“Best-efforts” clauses in commercial contracts are not enforceable absent an objectively measurable standard or guideline for determining performance, according to the Court of Appeals for the First District of Texas, which published a March 7 opinion in Spain v. Phoenix Elec. It was the first case in that court to decide the “best-efforts” clause issue within contracts.

Adams and Reese successfully represented Phoenix Electric, Inc. and Houston Metro Electrical Corporation. Evan Moeller, Financial Services - Litigation Team Leader and Houston Partner, served as trial counsel. Aaron McLeod, Litigation Counsel and Appellate Attorney in Birmingham and licensed in Texas, served as Appellate Counsel.

Linda and Barry Spain, as trustees of the Linda and Barry Spain Trust, sold Houston Metro Electrical Corporation (HMEC) to Phoenix Electric, Inc. (the purchasers). Following the business sale, disagreement arose over the amount to be paid to the trustees, and the trustees filed suit. The Spains alleged that Phoenix Electric failed to abide by the agreement to use “best-efforts” in operating HMEC to maximize the payments made to the Trustees.

Phoenix Electric moved for summary judgment, arguing that the “best-efforts” provision of the contract was vague and unenforceable. The trial court – 129th District Court of Harris County – granted summary judgment, dismissed the Trustees' suit, and the Court of Appeals affirmed the trial court’s summary judgment.

The memorandum opinion by Justice April L. Farris included:

“We begin our analysis by agreeing with CKB & Associates that, while best-efforts clauses may be enforceable, the contract nevertheless must “set some kind of goal or guideline against which best-efforts may be measured.” See 809 S.W.2d at 581. The contract at issue here fails to do so ...”

Historically, courts have applied differing standards on best-efforts clauses’ enforceability.

For example, the Texas Supreme Court has recognized contractual “best-efforts” clauses present a “multitude of thorny issues” regarding interpretation and enforceability (Vizant Techs., 576 S.W.3d at 369 n.12). Also, the Texas Supreme Court has not ruled on the general enforceability of “best-efforts” clauses in actions for breach of contract. See Herrmann Holdings Ltd. v. Lucent Techs. Inc., 302 F.3d 552, 558–59 (5th Cir. 2002) (making Erie guess absent controlling Texas Supreme Court precedent); W. Power, Inc. v. TransAmerican Power Prods., Inc., 2018 WL 1697122, at *3 (S.D. Tex. Apr. 6, 12 2018) (continuing to rely on Texas intermediate court authority absent controlling Texas Supreme Court authority).

Therefore, given this recent Appeals Court’s decision, businesses should bear in mind that in any Texas contract – if a business wants a “best-efforts”, “reasonable efforts”, or the like clause to be enforced – the business should include language to set some standard against which judges and juries can objectively measure a party’s actions later. A reasonable period of time to get something done, for example, or “best-efforts” to get it done, might be explained as “in any event no later than” some specified date or future event that will occur at a given time.

Justice Farris concluded:

“The language of the best-efforts provision itself does not provide a goal or guideline against which a court can measure whether Phoenix Electric used its best-efforts to maximize Earn-Out Payments to the Trustees. ...”