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Posted: May 19, 2014

Best Efforts Clause Enforceable if Criteria Can be Inferred From Circumstances

On May 13, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Board of Managers of the Chocolate Factory Condominium v. Chocolate Partners, LLC, 2014 NY Slip Op. 50754(U), refusing to dismiss a breach of contract claim because the best efforts clause upon which it relied did not contain guidelines for those efforts.

In Board of Managers of the Chocolate Factory Condominium, the plaintiff sued the defendants in connection with a condominium conversion. The defendants moved to dismiss. One ground for dismissal was that the “best efforts” clause in the offering plan was unenforceable. The court disagreed, explaining:

Defendants, in seeking dismissal of the Board’s first cause of action for Breach of Contract, point to the fact that the contractual provision in the Offering Plan upon which it is predicated requires that the Sponsor use its “best efforts” to obtain the J-51 benefits. They rely upon Strauss Paper Co. v RSA Exec. Search (260 AD2d 570, 571 [2d Dept 1999]), in which the Appellate Division, Second Department, held that where a clause in an agreement expressly provides that a party must use its best efforts, it is essential that the agreement also contain clear guidelines against which to measure such efforts in order for such clause to be enforced. Defendants argue that the Offering Plan does not contain any such guidelines against which to measure whether it used “best efforts” to obtain the J-51 tax benefits, and that this clause is, therefore, unenforceable.

Defendants’ argument, however, must be rejected. Initially, it is noted that, as recently observed in Cruz v FXDirectDealer, LLC (720 F3d 115, 124 [2d Cir 2013]), the New York Court of Appeals has not endorsed the requirement that the contract must contain clear guidelines before a best efforts clause can be enforced. Rather, numerous courts, including the New York Court of Appeals and the Second Department, have applied an express best efforts provision without articulated objective criteria. Noting that the cited cases appeared to conflict with the holding in Strauss Paper Co. (260 AD2d at 571) and other cases regarding the requirement for clear guidelines, Judge Battaglia observed that the cases can be reconciled by recognizing that there is no a priori rule precluding enforcement of a best efforts obligation even in the absence of articulated criteria, and that the obligation will be enforced where sufficient content may otherwise be read into it against which the promisor’s performance may be measured. This court concurs that the law does not require that best efforts criteria be defined by the contract. If external standards or circumstances impart a reasonable degree of certainty to the meaning of the phrase best efforts, the clause can be enforced.

While defendants rely upon language in the recent case of DirecTV Latin Am., LLC v RCTV Intl. Corp., 38 Misc 3d 1212[A] [Sup Ct, NY County 2013], affd 115 AD3d 539 [1st Dept 2014]) that for a promise to exert best efforts to be enforceable, there must be clear guidelines against which such efforts can be evaluated, such reliance is misplaced as the issue there was not best efforts, per se, but whether an enforceable agreement had been reached. Indeed, in affirming the dismissal of counterclaims in that case, the Appellate Division, First Department, found that the memorandum at issue lacked the definiteness as to material terms required in order to be a legally enforceable contract.

Under New York law, a best efforts clause imposes an obligation to act with good faith in light of one’s own capabilities, and apply 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. Best efforts can only be defined contextually. Thus, the court finds that a best efforts provision may be enforced even in the absence of contractually articulated criteria where the contractual language and the circumstances permit an inference as to the applicable criteria for performance.

(Internal quotations and citations omitted) (emphasis added).

This decision illustrates the fine line transactional counsel must walk.  A too-well-defined best efforts clause defeats the purpose by limiting the scope of those efforts to specific items listed in the contract, eliminating flexibility; a too-broad definition will not be enforced.

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