Gregg L. Weiner and Joshua D. Roth
Gregg L. Weiner and Joshua D. Roth (Handout)

In 1979, the great Second Circuit judge Henry Friendly wrote that the meaning of contractual “best efforts” provisions was “far from clear” under New York law.1 While many things have changed since 1979 (a time when the Soviet Union existed and cell phones did not), Friendly’s observation persists. In fact, since Friendly’s observation was made, New York law in this area has become even murkier, driven largely by a First Department decision in 2000, Timberline Development v. Kronman,2 which cast doubt on whether “best efforts” provisions were even enforceable in the absence of “objective criteria against which a party’s efforts can be measured.”3 The Timberline line of decisions is problematic for a number of reasons that will be explored in this article. This article will also discuss recent case law appearing to retreat from Timberline’s absolute rule—a rule peculiar to New York.

Background

“Best efforts” provisions (and similar provisions, like “reasonable best efforts” and “commercially reasonable efforts”) are typically used to set a general standard for the amount of effort that a contracting party is required to devote to an objective outside of its exclusive control, such as obtaining approval from a regulator or consent from a lender. In many circumstances, it would be impractical or undesirable to define expressly the scope of a party’s “best efforts” obligation at the outset of the parties’ agreement.

Overarching Legal Framework

The New York State Court of Appeals last considered the enforceability of a “best efforts” provision more than 40 years ago in Van Valkenburgh, Nooger & Neville v. Hayden Publishing Company.4 In that case, the defendant (a book publisher) and the plaintiff (the copyright holder of a series of books) were parties to a contract in which the defendant agreed to use its “best efforts” to promote the plaintiff’s books. As often happens, the parties eventually had a falling out over money. The defendant (which was still bound by contract to promote the plaintiff’s books) then commissioned “copy cat” versions of the plaintiff’s books and promoted them over the plaintiff’s.

The plaintiff subsequently sued for, among other things, breach of contract. The Court of Appeals enforced the defendant’s “best efforts” obligation and affirmed the Appellate Division’s finding of liability: “Although a publisher has a general right to act on its own interests in a way that may incidentally lessen an author’s royalties, there may be a point where that activity is so manifestly harmful to the author, and must have been seen by the publisher so to be harmful, as to justify the court in saying there was a breach of the covenant to promote the author’s work.”5 The Court of Appeals did not require “objective criteria” against which the defendant’s “best efforts” could be measured (or even discuss the notion of such a requirement).

Following Van Valkenburgh, New York courts repeatedly enforced “best efforts” provisions, holding that they impose a high standard of care on contracting parties.6 Beginning with Timberline, however, the First Department’s treatment of “best efforts” provisions began to diverge from earlier precedent.

‘Timberline’

Timberline arose from the bankruptcy of Liberty Warehouse Associates Ltd. In that case, the plaintiff entered into a contract with the defendants (limited partners in Liberty) to purchase an interest in property owned by Liberty for approximately $10 million. Because Liberty was in bankruptcy proceedings, the contract required the defendants to use “reasonable efforts to obtain approval from the Bankruptcy Court” for the transaction.7 Rather than encouraging the Bankruptcy Court to approve the transaction, the defendants allegedly “urg[ed] the Bankruptcy Court to direct a public sale rather than approve the private sale to plaintiff.”8 The Bankruptcy Court ultimately ordered a public auction, where the property sold for approximately $16.7 million. The plaintiff then sued, alleging that the defendants breached the purchase agreement.9

The First Department declined to enforce the defendant’s “reasonable efforts” obligation on the ground that it was impermissibly vague. The court focused on the fact that the Bankruptcy Court was legally bound to maximize the sale value of the property for the benefit of the debtor’s estate and, therefore, “whether any amount of advocacy on behalf of a private sale would have been sufficient to induce the Court to approve the purchase agreement is, at best, surmise.”10 As such, the court concluded that the defendant’s “reasonable efforts” obligation (absent “objective criteria” specifying the scope of that obligation) was void for vagueness.

Putting aside the logic (or more correctly the illogic) of the court’s reasoning, one would expect, particularly in New York, which rigidly enforces written agreements between commercial parties, that a court would be loath to refuse to enforce a common term expressly agreed to by the contracting parties. Indeed, it would be bizarre to allow a sophisticated commercial party that agreed to an express term in a significant contract effectively to void the entire contract and evade its obligations merely because the scope of that one term was less than crystal clear from the face of the contract.

Moreover, the term “best efforts” is no vaguer than many other common legal terms. For example, whether a breach is “material,” whether goods are delivered within a “reasonable amount of time,” and what constitutes “adequate assurance of due performance” all depend on the underlying contract and the attendant facts and circumstances. Courts have never required contracting parties to specifically define those terms. No doubt, if a dispute arises, the parties will disagree as to what the defendant was required to do to meet its obligation under the “best efforts” provision. But this has not been viewed as an impediment to the enforcement of such terms in other jurisdictions.11 Indeed, even in New York, despite strong language from some courts stating that “best efforts” provisions are unenforceable absent “objective criteria,” it is notable that virtually all decisions following Timberline deny the plaintiffs’ claims on alternate grounds.12

In any event, Timberline’s vagueness concerns do not (and should not) apply to all “best efforts” provisions. In many cases, the context of the contract (e.g., the purpose of the contract, the other terms of the contract, and the attendant facts and circumstances) will provide the court with ample guidance to define the scope of a party’s “best efforts” obligation. Courts can also look to extrinsic evidence, including the negotiating history of the contract, to help construe “best efforts” provisions.13

Recent Developments

Two recent decisions indicate that courts in New York may be beginning to reign in the overly broad application of Timberline. First, in Maestro West Chelsea SPE and Kadima Tenth Avenue SPE v. Pradera Realty a/k/a Pradera Realty,14 the plaintiffs (which were represented by the authors) sued to enforce their contractual right to buy air rights from a neighboring property owner. The sales contract for the air rights required the defendant to use its “best efforts” to obtain consent from its lender, and the plaintiffs asserted that the defendant had failed to do so. The defendant moved to dismiss, arguing that the “best efforts” provision was unenforceable under New York law because it did not contain express “objective criteria” specifying what “best efforts” entailed in terms of time, expense, specific actions, etc.

The Supreme Court, New York County, rejected the defendant’s argument, holding that the required “objective criteria” could be implied from the structure and terms of the sales contract and the attendant circumstances, such as the defendant’s own statements about its “best efforts” obligation.15 The court also recognized that it was required to “interpret and give effect to an express best efforts clause just as it would any other contractual provision.”16 In addition, the court found that the defendant’s proposed interpretation of the law “would invalidate innumerable contracts calling for parties to use their best efforts, even if the parties clearly intended to be contractually bound.”17 The court’s decision affirmed a bedrock principle of contract law that “a finding that a contract fails for indefiniteness is at best a last resort.”18

Second, in Cruz v. FXDirectDealer, the U.S. Court of Appeals for the Second Circuit enforced the defendant’s obligation to execute foreign exchange trades on a “best efforts” basis.19 The plaintiff alleged that the defendant “failed to act in good faith and, to the contrary, intentionally delayed trades or caused them to fail in order to enrich itself at the expense of its customers.”20 The defendant responded that its customer agreement expressly warned that it might not be able to execute orders at the customer-entered price and disclaimed liability for failing to do so.21 After surveying the relevant case law, including Van Valkenburgh, Timberline, and Maestro, the court held that “[r]egardless of the standard, the ‘best efforts’ clause in the Agreement clearly obligated [the defendant] to attempt in good faith at least to execute customer orders at the specified level.”22 The court reinstated the plaintiff’s breach of contract claims because its allegations that the defendant “intentionally delayed trades or caused them to fail in order to enrich itself at the expense of its customers” were “incompatible with a promise to execute orders on a ‘best-efforts basis[.]‘”23

Moreover, while the court recognized that “[s]ome New York courts have required ‘clear guidelines against which to measure’ a party’s efforts before they will enforce a ‘best efforts’ clause[,]” it found that the New York Court of Appeals (relying on Van Valkenburgh) “has not endorsed this requirement.”24 Prior to Maestro and Cruz, few courts had examined Timberline’s discussion about “objective criteria” in light of Van Valkenburgh.

Conclusion

Given the conflicting decisions in this area, practitioners should carefully evaluate the enforceability of “best efforts” provisions in contracts governed by New York law. Notwithstanding the recent developments discussed in this article, the safest option is to define, to the extent feasible, the scope of a party’s “best efforts” obligation in the contract itself to avoid the uncertainty that remains under New York law.

Gregg L. Weiner is a partner and the vice chair of the litigation department at Fried, Frank, Harris, Shriver & Jacobson. Joshua D. Roth is a litigation associate at the firm.

Endnotes:

1. Bloor v. Falstaff Brewing, 601 F.2d 609, 613 n.7 (2d Cir. 1979).

2. 263 A.D.2d 175 (1st Dept. 2000).3. Id. at 178; see e.g., Digital Broad. Corp. v. Ladenburg, Thalmann & Co., 63 A.D.3d 647, 647 (1st Dept. 2009) (“The breach of contract claim was properly dismissed because there was no objective criteria against which the Ladenburg and Intrater defendants’ efforts could be measured”); Brown v. Business Leadership Group, 57 A.D.3d 212, 212-13 (1st Dept. 2008) (“Nor does the evidence raise an inference that in operating the business BLG failed to use its ‘best efforts,’ pursuant to the 2003 agreement between DCA and BLG…since the agreement’s ‘best efforts’ clause does not contain ‘objective criteria against which [BLG's] efforts can be measured’”); StoreRunner Network v. CBS, 8 A.D.3d 127, 128 (1st Dept. 2004) (“We note in this connection that the provision of the contract upon which plaintiff relies did not set forth objective criteria against which defendants’ efforts could be measured”).

4. 30 N.Y.2d 34 (1972).

5. Id. at 46.

6. See, e.g., Pfizer v. PCS Health Sys., 234 A.D.2d 18, 19 (1st Dept. 1996) (finding that defendant breached “the terms of its agreement with plaintiff to ‘use its best efforts’ to promote plaintiff’s products”); Kroboth v. Brent, 215 A.D.2d 813, 814 (3d Dept. 1995) (“Contrary to plaintiffs’ contention, ‘best efforts’ requires more than ‘good faith’, which is an implied covenant in all contracts. ‘Best efforts’ requires that plaintiffs pursue all reasonable methods for obtaining subdivision approval”) (citations omitted).

7. Timberline, 263 A.D.2d at 176.

8. Id. at 177.

9. Id.

10. Id. at 179. While the utility of any such advocacy might have been limited, the defendants clearly could have asked the Bankruptcy Court to approve the transaction. According to the plaintiff’s allegations, the defendants did the exact opposite and asked the Bankruptcy Court to order a public auction. The court did not address that allegation as part of its holding.

11. See, e.g., Crum & Crum Enters. v. NDC of California, No. 09-145, 2010 WL 4668456, at *4-5 (D. Del. Nov. 3, 2010) (“[T]he duty of ‘best efforts’ is more exacting than the duty of good faith, and requires the promisor to undertake its contractual obligations diligently and with reasonable effort.”) (citing Nat’l Data Payment Sys. v. Meridian Bank, 212 F.3d 849 (3d Cir. 2000); T.S.I. Holdings v. Jenkins, 924 P.2d 1239, 1250 (Kan. 1996) (defining “best efforts” as “a duty [that] requires a party to make such efforts as are reasonable in the light of that party’s ability and the means at its disposal and of the other party’s justifiable expectations,” and noting that “the duty of best efforts is more onerous than that of good faith”) (quoting E. Allan Farnsworth, “On Trying to Keep One’s Promises: The Duty of Best Efforts in Contract Law,” 46 U. Pitt. L. Rev. 1, 4 (1984) (“Best efforts is a standard that has diligence as its essence and is imposed only on those contracting parties that have undertaken such performance.”).

12. See, e.g., Digital Broad. Corp., 63 A.D.3d at 647 (“In any event, the claim was properly dismissed because the agreement provided that defendants shall have no liability except for losses resulting from gross negligence or willful misconduct, neither of which occurred.”); Brown, 57 A.D.3d at 212-13 (“Nor does the evidence raise an inference that in operating the business BLG failed to use its ‘best efforts,’ pursuant to the 2003 agreement between DCA and BLG…since the agreement’s ‘best efforts’ clause does not contain ‘objective criteria against which [BLG's] efforts can be measured’”). See also Timberline, 263 A.D.2d at 180 (“Given the uncertainty regarding the criteria to be applied to the ‘reasonable efforts’ requirement and the explicit provision for liquidated damages in the event the Bankruptcy Court accepted a higher bid for the property, plaintiff is limited to the remedy provided in section 6.2 of the contract.”).

13. See, e.g., E. Allen Farnsworth, Contracts §7.3, at 239 (4th ed. 2004) (“[S]ince the [parol evidence] rule excludes evidence only if it contradicts the writing… [,] the rule does not exclude evidence offered to help interpret the language of the writing.”).

14. 954 N.Y.S.2d 819 (Sup. Ct. N.Y. County 2012).15. Id. at 824-825.

16. Id. at 825.

17. Id.

18. Id. (quoting Non-Linear Trading v. Braddis Assoc., 243 A.D.2d 107, 114 (1st Dept. 1998)).

19. 720 F.3d 115 (2d Cir. 2013).20. Id. at 125.

21. Id. Interestingly, the defendant does not appear to have argued that its “best efforts” obligation was void for vagueness.

22. Id.

23. Id.

24. Id. at 124.