Best Efforts Clauses

“BEST EFFORTS” CLAUSES

IVAN HOFFMAN, B.A., J.D.

Here is the situation: 2 or more parties enter into a written agreement in which 1 or more of the parties is required to perform certain acts in the future during the duration of the agreement. This type agreement can be:

1. an author-publisher agreement in which the publisher says or implies that it will market the book;
2. a distribution agreement that says or implies that the distributor will promote and distribute the book (and not merely take orders that come in);
3. an agency agreement in which the agent says or implies that it will seek deals for a client;
4. a web design or development agreement in which the designer or developer agrees to market and promote a site; or
5. any number of other agreements related to any number of other business transactions.

The question in all such instances is: how can the agreement be structured to make the performance requirements sound, meaningful and most significantly, legally enforceable. If a clause in an agreement is determined to be vague, the clause, or in the worst case scenario, the entire agreement can be held to be unenforceable. When parties simply cut and paste from forms containing these provisions, somehow in the belief that they understand what the provisions mean or that the provisions are not “important,” the parties may find that the money they “save” is later spent, many times over, in attorneys fees or damages. Or both! Here is a Hoffmanism, a legal maxim, you should remember: It never matters…until it matters…and then it matters!

In General

Clauses in agreements should be drafted with as much specificity as possible. Precision in contract drafting is in the best interests of all parties to the agreement since the last thing any party should want is to have to resort to litigation and have a court or jury interpret an agreement. An agreement should be drafted so that the only interpretation is the interpretation sought by the drafter of the agreement. Read “Precise Contract Language.” Thus, when an agreement contains uncertain phrases, it only invites claims, disputes and in the worst case scenario, litigation. In order to sufficiently be able to claim and in turn prove that a party breached a performance clause, the more concrete the standards for performance the better the case.

On the other hand, often a party who is to perform will not want box itself in too tightly and will try to make the language less precise so as give itself some “wiggle room” in the event it fails to fully perform.

One Example

A case from the Seventh Circuit Court of Appeals discusses some of these issues. In Hinc vs. Lime-O-Sol Company, the plaintiff Hinc sued for breach of contract based on a clause in the agreement that read:

This is a ‘best efforts’ agreement on the part of Lime-O-Sol and Thomas P. Hinc to market such product in a manner that seems appropriate.

Hinc developed a product that was to be used in the paint manufacturing industry to prevent discoloration. In the words of the Court:

Hinc mixed different ingredients and tested them on stains, eventually finding one that worked. Hinc’s product, which he named Less Work Painted Surface Stain Remover (“Stain Remover”), combined a certain proportion of a secret ingredient with a shower-cleaning product manufactured by LOS (“Shower Cleaner”).

For simplicity sake (there were issues in the case dealing with federal subject matter jurisdiction and choice of law that I will not discuss in this article), the parties eventually entered into a written agreement that contained the above clause, among other provisions. The Court stated:

The contract provided that while Hinc would retain ownership of the secret ingredient, he would divulge it to LOS. LOS would produce and distribute Stain Remover while keeping Hinc’s secret ingredient confidential. Hinc would receive $10 per gallon sold. Without discussion between the parties as to its meaning, the contract contained a term obligating both parties to use their “best efforts” to market the product “in a manner that seems appropriate.” The contract, which was subject to annual review, contained a provision allowing either party to cancel upon ninety-days written notice. [emphasis added].
After he signed the contract, Hinc supplied LOS with the secret ingredient and secured orders for Stain Remover with Sherwin-Williams. LOS filled these orders with its Shower Cleaner, not the combined product containing Hinc’s secret ingredient. LOS claims production difficulties prohibited filling the orders with Stain Remover, and, in order to deliver the orders on time, Hinc agreed to allow LOS to ship Shower Cleaner instead of Stain Remover. Hinc denies he ever agreed to this. Ultimately, LOS never produced, marketed, or sold instead of Stain Remover. [emphasis added]

Although Hinc sought new terms, the agreement was renewed at the end of the first year on the original terms but later, after LOS changed management and sought substantially different terms, the parties could not come to agreement and Hinc filed the within litigation claiming that LOS had failed to market Stain Remover. The trial court found that the “best efforts” clause was so vague that it was unenforceable. Hinc appealed.

The Appellate Court recited the general principle that a court should interpret a contract in such a way as to give effect to the intentions of the parties and should seek to declare a contract valid and not void wherever possible. Consistent with those general principles, the Court stated:

The phrase, “in a manner that seems appropriate,” is obviously indefinite and could mean different things to different people, but we do not believe that the clause as a whole is so vague as to be unenforceable as a matter of law. LOS, which drafted this provision of the contract, agreed to put forth its “best efforts” to market Stain Remover and required the same of Hinc. “Best efforts,” as commonly understood, means, at the very least, some effort. It certainly does not mean zero effort—the construction LOS urges here to escape any obligation under its contract.

In a footnote, however, the Court said:

A different question, that we do not resolve, is whether no marketing effort, which LOS admits was what it exerted here, was the “manner that seems appropriate” given the circumstances of this case. This, however, is a disputed issue that must be addressed by a fact finder. [i.e. the trial court on remand].

Other “Best Efforts” Provisions

There can be variations on the “best efforts” provisions. However, as indicated above, when whatever phrase is use is not further defined, the door is left wide open for differing opinions about what they mean and whether a party has or has not breached the “obligations” claimed to be imposed by these standards. The meaning of the phrases and their applicability in a given instance have to be examined on the basis of the facts that case presents.

However, the reader must understand that these issues are matters of state law and the interpretations of those state laws by courts and thus the reader should consult with an attorney in the reader’s state for matters relating to these provisions.

Conclusion

It is in the best interests of all parties to an agreement to have the agreement be as clear, thorough and precise as possible so that areas of dispute are reduced. It is not in any party’s interests to have to spend many years and many thousands of dollars in a litigation, with the risk of an uncertain legal result, to try to accomplish what could have been accomplished much more cheaply and effectively by precise language in an agreement.

Here is another Hoffmanism, legal maxim, to remember: Help me is almost always cheaper than fix me!

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This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on United States law. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.

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