Restructuring

Contributed by Lacey Laken
We have seen them used in hundreds of contracts to describe the degree of effort required by a party to satisfy its legal obligations – clauses requiring parties to use “best efforts” to achieve some goal.  Some think of best efforts as efficient shorthand for something, like pornography, that is immediately recognizable when seen but hard to define in advance.  Others think a best efforts clause is the mark of a lazy draftsman.  Still others see it as an indicator that the parties could not agree on what would be required by the contract and kicked the can down the road for someone to figure out later in the interest of getting the deal done.  The Seventh Circuit’s recent opinion in Denil v. deBoer, Inc., 2011 U.S. App. LEXIS 9754 (7th Cir. May 13, 2011), provides some guidance as to the meaning of “best efforts” in the context of negotiation between parties.  Although Denil is not a bankruptcy case, we see best efforts clauses in plan support agreements and in many other documents so its guidance may prove helpful in restructuring matters.
The facts of Denil are straight forward.  After a failed attempt to sell his business, the owner of a company hired two people to manage the company and prepare it for sale to an outside investor.  The parties intended to enter into three contracts in connection with the new managers’ employment: (i) an employment agreement, (ii) a stock purchase agreement, and (iii) a buy-sell agreement (to designate the allocation of purchase price among the owner and the managers in the event that the company was sold to an outside buyer).  The stock purchase agreement contained a clause requiring the parties to use their “best efforts” to consummate the buy-sell agreement, a prerequisite to the effectiveness of the stock purchase agreement.
The buy-sell agreement was never signed because the parties could not agree on its terms, and, as a result, the stock purchase agreement was not consummated.  In accordance with the terms of the employment agreement, the owner fired the managers.  The managers then sued the owner, claiming that the owner failed to use “best efforts” to conclude the buy-sell agreement.  The district court granted summary judgment for the defendant owner and dismissed the suit.
On appeal, plaintiffs (the new managers) argued that the owner did not fulfill, in accordance with the terms of the stock purchase agreement, his contractual obligation to use his “best efforts” to consummate the buy-sell agreement.  The managers interpreted this particular “best efforts” clause as an agreement to agree that was violated by the owner when he refused to take the same position as the managers in connection with the negotiations related to the buy-sell agreement.  Writing for the Seventh Circuit, Judge Easterbrook rejected this argument, pointing out that agreements to agree are unenforceable under Wisconsin law.
The court then discussed commonly used “best efforts” clauses, noting that they usually require a party to make appropriate investments for another party’s benefit.  The Seventh Circuit ultimately found these interpretations inapposite as the issue raised in Denil related to the meaning of “best efforts” in respect of bilateral negotiations between the parties rather than unilateral performance by one party.  Citing the Wisconsin Supreme Court’s decision in Metropolitan Ventures, LLC v. GEA Assocs., 291 Wis. 2d 393 (Wis. 2006), the court held that “a promise to use ‘best efforts’ to persuade another party to adhere to a partnership agreement was satisfied by earnest requests; it did not require one side to sacrifice its own interests in the process.”
The court then turned to the parties’ intent in including the “best efforts” clause in the stock purchase agreement.  Because the stock purchase agreement did not define the phrase “best efforts” and the parties did not provide the court with any extrinsic evidence to aid in interpretation, the court looked to federal labor law, which requires labor and management “to engage in good faith bargaining towards a contract with respect to those issues that employers must discuss with unions,” as persuasive authority for interpretation of the “best efforts” requirement.  Denil, 2011 U.S. App. LEXIS 9754, at *2  (citing First National Maintenance Corp. v. NLRB, 452 U.S. 666 (1981)).  As the court explained “[t]his duty requires an exchange of proposals and obliges each side to consider the other’s requests seriously, and to compromise when possible, but it does not compel either side to accept the other’s proposals.  The court found that the parties performed in accordance this duty.
In affirming the district court’s dismissal of the suit, Judge Easterbrook also briefly discussed the meaning of another commonly used, yet amorphous term of art — “good faith.”  In Denil, the managers argued that the owner had tortiously interfered with the contracts and did not act in “good faith.”  The court found that the owner simply enforced the contracts that had been negotiated and “took full advantage of [his] rights under the contracts.”  Rather than protect themselves by waiting until the buy-sell agreement was signed, the managers chose to start working.
While Denil does not provide definitive guidance on the meaning of “best efforts” in all contexts, it does provide some insight as to how the term should be interpreted in the context of negotiations if the parties do not have the foresight, energy, or ability to spell out exactly what efforts are good enough.  A word to the wise: if you do not spell out the actions required to satisfy contractual requirements, best be prepared to litigate.