Making the Best of a Best Efforts Clause

Divining the Meaning of "Best Efforts"

By Jonathan Pink

A "best efforts" clause must be one of the most misunderstood provisions to consistently worm its way into an agreement. To put such a claim to the empirical test, take a moment to define for yourself what is required by a party who promises to use best efforts to fulfill a contract obligation.

OK, have you given it your best effort?

A common assumption is that "best efforts" means exercising the highest level of duty required. In some cases, this isn't far off. For example, when the best efforts obligation is coupled with an exclusive agreement, the level of diligence is akin to a fiduciary obligation. (See Daniel J. Coplan, When Is "Best Efforts" Really "Best Efforts": An Analysis of the Obligation to Exploit in Entertainment Licensing Agreements, an Overview of How the Term "Best Efforts" Has Been Construed in Litigation, 31 Sw. U. L. Rev. 725 (2002).)

As you already know, a fiduciary obligation is the highest duty found in the law, comparable to what an attorney owes a client or a doctor owes a patient. (See Stanley v. Richmond, 35 Cal. App. 4th 1070 (1995).)

But what happens when a contract is not exclusive?

Consider this example: The year is 1992. Aside from being a really bad year in music, this is the year then-Federal Reserve Board Chairman Alan Greenspan testifies that the economy should pick up "within weeks." IBM introduces a digital tape–based computer data-storage business to handle vast storehouses of corporate information. And predictions of a reelection victory for the first President Bush are evaporating as unemployment rises.

With personal computers in their relative infancy, you enter into a services agreement to distribute software designed to allow companies to print their own checks and invoices with the push of a button—or maybe two. Your agreement with the software manufacturer does not contain an exclusivity requirement, but it does require you to use your "best efforts" to market and promote the manufacturer's software within a defined territory.

You sell the software for several years before advances in technology make the product less desirable. Customers demand the ability to email information and make their own revisions to the preprogrammed data contained on the software. And your competitors are offering products with these very features.

At this point, you beg the manufacturer to create a product with these add-ons, but to no avail. The manufacturer simply claims customers don't need those features, and maintains that it's your job to educate them about this.

In truth, the customers don't want educating. They want email. If your product doesn't contain it, they will buy from someone else. You don't want to violate the best efforts provision, but you also don't want to go out of business. You could use the software to print a bunch of checks to you from the manufacturer and then retire to the Bahamas. But that's another hypothetical.

Instead, you decide to split the difference: offering a competitor's product while continuing to promote the manufacturer's product to customers who will buy it. Unfortunately, as sales of the manufacturer's product plummet, the manufacturer decides to sue you. According to the manufacturer, you could not have used your best efforts if you were also selling a product made by its competitor.

INTERPRETING "BEST EFFORTS"

Whether you are in actual legal breach of your agreement depends on what is required of a party who promises to use its best efforts. Your answer might be: doing everything in your power to achieve the contract's objective.

Statutory requirements. Though your interpretation may sound reasonable, it is also true that every contract already contains an implied covenant of good faith and fair dealing. (See RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981): "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.") If best efforts means nothing more than this, why include the clause at all? Such obtuse redundancy does nothing to increase the contract's clarity.

Moreover, the presence of a best efforts clause can't convert a nonexclusive agreement into an exclusive one. Statutory controls also require that the court interpret the best efforts clause consistently with the general intent of the agreement. Thus, to avoid any repugnancy, one may not insert an exclusivity obligation into a best efforts clause if doing so would render repugnant the nonexclusive nature of the agreement. (See Cal. Civ. Code § 1652: "Repugnancy in a contract must be reconciled, if possible, by such an interpretation as will give some effect to the repugnant clauses, subordinate to the general intent and purpose of the whole contract.")

Contractual language.

The next lawyerly instinct you might have is to look at the letter of the agreement to discern exactly what you are required to do under the best efforts clause. Unfortunately for you, all it says is that you are required to use your best efforts to market and promote what is now an outdated product. It gives no indication about how those efforts will be measured. (Hey, you want "easy," then read People.)

Case law.

Grasping at straws, you look at the case law. (People is looking more attractive by the second.) This doesn't help much. Surfing through the dusty tomes now memorialized on the Internet, you find that the law discussing the level of diligence required by a party who promised to use its best efforts is almost as unsettled as you feel right about now.

Some courts have defined best efforts by comparing it to other recognized diligence standards. For example, in National Data Payment Systems, Inc. v. Meridian Bank, the court held: "The duty of best efforts 'has diligence as its essence' and is 'more exacting' than the usual contractual duty of good faith." (212 F.3d 849 at 854 (2000).)

And United Telecommunications, Inc. v. American Television & Communications Corp. (536 F.2d 1310 (1976)) held that, as between commercial parties, a best efforts clause is intended to impose a duty beyond a good faith, duly diligent performance of the contract. Hardly the clear-cut rule of law that tells you whether you are in breach of your agreement. (It would be a lot easier to become a celebrity and read about yourself in People.)

Nearing desperation in your research efforts, you reach out to find the unpublished decision of Krinsky v. Long Beach Wings (2002 Cal. App. Unpub. LEXIS 9026) and digest its ruling. In construing best efforts, the court in that case observed that "the plain meaning of the term denotes efforts more than usual or even merely reasonable."

Code provisions.

Throwing the case holdings aside, you read the Uniform Commercial Code. It requires "best efforts" by a seller in an agreement for exclusive dealing unless "otherwise agreed," and defines the elusive term no more precisely than a "more rigorous standard than 'good faith.' " (2 CORBIN ON CONTRACTS (REV. ED. 1995) § 6.5, p. 246 (discussing U.C.C. § 2-306, subdivision (2).)

Think these legal kingpins took a pass? Consider this: At least one court has held that determining whether a party has made sufficient efforts under a best efforts clause necessarily depends on "the factual circumstances" surrounding the agreement. (Martin v. Monumental Life Ins. Co., 240 F.3d 223 at 233 (2001).)

I don't know about you, but this tells me nothing. This court spent hours reviewing briefs and researching case law only to conclude that it couldn't define the term, but it knows it when it sees it.

At least when it considered the issue earlier, the court in Triple-A Baseball Club Associates v. Northwestern Baseball, Inc. came clean and held that best efforts "cannot be defined in terms of a fixed formula; it varies with the facts and the field of law involved." (832 F.2d 214 at 225 (1987).) Still, this translates to little more than "it depends."

Some courts have looked retrospectively and compared the efforts exerted in past dealings—when the efforts were not questioned—with the purportedly inadequate efforts giving rise to the current claim for breach of the best efforts obligation. (See Olympia Hotels Corp. v. Johnson Wax Dev. Corp., 908 F.2d 1363, 1373 (1990).) That does provide something of a measuring stick. But what do you do when the circumstances have changed? In the example about entering the software- distribution agreement with the manufacturer, recall that you sold the product pre-isoquantic shift—before email, before Google, and before YouTube. Is it really fair to compare your sales in that era to sales in a whole new world, when customers are demanding features that did not even exist when you entered into the agreement?

To put the issue in stark contrast, imagine that you entered the agreement in 1962, and that it required you to sell rotary phones. If the year is now 2008 and everyone but a few Luddites down the street have cell phones, can you really be faulted for throwing up your hands and offering those too—especially if they're the hands-free models?

This injection of reality highlights another benchmark courts have considered. The "standard industry practice" has served as a gauge for determining whether efforts are sufficiently "best" to defeat a claim for breach. (See Zilg v. Prentice-Hall, 717 F.2d 671, 681 (1983), cert denied, 466 U.S. 938 (1983), finding that the defendant's efforts were "perfectly adequate," although the defendant did not follow through as well as he might have.) But this assumes that industry standards can be identified.

PRACTICAL POINTERS

Before you chuck this article altogether and pick up one that gives you some information that's really useful—Is Brad leaving Angelina and getting back together with Jen? Is Angelina dumping Brad and getting together with Jen?—here's the point: Because of the uncertainty surrounding the legal effect of a best efforts promise, the best approach appears to be treating these clauses as unenforceable if they lack any objectively measurable standards. (See Pinnacle Books, Inc. v. Harlequin Enter. Ltd., 519 F. Supp. 118, 12122 (1981): absent an objective criteria by which to measure performance, "best efforts" clauses are so vague as to be unenforceable; Jillcy Film Enter., Inc. v. Home Box Office, Inc., 593 F. Supp. 515, 520–21 (1984) (accord).)

In Pinnacle Books, an author granted his publisher an option to renew the parties' contract for a series of books. The agreement provided, however, that if after extending their best efforts, the parties were unable to reach an agreement, the author would be free to offer his rights in these books to any other publisher. The court held that this best efforts clause was unenforceable because its terms were too vague.

Specifically, it held: " 'Best efforts' or similar clauses, like any other contractual agreement, must set forth in definite and certain terms every material element of the contemplated bargain." And also: "Essential to the enforcement of a 'best efforts' clause is a clear set of guidelines against which the parties' 'best efforts' may be measured." (519 F. Supp. at 121.)

Furthering this end, the court noted: "Unless the parties delineate in the contract objective standards by which their efforts are to be measured, the very nature of contract negotiations renders it impossible to determine whether the parties have used their 'best' efforts. ... Thus, absent express standards, a court cannot decide that one party's offer does not constitute its best efforts; nor can it say that the other party's refusal to accept certain terms does not constitute its best efforts." (519 F. Supp. at 122.)

This isn't hard: All it means is that if the parties are intent on including a best efforts clause, they must clearly define for themselves within the body of the agreement precisely what this means and how it will be measured. They need to set guidelines a court can use to determine what was required by the promisor and whether those requirements were met.

In the case of your agreement to sell software, for example, the contract might have included a requirement that you offer those products, explain their features, and wait for the customer to expressly ask for another product before you offer one. It might require that you offer the manufacturer's product to 100 prospective customers per month, or at least to as many as you offer any competitive product. As long as the agreement contains some objective standards, it would allow for a clear determination of breach.

But without any measurable standards, the parties and the trier of fact are left to wonder what was meant by the term best efforts. Standing alone, its meaning is nebulous and its enforceability tenuous. This is risky business: It subjects one party to a claim for breach for having failed to perform to a level it never intended—and would never have agreed to—and subjects the other party to losing the benefit of a promise for which it thought it had bargained.

When it comes to contractual provisions, no one benefits by being left to guess at what was meant by the words on the page. A best efforts clause must expressly state what is meant by this term—and most important, how to measure compliance.

Building such clarity into a contract requires the use of your prefrontal cortex. You must carefully consider how the contract language will play out in real life and whether it is sufficiently clear to allow a third party to decipher precisely what is required. Does the contract set forth milestones or benchmarks by which compliance with the best efforts provision will be measured? Does it take into account potential future changes in the marketplace or in technology that may not be foreseen at the time of contracting?

Your agreement may also benefit from a provision that allows for a periodic reassessment of how best efforts is defined and measured, especially if it relates to software or advanced technology. A clearly understandable and objectively measurable best efforts clause will likely make any litigation that ensues less cumbersome—and thus less expensive. It might even keep the parties out of court, which will save them a bundle.

Now, if you have understood all of this, you're -ready to tackle People or even the Weekly World News. Oh wait, that closed down. Gee, don't you wonder whether the publisher really used its best efforts to keep it going?

Jonathan Pink is co-vice chair of the Intellectual Property Group at Lewis Brisbois Bisgaard & Smith, and is located in the firm's Orange County office.