Contracts often include clauses requiring the parties to exercise their “best efforts” but don’t say what exactly this means. For example, a merger agreement may require parties to use their best efforts to secure all necessary regulatory approvals.
Does a “best efforts” clause require a party to subordinate its interests to the other party or undertake extraordinary efforts to fulfill its obligations? Does a “best efforts” clause establish a fiduciary relationship between the parties? Is a “best efforts” requirement the same as good faith?
In an opinion certified for partial publication last week, the Third District Court of Appeal answered all of these questions. California Pines Property Owners Ass’n v. Pedotti, Cal. Ct. Appeal Case No. C066315 (May 24, 2012) involved lawsuit over a rancher’s contractual obligation to use his “best efforts” to maintain a full reservoir. The plaintiff contended that the “best efforts” clause imposed a fiduciary obligation on the rancher to place the plaintiff’s interest in having a full or mostly full reservoir above the rancher’s interests in watering his crops and stock.
In the published portion of the opinion, the Court of Appeal rejected the plaintiff’s contention; holding that when a contract does not define “best efforts”, the promisor “must use the diligence of a reasonable person under comparable circumstances”. The Court’s opinion includes a number of observations about “best efforts” clauses and their enforcement that will undoubtedly be cited in future litigation, including:
“Best efforts are construed in the context of the circumstances of the particular case.”
“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.”
“Diligence is certainly required, but the obligation is framed within the bounds of reasonableness.”
Finally, the court concluded that a promise to use “best efforts” is different than a promise to act in “good faith”:
Farnsworth [Farnsworth on Contracts] distinguishes the standard of best efforts from that of good faith: “Good faith is a standard that has honesty and fairness at its core and that is imposed on every party to a contract. Best efforts is a standard that has diligence as its essence and is imposed on those contracting parties that have undertaken such performance. The two standards are distinct and . . . best efforts is the more exacting . . . .”