Good Faith Efforts and Best Efforts: Is There Really Any Difference?
Licensees often seek to require the licensor to exercise its “best efforts” in performing the licensor’s obligations under the agreement while licensors usually seek to negotiate a “good faith efforts” standard in the belief that “good faith efforts” requires a lesser standard of effort than “best efforts,” and that good faith is implied in every contract. In practicality, however, these terms are ambiguous without a commonly accepted meaning under the law with some courts finding each of these terms means “reasonable” efforts. Prudent parties should not affix any expectation that one standard dictates a higher level of performance in comparison to the other.
2. Good Faith
“Good Faith” is generally interpreted as requiring the parties to deal openly and honestly with each other and is dependent on the facts of the situation. Hamlin v. Steward, 622 N.E.2d 535 (Ind. App. 1993) (“A good faith effort is . . . what a reasonable person would determine is a diligent and honest effort under the same set of facts or circumstances.”). “The covenant of good faith and fair dealing does not include the requirement to use best efforts.” Liu v. Beth Israel Med. Ctr., 2003 WL 1488081, at *7 (S.D.N.Y. June 26, 2003). Unlike “good faith,” which takes on the mantle of dealing fairly with the other party, “best efforts” is generally interpreted as encompassing a performance or diligence standard.
On the other hand, “Bad Faith” has been defined as the “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance. Foseid v. State Bank of Cross Plains, 541 N.W.2d 203, 213 (Wis. Ct. App. 1995). Proposing materially different license terms from a term sheet has been found to breach a party’s obligation to negotiate in good faith. Pharmathene, Inc v. Siga Techs., Inc., 2011 WL 4390726 (Del. Ch. Sept. 22, 2011), Accessing computer code to create competitive software has been held to constitute bad faith. SAS Inst., Inc. v. S&H Computer Sys., Inc., 605 F. Supp. 816 (M.D. Tenn. 1985).
The law of most states implies an obligation of good faith in the performance of a party’s obligation under an agreement. See, e.g., Cal.: Kransco v. American Empire Surplus Lines Ins., Co., 2 P.3d 1 (Cal. 2000); Penn.: Fraser v. Nationwide Mut. Ins. Co., 135 F. Supp.2d 623 (E.D. Pa. 2001); Wis.: Ubelacker v. Paula Allen Holdings, Inc., 464 F. Supp.2d 791 (W.D. Wis. 2006). See also Restatement (Second) Contracts § 205 (“Every contract imposes on each party a duty of good faith and fair dealing in its performance and enforcement.”) but see Creative Dimensions in Management v. Thomas Group, Inc., 1999 WL 225887 (E.D. Pa. 1999) (Under Texas law “there is no implied covenant of good faith and fair dealing in each contract.”). The duty to negotiate in good faith does not prohibit a party from negotiating a contract that is financially advantageous to itself. Phoenix Mut. Life Ins. Co. v. Shady Grove Plaza Ltd. Partnership, 374 F. Supp. 118 (D. Md. 1990).
An implied covenant of good faith, however, does not “prohibit a party from doing what is expressly permitted by the agreement itself,” even if it is to the detriment of the other party. Wolf v. Walt Disney Pictures and Television, 162 Cal. App. 4th 1107, 1120 (2008).
Although state law may infer an obligation of good faith and fair dealing, it does not necessarily create an independent cause of action. Compare Automed Technologies, Inc. v. Eller, 160 F. Supp.2d 915, 925 (N.D. Ill. 2001) (implied duty of good faith “does not create independent duties or give rise to an independent cause of action. It is used more as a canon of construction for interpreting a contract’s other terms.”) with MacPhee v. Verizon Communications, Inc., 2008 WL 162899, at *7 (S.D.N.Y. Jan. 15, 2008) (“New York courts have recognized a separate cause of action for breach of the covenant of good faith and fair dealing in cases involving efforts by one party to a contract to subvert a contract to itself”).
For a general overview, see Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv. L. Rev. 369 (1980) and Summers, The General Duty of Good Faith – Its Recognition and Conceptualization, 67 Cornell L. Rev. 810 (1982).
3. Best Efforts
The meaning of “best efforts” has been recognized by many courts as ambiguous. Martin v. Monumental Life Ins. Co., 240 F.3d 223, 233 (3d. Cir 2001); Carlson Distributing Co. v. Salt Lake Brewing Co., 95 P.3d 1171, 1179 (Utah App. 2004) (“‘best efforts’ is primarily a subjective standard”). Its meaning is generally dependent on the factual circumstances surrounding an agreement. Carlson Distributing Co., 95 P.3d at 1179. At least one court has acknowledged the lack of clarity in distinguishing good faith and best efforts. In Ashrokan Water Services, Inc. v. New Start LLC, 111 Misc. 3d 686 (N.Y. 2006), the court stated “[i]t is still unclear . . . the relationship between ‘best efforts’ and ‘good faith’ . . . .”
“Best efforts” has been found to require “greater care and diligence than ordinary care and diligence.” Allen v. Williamsburgh Sav. Bank, 69 N.Y. 314, 322 (1877). It requires more than good faith, which is implied in all contracts, Kroboth v. Brent, 215 A.D.2d 813, 814 (3d Dept. 1995), and generally requires diligence and an elevated duty of good faith. National Data Payment Systems v. Meridian Bank, 212 F.3d 849, 854 (3d. Cir. 2000). A party is obligated to do the best it can, regardless of the abilities of others. Carlson Distributing, 95 P.3d at 1179. The court in Bloor v. Falstaff Brewing Corp., 454 F. Supp. 258 (S.D.N.Y 1978), aff’d, 601 F.2d 609 (2d Cir 1979) held that “best efforts” requires a party to perform “to the extent of its own total capabilities.”
Some courts seek to impose a reasonable efforts standard. “Best efforts” 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.” T.S.I. Holdings, Inc. v. Jenkins, 924 P.2d 1239, 1250 (Kan. 1996). Kroboth v. Brent, 215 A.D.2d 813, 814 (3d Dept. 1995) (“‘Best efforts’ requires that plaintiffs pursue all reasonable methods for” meeting its contractual obligations); Timberline Dev. v. Kronman, 263 A.D.2d 175, 178 (1st Dept. 2000) (“The requirement to employ reasonable efforts or ‘best efforts,’ as it is generally expressed in the performance of contractual obligations is deemed to be implicit in every agreement.”); Permanence Corp. v. Kennametal, Inc., 908 F.2d 98 (6th Cir. 1990) (the exercise of due diligence or reasonable efforts).
“Best efforts” does not require a party to ignore its own interests. First Union National Bank v. Steele Software Sys. Corp., 838 A.2d 404 (Md. App. 2003); Macksey v. Egan, 633 N.E.2d 408, 414 n.16 (Mass. 1994) (“best efforts” requires a good faith effort to meet a party’s obligations with the right to consider its own interests). Further, it does not require success or the “single minded pursuit of the objective.” Mark Technologies v. Utah Resources Intern., 147 P.3d 509, 512 (Utah App. 2006). See also Triple-A Baseball Club Assocs. v. Northeastern Baseball, Inc., 832 F.2d 214, 225–26 (1st. Cir. 1987), cert. denied, 485 U.S. 935 (1988) (“best efforts” equates to good faith but does not require every conceivable effort).
At least one court has found that the difference between best efforts and reasonable efforts “is merely an issue of semantics . . . .” Trecom Business Systems, Inc. v. Prasad, 980 F. Supp. 770, 774 n.1 (D.N.J. 1997).
Given the ambiguity surrounding the concept of best efforts, the parties should avoid adopting a “best efforts” standard unless it is clearly defined. By defining “best efforts,” the parties can ensure certainty in the interpretation of their contract. A potential definition is “Reasonable diligence necessary to further the intentions of the parties hereunder.”