On May 24, 2012, the California Third District Court of Appeal issued an opinion that provides guidance on the contractual duties created by so-called "best efforts" clauses. Best efforts clauses are standard features of many types of contracts, including merger agreements. Most best efforts clauses do not describe in detail what "best efforts" entail or require.
The case involved a contractual dispute in which one party had agreed to use its "best efforts" to keep a reservoir full. The plaintiff argued that the defendant had a contractual fiduciary duty to keep the reservoir full, even if carrying out such duty would be against the defendant’s self-interest.
In its ruling, the court held that when left undefined in a contract, "best efforts" creates an obligation to "use the diligence of a reasonable person under comparable circumstances" but "does not mean every conceivable effort" and "does not require the promisor to ignore its own interests, spend itself into bankruptcy, or incur substantial losses to perform its contractual obligations."
California Pines Property Owners Ass’n v. Pedotti, Cal. Ct. Appeal Case No. C066315 (May 24, 2012)