The “Best Efforts” Contract Clause: Exactly How Much Effort is Best?

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It is quite common to see best efforts clauses in many different kinds of contracts. A party may be required to use its best efforts to market a product in a licensing, distribution or franchise agreement. In a merger agreement, one or both parties may have to use their best efforts to obtain shareholder or regulatory approval. Similarly, buy-sell agreements often require the parties to use their best efforts to conclude the agreement. These clauses are standard terms in all kinds of contracts, but rarely is it defined what constitutes such “best” efforts. Exactly how much effort does a party have to make and how much do they have to spend in order to meet their obligations under such a provision?

A recent case in California provided some practical guidance on the meaning of best efforts. In a contract between a homeowners association (the plaintiff) and a rancher (defendant), the rancher was contractually obligated to use his best efforts to keep a reservoir full. Typically, “best efforts” was not defined in the contract. Plaintiff sued claiming that best efforts meant the rancher had a contractual fiduciary duty (a higher standard) to keep that reservoir full or mostly full, even if it came at the expense of the rancher watering his crops and livestock.

The court held that:

• “best efforts” creates an obligation to use the diligence of a reasonable person under comparable circumstances;
• the level of diligence required is framed within the bounds of reasonableness; and that
• best efforts are to be construed in the context of the circumstances of the particular case.

Just as importantly, the court held that best efforts do not mean every conceivable effort where the promisor is required to ignore its own interests, spend itself into bankruptcy, or incur substantial losses to perform its contractual obligations.

A best efforts clause serves an important purpose and is a key term in many contracts.  While it is preferable to define what best efforts means in the contract that may not always be feasible or practical.  In the absence of a contractual definition, the court’s ruling provides some practical guidelines on just how much effort will be deemed “best.”

California Pines Property Owners Ass’n v. Pedotti, Cal. Ct. Appeal Case No. C066315 (May 24, 2012)