David Ziff on doing your (legal) bestBy http://profile.typepad.com/6p0167692fcc76970b // August 13, 2012 in Guest Posts, Legal Docs
Introductory note from Bill: Ken Adams, this post is for you. When you started explicating obscure caselaw references at the drop of a Disqus comment, I knew I had to call in a big gun.
Bill Carleton pointed me to the comments section on this post regarding "best efforts" clauses, "commercially reasonable efforts" clauses, and the differences (if any) between them. At the outset, I agree with Bill that a "commercially reasonable efforts" clause is preferable to a "best efforts" clause -- even if courts tend to interpret the clauses the same. Why? Well, as a general matter, plain language is always preferable in my book. If what you mean is "commercially reasonable efforts" then just use "commercially reasonable efforts" rather than use a term of art that says something else but is generally understood to mean the same thing.
The general rule in favor of plain language has specific advantages here. (1) Judges are sometimes wrong! How easy for a plaintiff argue the following against your client, the defendant: Other contracts say "reasonable," this contract says "best," and if the defendant wanted to say "reasonable" he could have used reasonable. Look! The word "reasonable" is used in X other places in the contract! I would not be surprised at all for that argument to have some chance of success, especially if "reasonable" is used elsewhere in the contract. (2) Why risk a claim of unilateral mistake or some sort of failure of meeting of the minds. How do you know the other side understands that "best" means "reasonable"? As the lawyer, you can confirm with your own client, but what about the other side? Are you going to have a conversation with the other side to confirm that you both mean "reasonable" when you say "best"? And if you're having that conversation, goodness, why not just write "reasonable" in the first place? It seems a bit silly.
That's all well and good, but things get more interesting in the comments. Ken Adams (of Koncision Contract Automation, and the author of A Manual of Style for Contract Drafting, among other pursuits) weighs in on a couple points. First, he notes that courts interpret all "efforts" clauses the same -- "best," "reasonable," "commercially reasonable," etc. That's my general understanding as well. I did some research but I could not find any case where the court distinguished between the clauses. That is, I couldn't find an example of a court saying, "Well, this is a 'reasonable efforts' clause, not a 'best efforts' clause, so the defendants actions were sufficient for compliance." Nor could I find an example of a court distinguishing prior precedent by saying, "Well, that case involved 'best efforts' but this is just a 'reasonable efforts' case."
Which brings us to Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir. 1979), a nifty little Second Circuit case about best efforts. In the comments, Bill asked Ken about Bloor and how it related to the best/reasonable distinction. (At least, I assume that's what the point was, because Bloor is a "best efforts" case and -- as we'll see later -- the opinion could be read as setting a somewhat onerous definition of "best" that might go beyond "reasonable.") Ken responded that Bloor "doesn't say what people think it says." I must admit that, having never heard of Bloor or discussed it with anyone else (maybe I read it in law school or came across it studying for the NY bar?), I have no idea what people think Bloor says. So perhaps I'm at a disadvantage here. But I know what I think it says, which I guess is something.
Ken says that Bloor stands "for the proposition that U.S. courts haven't required that a party under a duty to use best efforts to accomplish a specific goal make every conceivable effort to do so." And indeed, that is what the court says. The relevant "best efforts" clause "did not require Falstaff to spend itself into bankruptcy to promote the sales."
But if one were to read this case as a basic run-of-the-mill "best efforts" case I can see the confusion. Here's a basic (incomplete) outline of the facts: A beer company was losing a ton of money. The owners sold the company to Falstaff in exchange for (1) cash and (2) a percentage of future sales. The contract required Falstaff to use "best efforts" to sell beer. But remember that the company was losing HUGE amounts of money when Falstaff bought it. Falstaff rejiggered the company, spent less on advertising, lowered expenses, and sales went down, but as a result Falstaff made a profit! Good for Falstaff! Certainly, the contract did not obligate Falstaff to run the company at a loss, all so Seller could get its percentage payments, right? Seller, however, was obviously not happy because the reduction in sales resulted in a reduction in the Seller's percentage take. So Seller sued for breach of the "best efforts" clause. The court concluded that Falstaff did indeed breach the "best efforts" clause, even though Seller continued to sell beer while making business decisions that turned a sink hole company into a profitable company.
It would be easy to read the case as requiring "best efforts" even when those efforts are to a party's (serious?) commercial detriment. (Perhaps that is what people think the case means?) But I think that would be a mistake for a couple of reasons. The less interesting reason first: The case needs to be read in light of the court's factual findings. The trial court did not find, as a matter of fact, that Falstaff could not have turned a profit without lowering sales, or that Falstaff's consideration of profit over sales constituted a breach of the contract. Rather, the trial court essentially found that Falstaff engaged various sorts of trickery and malfeasance to structure the company in a way that minimized the required percentage payments to the Sellers and to therefore maximize its own profit. As the court found: "Falstaff simply didn't care about [Seller's] volume and was content to allow this to plummet." Well, that's no good. That's not "best effort" or "reasonable effort"; that's no effort. I don't think any party would argue that a "best efforts" clause could be satisfied with no effort. Importantly, once Seller showed that Falstaff made no effort, the burden was on Falstaff to prove why it couldn't have done differently, or some sort of impossibility or whatever. The point is, Seller didn't have to come up with what efforts Seller could/should have made. Seller failed; that was enough.
But here, I think, is the more interesting reason for the court's holding: Most "best efforts" clauses are of the sort that require best efforts to sell something. Try to sell it! Make a reasonable effort! However that is not what the clause here required. I intentionally sort of fudged that above (sorry!) to allow for more confusion. Rather, the clause stated: “After the Closing Date the (Buyer) will use its best efforts to promote and maintain a high volume of sales . . . .” (emphasis added). So two important points. (1) Falstaff was obligated to use its best efforts (or reasonable efforts) not just to sell the beer, but to sell a high volume of beer. (2) How do we know what a "high volume" is? Well, the goal is to maintain the volume from the pre-sale era. That was a lot of beer. And since it was a historical amount, it was an amount both parties knew! In other words, they understood what levels of sales "maintain" meant. By referencing the maintenance of the normal historical "high volume" of sales, and by setting a per-volume percentage payment, the contract allows the Seller to have some idea, based on passed sales, about the level of percentage payments it could expect over the course of the contract. That amount was no doubt reflected in the payment price. Generic "best efforts" clauses are a bit squishy. But "best efforts" tied to a historical sales number that both parties recognize -- that's a more tangible expectation and something that, I'd imagine, courts are more likely to enforce than the squishier version.
Some final/additional thoughts:
"Best efforts"-type clauses come up in two situations: (a) express clauses, and (b) implied obligations based on requirements contracts. I wonder whether courts interpret these two obligations the same? I don't see why they should, but I tend to think that they do. For example, Bloor itself cites to the New York case of Feld v. Henry S. Levy & Sons, Inc., which involved a requirements contract for the sale of goods under the UCC and the resulting implied "best efforts" obligation. It seems strange to me that an obligation implied by law by a requirements contract would be interpreted the same as an express written obligation agreed upon by two sophisticated entities in the sale of a company.
This is especially true in a state like Washington (and New York!) that implies a duty of good faith and fair dealing onto every term in a contract. This implied duty of good faith is a (not THE) source of the implied "best efforts" obligation in a requirement contract. But that implied duty of good faith would equally attach to the percentage payment provision of the sales contract in Bloor. Wouldn't it be a violation of the percentage provision, as viewed through the good faith obligation, to structure the company in a way that minimized the payments to the Seller? I would think so. And if so, then what extra work is the "best efforts" clause doing? Anything? Shouldn't we interpret the written "best efforts" or "reasonable efforts" clause to be something more than the already-existing implied duty of good faith? I would think the law would want to avoid that sort of redundancy.
There is another reason to view implied obligations (from requirements contracts) differently than express "best efforts" clauses: consideration. Washington courts may be wary to imply a "best efforts" obligation unless such an implication is necessary to save the contract for lack of consideration.See, e.g., Oliver v. Flow Int'l Corp., 137 Wn. App. 655, 661 (2006) (refusing to imply obligation to sell/patent/make despite royalty terms because contract was supported by other consideration). In a requirements contract, for example, the implied "efforts" are the only consideration supporting the contract. Therefore, shouldn't the implied obligation be extremely minimal? Perhaps the peppercorn of efforts? That doesn't seem to be what courts do, but why not? It seems like a bargained-for expressed "best effort" or "commercially reasonable" effort would be higher than the effort necessary to supply consideration to a contract. Wouldn't a promise to do a shoddy, slow, and late job on something be sufficient consideration? Then why imply more? I wonder how much of the implied obligation in the requirements setting is (a) guessing at the intent of the parties, (b) providing consideration, (c) re-writing the contract to what the court considers fair.
But all that is just to say that implied "best efforts" obligations, implied "good faith" obligations, and express "efforts" obligations of any kind all seem to have different justifications. It seems to me like they all get interpreted the same, though I'm not sure why that should be so.
Photo: James Hall / Flickr.