Guest View: Understanding ‘best efforts’ in contracts

Patrick Casey is an attorney with L+G, LLP. You may contact the author at (888) 757-2444 or [email protected]

There are various contracts that require one party to use their “best efforts” to take some action or to accomplish some task. Parties often get into disputes as to what it means to use “best efforts” and whether a party has actually met this requirement. The “best efforts” standard has never been clearly defined until a recently decided California appellate court case.

The case of California Pines Property Owners Association v. Pedotti involved the use of water from a reservoir. Pedotti owned a ranch with water on it that flowed onto adjacent property owned by the California Pines Property Owners Association. The previous owners of the Pedotti and the Association properties entered into a 1986 agreement which established that water from Pedotti’s property would flow into a reservoir established on the association’s property. The owner of Pedotti’s land would have the right to draw water from the reservoir and use it on Pedotti’s land for irrigation purposes. Pedotti owned a 17,000-acre ranch that had 1,000 head of cattle.

The State Water Resources Control Board had previously issued licenses for diversion and use of water from the reservoir to irrigate various portions of Pedotti’s ranch. The 1986 agreement stated that Pedotti could not interfere with water flowing from the ranch into the reservoir, and that he must use his “best efforts” to maintain a full reservoir subject to natural circumstances beyond Pedotti’s control. The agreement did not define “best efforts.”

From 2006 to 2008, Pedotti used water from the reservoir to irrigate his ranch. Rainfall was light in those years and the water level dropped significantly in the reservoir. The association then sued Pedotti alleging that he had breached the 1986 agreement by improperly irrigating his field and thereby over-drawing the reservoir. At trial, Pedotti’s expert witness showed how Pedotti really had done everything he reasonably could have to irrigate his ranch in the most efficient manner possible. The association’s expert witness was not nearly as credible as Pedotti’s expert witness and the trial court ruled that Pedotti had used his best efforts to maintain a full reservoir while still being able to irrigate his ranch. The trial court equated “best efforts” with the implied covenant of good faith and fair dealing that is inherent in every contract and determined that Pedotti had complied with the best efforts requirement by exercising good or typical efforts to keep the reservoir full. The association appealed the decision to the Appellate Court.

In the Appellate Court, the association argued that “best efforts” means the efforts of a fiduciary, which would require more than usual or reasonably diligent efforts. The association argued that “best efforts” required Pedotti to place the association’s interest in having a full reservoir above Pedotti’s interest in being able to irrigate his ranch. The Appellate Court disagreed with the association’s argument. The Appellate Court held that the “best efforts” clause, by itself, does not create a fiduciary relationship between the parties. The court held that “best efforts are construed in the context of the circumstances in a particular case.” The court stated that best efforts does not mean that a party makes every conceivable effort to satisfy the obligation. “It does not require the promissor to ignore its own interests, spend itself into bankruptcy, or incur substantial losses to perform its contractual obligations.”

The Appellate Court reasoned that unless the contract specifically defines what is meant by “best efforts,” then “best efforts” simply means that a party shall make “such efforts as are reasonable in…light of that party’s ability and the means at its disposal and of the other party’s justifiable expectations.” The Appellate Court concluded by stating that when a contract does not define the phrase “best efforts,” then the promissor “must use the diligence of a reasonable person under comparable circumstances. Diligence is certainly required, but the obligation is framed within the bounds of reasonableness.”

This is an excellent case to show that while parties must comply with their contractual obligations, it does not mean that they have to do so at their every peril. If a contract will contain a “best efforts” clause, then the parties may want to define exactly what is meant by “best efforts.” This may be more difficult than it first appears and the process of trying to define best efforts will help to clarify each party’s expectations and obligations under the contract. If the parties decide not to define the term “best efforts,” then the “best efforts” standard will be that of using reasonable efforts in light of the particular circumstances at that time. Parties should keep this in mind when writing any type of contract. If a person is uncertain as to what their rights, duties, or obligations may be under a contract, then they should contact an attorney to review these issues and the proposed contractual language.

This article was written by Patrick Casey and is the work product of L+G, LLP, which has offices in Hollister and Salinas. Patrick Casey is an attorney with L+G, LLP. You may contact the author at (888) 757-2444 or [email protected]

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