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CALIFORNIA CORPORATE & SECURITIES LAW

Best Efforts – A California Perspective

UCLA Law School Professor Stephen Bainbridge posted some thoughts yesterday on the meaning of contractual “best efforts” requirements.  See What do “best efforts” and variants mean? A proposed set of definitions.  The springboard for Professor Bainbridge’s piece was the Delaware Supreme Court’s recent decision in Williams Cos. v. Energy Transfer Equity, L.P., 2017 Del. LEXIS 128 (Del. Mar. 23, 2017).  California courts have also had to struggle with the meaning of “best efforts”.  In California Pines Property Owners Assn. v. Pedotti, 206 Cal. App. 4th 384 (2012), the Court of Appeal made the following observations:

  • “Courts have held that a best efforts clause, without more, does not create a fiduciary relationship. (Olympia Hotels Corp. v. Johnson Wax Development Corp. (7th Cir. 1990) 908 F.2d 1363, 1374; O’Hearn v. Bodyonics, Ltd. (E.D.N.Y. 1998) 22 F.Supp.2d 7, 12.”
  • “[B]est 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 [sic] 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.”
  • [A] promise to use ‘best’ efforts is different than a promise to act in ‘good faith'”.

These don’t actually define “best efforts” but they do provide at least a few firm guidelines for analysis.  First, they tell us two things that aren’t necessarily the same as best efforts: a fiduciary relationship and good faith.  Second, we can conclude that in California courts are likely to approach the question contextually both in terms of the circumstances and the other provisions of the contract.  This contextual approach is likely to make the question of good faith a question of fact (which will have procedural and other implications for the litigants).  Finally, best efforts do not require unreasonable efforts.

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