best efforts, good faith and fair dealing in...
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Presenting a live 90-minute webinar with interactive Q&A
Best Efforts, Good Faith and Fair Dealing
in Commercial Contracts: Drafting and
Interpretation Challenges Avoiding Enforceability Pitfalls With Clear and Measurable Performance Standards
Today’s faculty features:
TUESDAY, JULY 21, 2015
Rebekah R. Conroy, Partner, Brown Moskowitz & Kallen, P.C., Summit, N.J.
Tammi Franke, Partner, Fitzgerald Franke & Hewes, Chicago
Brendan M. McNallen, Esq., Reed Smith, San Francisco
Zachary R. Gates, Esq., Burns & Levinson, Boston
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Tammi K. Franke
Fitzgerald, Franke & Hewes LLP
Best Efforts, Good Faith and Fair Dealing
in Commercial Contracts Drafting and Interpretation Challenges
July 21, 2015
No Legal Advice or Attorney-Client Relationship: This document was prepared by Fitzgerald, Franke & Hewes, LLP (FF&H) for informational purposes and is not legal
advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. You should not act upon this information without
seeking advice from a lawyer licensed in your own state or country.
Background on Efforts Clauses
Standard Feature of Contracts
Confusion About the Actual Meaning
Contention During Negotiation
Disputes after Contract Execution
Variety of Contracts and Situations
Used When the Accomplishment of a Goal is not Within the Control of a Party
Party is not Obligated to Accomplish the Goal, but rather use its “Best Efforts”
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Variety is the Spice of Life
Best Efforts Commercially
Reasonable Efforts Reasonable Best
Efforts Reasonable Efforts
Good Faith Efforts Commercially Reasonable Best Efforts
Diligent Efforts Good-Faith Best Efforts
Every Effort Commercially Reasonable and Diligent Efforts
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Sample Effort Clauses – Employee Duties
Employment Agreement
During the Employment Term, the
Employee shall devote the Employee’s
full business time, attention, skill and
energy pursuant to the terms of this
Agreement to the business and affairs
of the Company and, to the extent
necessary to discharge the
responsibilities assigned to the
Employee hereunder, to use the
Employee's best efforts to perform
faithfully and efficiently such
responsibilities in a diligent, trustworthy
and businesslike manner so as to
advance the interests of the Company.
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Sample Effort Clauses – Required Consents
Asset Purchase Agreement
If any of the Purchased Assets
require the consent of a third
party for transfer or assignment
to Buyer, such consent has not
been obtained prior to the
Closing, and the Closing takes
place without delivery of such
consent, the Seller will use
commercially reasonable efforts
to obtain such consent (or, if
requested by Buyer, to assist
Buyer in obtaining) as soon as is
practicable following the Closing.
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Sample Effort Clauses – Audit Clause
Pick, Pack and Ship Agreement
Supplier shall provide
commercially reasonable
best efforts in facilitating
any examination or audit,
including making its
facilities, relevant records,
and relevant employees
available to examiners.
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Sample Effort Clauses – Dispute Resolution
Limited Liability Company Operating Agreement
In the event of any dispute
between the parties with respect
to any matter covered by this
Agreement, the parties shall first
use their best efforts to resolve
such dispute among themselves.
If the parties are unable to
resolve the dispute within thirty
(30) calendar days after the
commencement of efforts to
resolve the dispute, the dispute
will be submitted to arbitration in
accordance with Section 12.3.
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Sample Effort Clauses – Anti Virus Warranty
Mobile App License
Licensor represents, warrants
and covenants that the App(s)
and any Content, material or
services made available in such
App(s) shall be free from
Viruses, and it shall use
commercially reasonable efforts
(of at least a level and quality
generally accepted in the
industry) to prevent Viruses from
being coded or introduced into
the infrastructure of Licensee.
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Sample Effort Clauses – Industry Standard Definition
Master Services Agreement
“Industry Standard” means a
standard: (1) publically
acknowledged and actually used
or adopted by a substantial
number of companies working
with comparable information; (2)
prescribed for use by an industry
standards body or group; or (3)
publically assessed before use
by recognized experts in the field
as acceptable and reasonable.
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What is required of parties to satisfy “best efforts”?
July 21, 2015
Presented by:
Brendan McNallen
Frequently Cited Case – Fifth Circuit
Triple-A Baseball Club Associates v. Northeastern Baseball, Inc., 832 F.2d 214 (1987)
Plaintiff triple-A baseball team owner and defendant double-A baseball team owner
entered into a series of agreements whereby each of them would sell its baseball team to the
other. The sale of the double-A team was subject to the consent of the Eastern League, the
governing league for the team. Both parties agreed to use their best efforts to obtain Eastern
League approval of the sale. The Eastern League refused to approve the sale of the double-A
team, except through a relinquishment of the rights in the team to the Eastern League. In
response to the disapproval, defendant offered certain financial accommodations to induce
the Eastern League to permit the sale to plaintiff, which the Eastern League rejected.
Defendant did not inquire fully about how the Eastern League directors felt about the sale prior
to seeking approval, did not seek formal National Association review of whether the Eastern
League had rights over the territory in question, or examine whether the Eastern League could
in fact demand relinquishment. Despite the shortcomings, the Court held that no cases have
held best efforts means using every conceivable effort and that defendant did use its best
efforts.
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“Best Efforts” Standards – California
• A best efforts clause, without more, does not create a fiduciary relationship.
• Best efforts are construed in the context of the circumstances in a particular case. When
a contract does not define the phrase “best efforts,” the promisor must use the diligence of
a reasonable person under comparable circumstances.
• A best efforts clause must be reconciled with other clauses in the contract to the extent
possible.
• Best efforts does not mean every conceivable effort. It does not require the promisor to
ignore its own interests, spend itself into bankruptcy, or incur substantial losses to perform
its contractual obligations. Rather, it requires a party to make such efforts as are
reasonable in light of that party's ability and the means at its disposal and of the other
party's justifiable expectations.
California Pines Property Owners Assn. v. Pedotti, 206 Cal.App.4th 384, 394-95 (2012)
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Case Law – California
• Gilmore v. Hoffman, 123 Cal.App.3d 313 (1954): Plaintiff tenant cotton farmer entered into a lease agreement with defendant landowners
whereby, if a water pump failed, landowners would use their best efforts to deepen the well, lower the pump, or do such other things as may be
necessary to increase the water supply. When the pump failed, landowners attempted to fix it three times before ultimately drilling a new well and
providing water approximately seven weeks after the pump initially failed. The Court held the landowners did not use their best efforts because,
as experienced cotton people who knew the ample amount of water cotton needs, they should have dug a new well immediately following the
pump failure.
• Midland Pacific Building Corp. v. King, 157 Cal.App.4th 264 (2007): Plaintiff buyer entered into a contract with defendant seller for the sale of
an undeveloped tract of land. Sellers would be compensated, in part, based on the number of single family lots ultimately zoned on the tract.
Sellers agreed to use their best efforts to obtain approval by the City of a low-density tract map. However, sellers instead sought and obtained
approval for a high-density tract map. The Court held seller did not use best efforts to obtain approval of a low-density tract map by promoting a
high-density map.
• Samica Enters., LLC v. Mail Boxes Etc. USA, Inc., 637 F. Supp. 2d 712 (2008): Plaintiff franchisees entered into an agreement with defendant
franchisor, whereby franchisor agreed to use its best efforts to ensure that its affiliate (UPS) would give franchisees discounts and incentives.
Franchisor had several discussions with UPS, made numerous requests for discounts and incentives and suggested to UPS a simplified pricing
structure. The franchisor obtained franchisees the best discounts and incentives of any shipping supply store. The agreement expressly provided
that UPS may in its sole and absolute discretion modify the discounts and incentives offered to the franchisees. The Court held the franchisor
used its best efforts based on the agreement terms, defendant’s ability, and plaintiff’s expectations. Moreover, the outcome would not have been
any different if the franchisor exerted greater effort.
• California Pines Property Owners Assn. v. Pedotti, 206 Cal.App.4th 384 (2012): Plaintiff property owners association had a water storage
agreement with defendant rancher, whereby rancher agreed to use its best efforts to maintain the water level of a reservoir of stored ranch water
to enhance the aesthetic value of the waterfront homes adjacent to his ranch. The property owners association contended that in 2006 through
2008, the rancher did not use best efforts to maintain the water level by taking more water than reasonably permitted under the agreement and
failing to apply the water to beneficial use (including using it for flood irrigation, using open ditch canals and irrigating with livestock in the field).
Through examination of expert testimony, the Court held the rancher used his best efforts because he used the diligence of a reasonable person
under comparable circumstances. The best efforts clause did not create a fiduciary duty and did not require the rancher to place the association’s
interest above his own.
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“Best Efforts” Standards – New York
• Best efforts requires greater care and diligence than the ordinary care and diligence.
• Best efforts requires more than good faith.
• A promisor may be found to have breached a duty to use best efforts, even if it has not
breached the implied duty of fair dealing.
• Best efforts can only be defined contextually.
• The best efforts obligation requires such efforts as are reasonable in the light of that
party's ability and the means at its disposal and of the other party's justifiable
expectations.
Ashokan Water Servs., Inc., v. New Start, LLC, 11 Misc. 3d 686, 691-92 (2006)
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Case Law – New York
• Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publishing Co., 30 N.Y. 2d 34 (1972): Plaintiff author entered into a contract with defendant publisher whereby publisher agreed to use its best efforts in promotion of author’s books on electronics. After three high-selling editions, publisher unsuccessfully sought to reduce the royalties that it paid to author on the fourth edition. The publisher then hired writers to prepare a new set of electronics books with the same layout and information as author’s books and for which publisher would pay substantially lower royalties (3% vs. 15%). Publisher advertised the new books, while suspending advertisement of the author’s works. The Court found a narrow breach of best efforts. Although the publisher has the right to publish competing works and incidentally lessen an author’s royalties, there is a point where that activity is “so manifestly harmful” that it constitutes a breach of the best efforts covenant.
• Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2nd Cir. 1979): Plaintiff brewery (“Ballantine”) entered into an agreement with defendant brewery (“Falstaff”) for the sale of the Ballantine brewing labels, trademarks, accounts receivable, distribution systems and assets other than the brewery itself, for consideration tied, in part, to a royalty payment on future sales of Ballantine label beer. In the purchase agreement, Falstaff, the buyer, agreed to us its best efforts to promote and maintain a high volume of sales of Ballantine’s beer. Having lost $22 million in the first three years of ownership (1972-1975), and facing the peril of potential insolvency, Falstaff heavily decreased the marketing budget for Ballantine beer, resulting in a heavy reduction in sales. The decreased expenses stemmed the tide of losses for Falstaff overall, but the Ballantine label continued to see decreased sales through 1976. In an opinion drafted by Judge Friendly, the Court held that, even given Falstaff’s right to give reasonable consideration to its own interest, it breached its duty to use best efforts because it did not at least explore other options that could have alleviated the rate of decline in Ballantine’s sales once the peril of insolvency had been averted. While the best efforts clause did not require Falstaff to spend itself into bankruptcy to promote the sales of Ballantine products, it did prevent the application of a philosophy of emphasizing profit without “fair consideration” of the effect on Ballantine’s volume. Once it was established that Falstaff simply didn’t care about Ballantine’s value and was content to allow the sales to plummet so long as that course was best for Falstaff’s overall profit, the “burden then shifted to Fals taff to prove there was nothing significant it could have done to promote Ballantine sales that would not have been financially disastrous.”
• Vestron, Inc. v. National Geographic Soc., 750 F. Supp. 586 (S.D. NY 1990): Plaintiff video program distributor and defendant National Geographic Society entered into an agreement, whereby distributor agreed to use “best efforts to promote the manufacture, sale, distribution, and exploration of [National Geographic’s] programs” in certain international markets. The agreement expressly permitted subdistribution. When distributor encountered financial trouble that caused it to close its international operations, distributor entered into subdistribution contracts that reduced the royalties that National Geographic Society would receive. The Court held the distributor did not breach the best efforts clause because it simply made reasonable marketing decisions permitted by the agreement in light of the resource constraints. In contrast to Bloor, the Court held that the distributor did not enter into the subdistribution agreements in order to promote a competing product.
• Town of Roxbury v. Rodrigues, 277 A.D. 2d 866 (2000): Plaintiff town entered into a contract to purchase property from defendant seller whereby the town was required to use its best efforts to comply with all requirements for the sale of the property. Plaintiff’s town board unanimously passed the resolution authorizing the sale, but town residents ultimately defeated the sale through a referendum. The Court held the town exercised its best efforts because the board approved the resolutions and there is no proof that the town did not continue to support the resolution.
• Ashokan Water Servs., Inc., v. New Start, LLC, 11 Misc. 3d 686 (2006): Plaintiff auditor entered into a contract with defendant property owner, whereby auditor agreed to use its best efforts to bring about savings to the owner with regard to the property owner’s utility bills. Auditor inspected the property, reviewed the Department of Environmental Protection account records, analyzed the data, demonstrated that Department of Environmental Protection over-billed property owner and obtained a refund on overpaid amounts on behalf of the property owner. The Court held the auditor’s actions amounted to best efforts.
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“Best Efforts” Standards – Illinois
• A best efforts undertaking has been likened to the exercise of good faith implied in all
contracts.
• The obligation to use one’s best efforts on behalf of another does not require the obligor to
ignore its own interests.
• The question of whether a party has satisfied its best efforts or good faith obligations is a
factual one, dependent upon the nature of the undertaking for which the best efforts
commitment has been made.
Grant v. Board of Educ., 282 Ill. App. 3d 1011, 1024-25 (1996)
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Case Law – Illinois
• Leonard v. Koval, 187 Ill. App. 3d 924 (1989): Plaintiff seller entered into an agreement
to sell an airplane hangar to defendant buyer. The agreement required the buyer use his
best efforts to obtain a zoning ordinance variance to allow for expansion of the hangar,
which would increase the purchase price. Buyer filed an application for the variance
initially with the wrong tribunal and, following submission of the application to the correct
board, made numerous requests for continuances, did not comply with the board’s
suggestions, was unprepared, and sought a variance in excess of what the agreement
required. The Court held the buyer did not use his best efforts because of these errors.
• Klemp v. Hergott Group, 267 Ill. App. 3d 574 (1994): Plaintiff seller entered into a real
estate contract with defendant purchasers, whereby purchasers agreed to use their best
efforts to obtain a rezoning classification. Purchasers filed an application with the City
Council to change the zoning, but the Council unanimously denied the request. The Court
held the purchasers were not required to appeal the City Council decision in order
establish best efforts since the contract unambiguously required purchasers to seek
rezoning only until a final decision of the City Council.
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“Best Efforts” Standards – Delaware
• To the extent that an act was both commercially reasonable and advisable to enhance the
likelihood of consummation of the financing, the onus is on the party to take that act. To
the extent the party deliberately chose not to act, but instead pursued another path
designed to avoid the consummation of the financing, that party knowingly and
intentionally breach its covenant to use its best efforts.
Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 749 (2008)
23
Case Law – Delaware
• Alliance Data Sys. Corp. v. Blackstone Capital Partners V L.P., 963 A.2d 746 (Del. Ch. 2009): Plaintiff (“ADS”) entered into a merger agreement with defendant (“Aladdin”), whereby Aladdin, an acquisition vehicle owned by the Blackstone Group, agreed to acquire ADS. The agreement required Aladdin to use reasonable best efforts to obtain the approval the Office of the Comptroller of the Current (“OCC”), a federal agency, as a condition to the sale. Throughout months of negotiations, the OCC consistently requested that Blackstone Group provide financial assurances to preserve the capital and liquidity of Aladdin, which Aladdin refused. The Court found for the defendant because the plain language of the agreement only called for the Aladdin’s best effort to obtain OCC approval, which did not require causing its parent to provide such financial accommodations.
• Wavedivision Holdings, LLC v. Millennium Digital Media Sys., L.L.C., 2010 Del. Ch. LEXIS 194 (2010): Plaintiff buyers entered into an asset purchase agreement with defendant sellers, which required sellers to use reasonable best efforts to obtain the consent of its lenders to the sale. Sellers did not respond quickly to its senior lenders’ comments on the consent documents, waited two weeks to respond to a notice of non-consent received from its bondholders, made no efforts, and concealed efforts of one senior lender to acquire its outstanding debt from the other lenders in order to block the transaction. Moreover, sellers used most of their energy and resources helping to develop an alternative to the sale. The Court held the sellers did not use reasonable best efforts to secure the consent of its lenders given that it actively pursued a course of action that made the lenders’ consent less likely.
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Contact Details
25
Brendan McNallen
Email: [email protected]
Telephone: 415 659 5648
• Brendan McNallen is an associate in the Energy & Natural Resources Group of
the firm’s San Francisco office. His practice focuses on project development and
finance in the energy generation, energy storage, transmission and distribution,
infrastructure and natural resources sectors, with a specific focus on renewable
energy.
• Brendan represents developers, manufacturers, underwriters and lenders on the
development and financing of wind, solar, geothermal and biofuel energy, as well
as combined-cycle natural gas and other conventional energy projects. He has
advised on energy projects throughout the United States and abroad (including
Europe, the Middle East, Mexico and Canada) totaling thousands of megawatts of
electrical capacity.
burnslev.com
Judicial Consideration Of Efforts
Provisions Under The Covenant Of
Good Faith And Fair Dealing
Zachary R. Gates
July 21, 2015
Efforts Provisions Considered
• “Best Efforts”
• “Reasonable Best Efforts”
• “Commercially Reasonable Efforts”
• “Commercially Reasonable Best Efforts”
A Set Of Considerations
• Does your jurisdiction recognize breach of an
implied covenant of good faith and fair dealing
as a separate claim?
• Does it is a separate claim, would it be
precluded by the language of the contract?
• If not precluded, how will your court interpret
each of these potential formulations of a duty?
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“Best Efforts”
29
Best Western, Int’l, Inc. v. Furber,
Case No. 06-cv-1537, 2008 U.S. Dist. LEXIS 70552
(D. Ariz. Sept. 5, 2008)
“Best Efforts” – A Cautionary Tale
• “BWI's rules and regulations require members "to use their best efforts to
maintain positive relationships with customers and solicit return business.
BWI contends that Defendants have breached their implied covenant of
good faith and fair dealing by posting allegedly tortious statements on the
Freewrites.net website. BWI cites two sections of the rules and regulations
in support of this contention: §§ 500.15 and 500.27. Section 500.15
requires members to "permit inspection" of their hotels. Section 500.27
requires members to provide "[e]fficient, courteous and high quality
services[.]" Id. at 13. BWI does not explain how the operation of the
website has "impair[ed] the right of [BWI] to receive the benefits
which flow from [§§ 500.15 and 500.27]." Rawlings v. Apodaca, 151
Ariz. 149, 726 P.2d 565, 569 (Ariz. 1986). BWI does not contend that
Defendants have frustrated efforts to inspect their hotels. Nor has BWI
presented evidence showing that Defendants have provided poor service to
their customers. The Court will grant summary judgment in favor of
Defendants with respect to count three.” Id. at *10-11 (emphasis added).
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“Best Efforts” – NY Law
• Morris v. Putnam Berkley, Inc., 259 A.D.2d 425, 687 N.Y.S.2d 139, 140 (N.Y.A.D.
1 Dept., 1999) (“Since the contract called for plaintiff to be compensated, in large
measure, by royalties . . ., the court properly found an implied promise on
defendant's part to use its best efforts . . . and, accordingly, that defendant's
decision not to market or distribute . . . could constitute a breach of an implied
covenant of good faith and fair dealing.”)
• Kroboth v. Brent, 215 A.D.2d 813, 625 N.Y.S.2d 748, 749-750 (3d Dep't 1995)
(“‘best efforts’ requires more than ‘good faith, which is an implied covenant in all
contracts . . . ‘Best efforts’ requires that plaintiffs pursue all reasonable methods for
obtaining subdivision approval . . . , and whether such obligation has been fulfilled
will almost invariably, as here, involve a question of fact”)
• Chabria v. EDO Western Corp., 2009 U.S. Dist. LEXIS 27078, *33 (S.D. Ohio
Mar. 30, 2009) (applying New York law and granting summary judgment to
defendant on plaintiff’s breach of contract claims; “implication of a best efforts
duty does not require slavish devotion to the marketing of the line, especially in
light of the continued and unanticipated monetary losses and low sales. Reasonable
efforts does not require every possible effort, to the detriment of one's own interests
or finances”)
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Treatment of “Best Efforts”
As Fact-Intensive
• Richard Parks Corrosion Tech Inc. v. Plas-Pak Indus., Case No.
3:10-cv-00437-WWE, 2014 U.S. Dist. LEXIS 40569 (D. Conn.
Mar. 27, 2014) (denying defendant summary judgment on its
counterclaim for breach of the implied covenant of good faith and
fair dealing; “issues of fact remain in dispute regarding . . . whether
plaintiff used its best efforts as required”)
• Weco Supply Co. v. Sherwin-Williams Co., 1:10-cv-00171, 2012
U.S. Dist. LEXIS 73255, *34 (E.D. Cal. May 25, 2012 (applying
Ohio law, denying plaintiff’s motion for summary judgment on its
implied covenant claim, for reasons including that there was “a
genuine issue of material fact as to whether Weco used ‘best efforts’
to perform its contractual obligations”)
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“Best Efforts”
• And yet another treatment: • Am. Inst. for Preventative Med., Inc. v. OakstonePubl’g, LLC,
Case No. 09-cv-11195, 2010 U.S. Dist. LEXIS 19968 (E.D.
Mich. Mar. 5, 2010) (observing that “‘best efforts’ and ‘good
faith’ duties are legally distinct concepts,” but denying
summary judgment on breach of contract claim in part because
“a duty to employ best efforts may be implied by law”)
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“Reasonable Best Efforts”
• Seen sometimes in Delaware cases.
• Alliance Data Sys. Corp. v. Blackstone Capital
Partners V L.P., 963 A.2d 746 (Del. Ch. Jan. 15,
2009)
• Wavedivision Holdings, LLC v. Millennium Digital
Media Sys., L.L.C., 2010 Del. Ch. LEXIS 194
(Sept. 17, 2010)
• Narrowstep, Inc. v. Onstream Media Corp., 2010
Del. Ch. LEXIS 250 (Dec. 22, 2010)
34
“Commercially Reasonable Efforts”
• Charlotte Broadcasting, LLC v. Davis
Broadcasting of Atlanta, L.L.C., 2015 Del.
Super. LEXIS 303 (Del. Super. June 10, 2015)
• Eastwood Ins. Servs. v. Titan Auto Ins. Of
N.M., Inc., 469 Fed. Appx. 596 (9th Cir. Feb.
27, 2012) (unpublished)
• Citrilite Co. v. Cott Beverages, Inc., 721
F.Supp.2d 912 (E.D. Cal. 2010)
35
“Commercially Reasonable Best Efforts”
• A familiar result in Fortis Advisors LLC v.
Dialog Semiconductor PLC, 2015 Del. Ch.
LEXIS 22 (Jan. 30, 2015) • “The Merger Agreement, however, expressly imposed on Dialog the
obligation to use "commercially reasonable best efforts to . . . achieve and
pay the Earn-Out Payments in full.” Thus, the Merger Agreement sets a
contractual standard by which to evaluate if Dialog's failure to achieve and
pay the earn-out payments in its operation of the Power Conversion
Business Group was improper. There is no gap in the Merger Agreement to
fill in this regard. Stated more generally, Count III must be dismissed
because Fortis has failed to identify any "interstitial space in which the
doctrine of the implied covenant might operate” regarding any of the six
actions or failures of Dialog that Fortis challenges in this action.”
36
REBEKAH R. CONROY PARTNER BROWN MOSKOWITZ & KALLEN, P.C. 973-376-0909 [email protected]
Map Your Contract
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What is your goal?
What acts/conditions will are you seeing to control with your “best efforts” clause? ◦ Examples:
Increased sales—how much? by what percentage?
How was a task done—were new ways to increase sales tried? Are you looking for an innovative approach?
Are there other benchmarks to work off of?
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Opportunity to Cure ◦ How critical is the “best efforts” clause to your
contract?
◦ Will notice be required if Company A feels Company B is not using its “best efforts”
Bear in mind, that the parties will not be obligated to perform any greater a duty than contained in the contract, so be sure your contract contains all the structure needed to impose the conduct you seek.
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Be Specific and Be Realistic
41
Be as specific as possible.
The broader the clause, the more discretion exists to find the parties did or did not act with their best efforts.
Use language that reflects the industry your client is in
Best practices vs. Acceptable industry practices
Fewer companies adhere to “best practices” as opposed to “acceptable industry practices”
A good starting point– will an industry expert be able to objectively define what my client seeks through the “best efforts” clause
Don’t bite off more than you plan to chew
“reasonable commercial judgment”
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Bear in mind, the court is not going to substitute its business judgment for the parties:
Non-Linear Trading Co. v. Braddis Assocs. 243 A.D.2d 107, 675 N.Y.S.2d 5 (NY App. Div. 1998)– dismissing complaint and finding best efforts clause unenforceable as indefinite where there were “no objective means by which a motion court or trier of fact can determine whether defendant has breached the Agreement. . . a court could not intervene without imposing its own conception of what the parties should or might have undertaken rather than confining itself to a bargain to which they have mutually committed themselves”)
Polestar inquiry: what are the objective benchmarks your client wants to hit or avoid?
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“Best efforts’ . . . cannot mean everything possible under the sun.” Coady Corp. v. Toyota Motor Distrib., 361 F.3d 50, 59 (1st Cir. 2004) ◦ “Best efforts” clause is not going ensure that any
agreement becomes the Messiah for your client.
◦ Statements made during contract negotiations may become relevant to explain an ambiguous “best efforts” clause. Stone v. Caroselli, 653 P.2d 754, 757 (Colo. Ct. App. 1982)
45
How did the promisor perform in other agreements with the same or a similar obligation? ◦ Olympia Hotels Corp. v. Johnson Wax Dev. Corp.,
908 F. 2d 1363 (7th Cir. 1990)
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Use objective criteria for what will satisfy best efforts obligations—does not need to be sophisticated to be upheld ◦ Muka v. Estate of Muka, 164 Ill.App.3d 223, 115
Ill.Dec. 262, 517 N.E.2d 673 (1987)-- Stephen Muka agreed to transfer to Chris Muka $1,000,000 worth of stock provided that Chris worked "reasonably hard & [sic] smart at things in the next year.“ The court upheld the provision and found that the objective standard applied.
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◦ What are some key terms to address:
Allocation/spending of money
Incurring expenses
Incurring liabilities
Time to be spent on various tasks
Desire for new business strategy (or maintain current business strategy)
Disposing of assets
Incurring litigation
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◦ If wiggle room needed:
“among other things”
“reasonable commercial judgment”
“standard practices”
◦ If difficult to come up with benchmarks:
Look at industry reports
Consult with experts prior to drafting the contract, or with regard to the job description
Find Statistics
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