By Susan C. Levy, Clay Stiffler & Rayna Matczak
Parties to a contract often use the phrase "best efforts" where they cannot control all of the factors that will affect the likelihood of a desired result, and where they cannot guarantee the accomplishment of an undertaking.
Given those circumstances, "best efforts" may be as close to a guarantee as a careful contractor is willing to give. However, courts are far from clear, and sometimes contradictory, as to the meaning of "best efforts."
Unfortunately, using "best efforts" language in a contract has often proven to be a trap.
One party may find himself required to perform more work than anticipated in order to achieve "best efforts," while the other party to the contract may find herself receiving less performance than anticipated.
This article addresses the meaning of "best efforts" provisions, its inherent uncertainties, recent court efforts to apply and define best efforts provisions, and what parties can do to prevent uncertainty and future litigation over the phrase.
Court rulings
In the benchmark opinion, Bloor v. Falstaff Brewing Corp., the 2nd Circuit held that Falstaff had breached its agreement to use its best efforts to promote and sell plaintiff's beer because Falstaff's promotion and sales policy had deteriorated to, in the words of a Falstaff executive, "We sell beer, F.O.B. the brewery. You come and get it." 601 F.2d 609, 613 (2d Cir. 1979).
After Bloor, courts held that a total lack of efforts amounts to a violation of the clause. See, e.g., Hinc v. Lime-O-Sol Co., 382 F.3d 716, 721 (7th Cir. 2004) ("'Best efforts,' as commonly understood, means, at the very least, some effort. It certainly does not mean zero effort.").
Although the law is far from clear as to the meaning of best efforts, courts generally find that "best efforts" requires a party to use good faith and reasonable diligence in light of the party's own existing capabilities. See Bloor v. 601 F.2d at 613 n.7. ("[U]nder New York law a 'best efforts' clause imposes an obligation to act with good faith in light of one's own capabilities.").
Nevertheless, not every case is predictable. Courts analyzing best efforts cases have produced a cornucopia of terminology, making it difficult to predict what standard a court will use should litigation arise.
For example, "the verbal formulae that courts use when applying a 'best efforts' obligation often confuse rather than clarify. Those formulae include: 'due diligence'; 'all reasonable methods'; 'reasonable efforts'; 'good faith business judgment'; 'genuine effort'; and 'active exploitation in good faith.'" Ashokan Water Servs., Inc. v. New Start, LLC, 807 N.Y.S.2d 550, 555 (2006) (citations omitted).
Despite the inconsistency in case law regarding the meaning of best efforts, most courts have refused to find the clauses impermissibly vague and unenforceable. See, e.g., Hinc, 382 F.3d at 721 (best efforts clauses are indefinite, but not so vague to be unenforceable). By using a best efforts clause, parties on both sides of the bargaining table subject themselves to the additional risks and potential unforeseen pitfalls that plague best efforts litigation.
Below are four potential dangers of using a best efforts clause.
Unanticipated comparisons
By promising to use its best efforts, a party may be unknowingly promising to maintain a quality of performance equal to its industry peers.
The capabilities of other third parties may be introduced as evidence to assist in determining whether a promisor has breached its best efforts promise. Carlson Dist. Co. v. Salt Lake Brewing Co., L.C., 95 P.3d 1171, 1178-79 (Utah App. 2004) ("Best efforts" is a subjective standard, but evidence of the actions of capabilities of others might be relevant.).
A court might also look to an entire industry for comparison. McKinley Allsopp, Inc. v. Jetborne Int'l, Inc., No. 89 Civ. 1489 (PNL), 1990 WL 138959, at *7 (S.D.N.Y. Sept. 19, 1990) ("the efforts expended by McKinley were not in conformity with the understandings prevailing in the investment banking community regarding a 'best efforts' undertaking").
Increased trial risks and expenses
The risk of an expensive trial is increased because the murky nature of the clause generally demands a factual determination as to its meaning. See, e.g., United Telecomm v. Am. Television & Comm. Corp., 536 F.2d 1310, 1319 (10th Cir. 1976) ("Both parties had introduced evidence bearing on the negotiations and the meaning intended for the term 'best efforts.' When the interpretation is in dispute as is was here, it is a question for the jury.")
Trial is especially risky when a best efforts clause is involved because parties may find themselves at the mercy of a judge or jury who has the advantage of hindsight. First Union Nat'l Bank v. Steele Software Syst. Corp., 145 Md. App. 175, 177, 838 A.2d 404, 450 (2003) (affirming $37 million award as a proper "determination by the jury, after the fact, of what level of business would have resulted" had best efforts clause not been breached).
A best efforts clause also gives the court an opportunity to come up with an idea of what, in hindsight, a better "best effort" would have looked like. Salovaara v. Eckert, No. MRS C-29-94, 1998 WL 34075425, at *13 (N.J. Super. Ch. July 14, 1998) ("If Eckert became convinced that continued fund raising [for the partnership] was not a good idea he should have encouraged the Partnership to rethink its position, not just walk away from the effort.").
Inability to act in one's own best interests
Promising to use one's best efforts for the sake of another party can impact the promisor's ability to exercise its usual business judgment or act in its own best interests. For example, in Bloor the court held that because of its best efforts obligation, Falstaff was not allowed to emphasize its own self interest above all else "without fair consideration of the effect on Ballantine volume." 601 F.2d at 614.
However, the promisor need not act entirely in the other party's interest, take actions to its detriment, or otherwise make futile gestures in order to satisfy its best efforts obligations. See, e.g., LTV Aerospace and Defense Co. v. Thomson-CSF, S.A. & VT Missile Co. 198 B.R. 848, 858 (S.D.N.Y. 1996) (best efforts obligation does not require "futile gestures" or "activity harmful to [defendant's] own interests").
Whether a promisor has done enough in the other party's interest to satisfy its best efforts obligations depends on the circumstances of the individual case, and it will be up to the trier of fact to determine whether those efforts were sufficient.
Decreased opportunities
Best efforts clauses in licensing and marketing agreements are often interpreted as imposing an element of exclusivity preventing the promisor from expending efforts on the behalf of others. PRC Realty Sys. v. Nat'l Assoc. of Realtors, 972 F.2d 341 (Table), Nos. 91-1125, 91-1143, 1992 WL 183682, at *9 (4th Cir. Aug. 4, 1992) (unpublished) ("No party can provide best efforts to promote the business of two separate and competing parties."). In other words, a promise to use one's best efforts to market one product may, in effect, prevent the promisor from marketing other products, including the promisor's own products.
Conclusion
Parties who use "best efforts" clauses run the risk of injecting a significant amount of uncertainty into their contracts. Counsel should carefully scrutinize all contracts using "best efforts" language to determine whether more precise language can be used.
If "best efforts" is appropriate under the circumstances, counsel should define in the contract what best efforts mean under the circumstances of that particular case.
Susan C. Levy is a partner in the Chicago office of Jenner & Block LLP. She is a member of the firm’s litigation department, as well as the firm’s arbitration, business litigation, government contracts, and insurance litigation and counseling practices.
Clay Stiffler is a partner in the Chicago office of Jenner & Block LLP. He is a member of the firm’s litigation department.
Rayna Matczak is an associate in the Chicago office of Jenner & Block LLP. She is a member of the firm’s litigation department.
January 2008 / MWIH
