“Best Efforts” and Leaving Deal Terms Open

by Brian Rogers on May 28, 2011

in U.S. 7th Circuit Contract Cases

If you’ve ever negotiated a contract, you know what I’m talking about. Most of the important deal terms have been agreed to. Both parties—as well as their lawyers—are eager to wrap up negotiations. But there’s a sticking point that won’t be a big deal until months, or even years, down the road. So why not put off making a tough call and agree to make the decision later?

Denil v. deBoer, Inc.

The U.S. Seventh Circuit Court of Appeals decided a case earlier this month where the parties decided to put off making difficult choices in contract negotiations. The case involved three inter-related contracts relating to the sale of a minority interest in family-owned deBoer, Inc. and its affiliates to two of the companys’ officers, Peter Denil and Gerald Nardella. The parties nailed down all of the terms of a stock purchase agreement and the officers’ employment agreements, but put off finalizing the terms of a buy-sell agreement.

After a period of extended negotiations on the buy-sell agreement, a drop dead date in the employment agreements came and went and the officers were fired pursuant to a provision that allowed the company to terminate them for cause if the buy-sell agreement had not been finalized by the drop dead date.

Denil and Nardella sued deBoer, their principal contention being that the company had breached a clause in the stock purchase agreement that required the parties to use their best efforts to conclude the buy-sell agreement.

Agreements to Agree Are Unenforceable

Determining what the best efforts clause required of deBoer was key to the court’s decision. The court first noted that if the clause meant that the parties agreed to actually reach an agreement on the buy-sell agreement, then the clause would be unenforceable as an agreement to agree, which is unenforceable under Wisconsin law.

“Best Efforts” to Negotiate in Good Faith

The court then noted that a best efforts clause usually requires a party to “make appropriate investments for the benefit of another.” If a clause in a distribution agreement, for example, requires the distributor to use its best efforts to sell a manufacturer’s products, the distributor is required to advertise the products and do the other things that are necessary to sell the products.

In the context of negotiation, however, using one’s best efforts is different. An agreement to use best efforts to persuade someone to abide by a partnership agreement, for example, is met by making earnest requests; it is not necessary for one’s own interests to be sacrificed.

Ultimately, the court looked to labor law for an analogy to determine that deBoer had not breached its obligation to use its best efforts to conclude the buy-sell agreement. Under federal labor law, management and labor have a duty to negotiate in good faith by making serious proposals and considering the proposals made by the other side, as well as to compromise. Neither side is required to accept the other side’s proposals and sacrifice its own interest, however. DeBoer’s good faith negotiations accordingly satisfied its obligations to use its best efforts.

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