Interpretation of “Best Efforts” Clauses in Real Estate Contracts

What standard of care or contractual duty should be applied in order for a party to fulfill a “best efforts” requirement in a contract? This question is a frequently litigated topic in contract dispute cases, including real estate contracts, as “best efforts” clauses, when not sufficiently defined by the contract, can be misinterpreted or misapplied.

California Pines Property Owners Assoc. v. Pedotti

In the recent case California Pines Property Owners Assoc. v. Pedotti (2012) 206 Cal.App.4th 384, the California Court of Appeals explored this topic and held that the “best efforts” clause in a contract is interpreted as a reasonableness standard, not a fiduciary one. The following is a summary of the case and illustrates its importance to both litigation and in the drafting of contracts.

In California Pines, a dispute arose from a water storage agreement (“Agreement”). Both parties, California Pines Property Owners Association (“Association”) and Pedotti, were assignees of the Agreement. The Agreement provided that Pedotti, a rancher, had a right to certain water (“Ranch Water”) that flowed into the Donovan Reservoir (“Reservoir”) and certain water delivery systems that could divert water out of the Reservoir to use at his Diamond C Ranch (“Ranch”). The Association had an interest in the Ranch Water, as such water was needed in order to maintain the Reservoir level and the aesthetic value of the water-front area of the California Pines subdivision.

The Agreement provided that Pedotti was to use his “best efforts” to maintain a full Reservoir. The Agreement did not define “best efforts.” The action arose when the Association filed a complaint alleging that Pedotti breached the Agreement by failing to use his “best efforts” to maintain the water level of the Reservoir and to conserve water.

Pedotti used a flood irrigation system to use Ranch Water on his land. Pedotti’s expert had extensive knowledge in the field of farm irrigation and had familiarity with the Reservoir. He opined that Pedotti’s practices, as a whole, were reasonable of someone in comparable conditions. The Association’s expert was a civil engineer who had limited experience in flood irrigation, but opined that Pedotti’s methods were not acceptable practice.

The trial court ruled in favor of Pedotti, stating that Pedotti had used the best practices for a rancher in the area and had complied with the Agreement.

Best Efforts Standard

On appeal, as to the main issue published in the Court’s opinion, the Association contended that “best efforts” means the efforts required of a fiduciary and, therefore, the trial court erred by equating “best efforts” with the implied covenant of good faith and fair dealing. Although the Court agreed with the Association that a promise to use “best efforts” is different than a promise to act in “good faith,” it did not agree that a “best efforts” promise creates a duty equivalent to a fiduciary duty.

The Court affirmed the judgment against the Association, reasoning that when a contract does not define the phrase “best efforts” the promisor must use the diligence of a reasonable person under comparable circumstances and does not require every conceivable effort. Thus, a “best efforts” clause will likely turn on expert testimony to determine the applicable reasonable person standard.

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