Understanding Your Distribution Contract: The “Best Efforts” Clause
Manufacturers and distributors have lost millions of dollars because they have not heard the phrase “best efforts.” The “best efforts” clause is the most common standard of care in distribution contracts and most distributorship and franchise contracts require that either one or both parties use a certain level of care and effort.
Typically, there is a provision that states, a “distributor agrees to use its ‘best efforts’ to sell manufacturer’s products.” However, “best efforts” is rarely defined or understood by the parties and is often ignored as boilerplate. There is no bright line test to determine when a party has violated a “best efforts” clause. However, courts from various jurisdictions, including Wisconsin, have routinely agreed that “best efforts” means “good faith” plus “diligence.”
The “good faith” standard is that of honesty and fairness. The parties agree not to purposefully or intentionally damage or injure the other party’s right to receive the benefits for which it contracted. This necessitates an examination of the parties’ expectations at the time the contract was made. “Diligence” means “active exploitation,” undertaking “every reasonable and proper effort,” “aggressive” pursuit and the conduct of the “average, prudent, comparable” distributor under the same circumstances.
Courts have found that “diligence” does not require a party to do everything possible or take every conceivable course of action. Courts have said “best efforts” does not create an absolute requirement, and does not require the continued expenditure of time and money when it becomes obvious that the objective is futile. Courts have also said that the mere fact that there was more that could have been done does not constitute breach of a “best efforts” clause.
Distributors obligated to provide “best efforts” are not per se prohibited from selling competing products. However, courts have found that the conduct of the distributor can reach a point where it is impermissibly harmful to the other party. For example, the type of industry, current market circumstances and the specific conduct of the distributor, including any malfeasance and any degree of nonfeasance, are all relevant in determining whether the degree to which the specific conduct of a distributor in promoting and selling competing products violates a “best efforts” clause.
An instructive case on a “best efforts” clause is the unpublished opinion by the Federal District Court for the Western District of Wisconsin inGilson v. Rainin Instrument, LLC. The contract at issue in the Rainin case required Rainin to use its “best efforts” to promote and sell Gilson’s pipettes (a laboratory instrument used to measure and transport liquids). The Court summarized this obligation by stating that “the ‘best efforts’ standard requires good faith plus diligence.”
The ultimate issue in the Rainin case was whether the sale by Rainin of its own competing products violated the “best efforts” obligation of Rainin. The court framed the issue as follows:
There is no dispute that the parties’ agreement permits Rainin to manufacture pipettes which compete with Gilson pipettes. Nevertheless, Rainin’s privilege to compete with Gilson is not absolute. The means that Rainin may employ to compete with Gilson are limited by Rainin’s obligation to use reasonable efforts and due diligence in the promotion and sale of Gilson’s pipettes. Although Rainin has a general right to promote the sale of a competing brand of pipettes and thereby lessen Gilson’s share of the market, there will be a point where Rainin’s methods are so manifestly harmful to Gilson as to justify the finding that Rainin has breached its obligation to Gilson.
The court determined that Rainin’s failure to promote and sell Gilson’s products in good faith violated the “best efforts” standard.
The Bottom Line
The terms “best efforts,” “commercial reasonable efforts,” “good faith,” “reasonable efforts” or any variant indicate a certain standard of care is required. Parties should ask what is required as a party to the contract and define that standard with clear objective requirements and goals.
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