's acts to the efforts that might be made by one's peers.

In the absence of any benchmark by which to measure best efforts,  a requirement that a hospital or facility use efforts to accomplish a contract goal would likely be balanced against the broader constraints faced by the promisor in conducting the business that is the subject of the contract.  In agreeing to use best efforts, the last thing you want is to compromise your right to exercise sound business judgment. Without such balancing, the hospital or ASC the could be forced to expend sufficient resources as to render the contract uneconomic, which is often a reason for "termination for cause". A look at typical contract language in the contract reads,

(PHO or Health Plan may terminate this Agreement at any time for cause. Cause for termination includes the following:

... a.   Enactment of state or federal legislation or amendment by either party which renders this Agreement illegal or which significantly decreases the value of continuing this Agreement for either party; )

The circumstances of a case may lead a court or arbiter to reject such balancing depending on the context of the matter. Another context that poses a risk of a court holding that a hospital or ambulatory surgery center was required to make what may seem like disproportionate efforts is when an efforts provision applies to only a discrete aspect of a business relationship, making it perhaps less obvious that one is to balance the required efforts against the benefits to the facility under that relationship, or how one is to do so. especially when it might mean controlling doctors' professional acts in treating a patient. You credential, you do privileging, you have quality and safety policies and procedures, but when the scalpel is in his or her hand, control goes out the window.

The final kicker. This client is in Illinois. Courts in most jurisdictions have held that efforts provisions are enforceable. The principal exception is Illinois courts, which have held that a promise to use best efforts is too vague to be binding if the parties fail to indicate what performance the phrase requires. So should my client push back on the refusal to modify from best efforts to reasonable commercial efforts. That's their call. It depends on how much risk with a new contracting partner they wish to endure.

Want to know when my next contracting workshop or Master Class will take place? Visit my website at MariaTodd.com to check the calendar.

 

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