"Best Efforts" Defined 

publication 

November 2010 - (Real Estate Brief Fall 2010)

Real Estate Brief Fall 2010

It is not uncommon to see language in commercial agreements whereby one party agrees that it will use its "best efforts" to achieve a particular result. However, what exactly do such "best efforts" entail?

This question recently came before the British Columbia Supreme Court in the case of Automaster Automotive Services Ltd. v. Kenco Enterprises Ltd., 2009 BCSC 1594. This case confirmed "best efforts" is a high standard and resulted in a party losing an option to purchase for failing to use its best efforts.

Automaster Automotive Services Ltd. ("Automaster") operated a transmission repair shop in Nanaimo, British Columbia in premises leased from Kenco Enterprises Ltd. ("Kenco") pursuant to a lease executed by the parties in March, 2005 (the "Lease").

Prior to the execution of the Lease, Kenneth Riddell (a principal of Kenco) entered into a letter agreement (the "Option Agreement") with Robert Litke (the President of Automaster and its parent company Litke Development Corporation) whereby Litke Development Corporation acquired an option to purchase the property. The terms of the Option Agreement were incorporated into the Lease and provided that Litke Development Corporation could exercise the option for the first 18 months of the Lease but that it would use its best efforts to complete the purchase within the first 12 months of the Lease.

On May 24, 2006, one week before the option was to expire, Litke Development Corporation gave notice that it was exercising its option to purchase the property pursuant to the Option Agreement. Kenco replied that it was not prepared to proceed with the transaction and Automaster commenced an action for specific performance of the Option Agreement.

At the trial, Kenneth Riddell testified that during the first 12 months of the Lease the period during which "best efforts" were to be used he received no indication that the option would be exercised. Robert Litke testified that the option was not exercised earlier because Litke Development Corporation was involved in a potential sale of another property in Vancouver, the proceeds of which would have been applied to the purchase of the Nanaimo property from Kenco. The Vancouver sale was not completed as planned.

Justice Nathan Smith examined the meaning of "best efforts" and reviewed certain principles from the prior case law:

  1. "Best efforts" imposes a higher obligation than a "reasonable effort";
  2. "Best efforts" means taking, in good faith, all reasonable steps to achieve the objective, carrying the process to its logical conclusion and leaving no stone unturned;
  3. "Best efforts" includes doing everything known to be usual, necessary and proper for ensuring the success of the endeavour;
  4. The meaning of "best efforts" is, however, not boundless. It must be approached in the light of the particular contract, the parties to it and the contract's overall purpose as reflected in its language;
  5. While the "best efforts" of the defendant must be subject to such overriding obligations as honesty and fair dealing, it is not necessary for the plaintiff to prove that the defendant acted in bad faith in order for a best efforts test not to have been met;
  6. Evidence of "inevitable failure" does not relieve a party from liability (but may impact the damages the other party can claim). The onus to show that failure was inevitable regardless of whether the defendant made "best efforts" rests on the defendant; and
  7. Evidence that the defendant, had it acted diligently, could have satisfied the "best efforts" test is relevant evidence that the defendant did not use its best efforts.

In this case, Justice Smith was satisfied that, during the first 12 months of the Lease, Litke Development Corporation was making all reasonable efforts to sell its property in Vancouver. However, its obligation to use "best efforts" under the Option Agreement required it to explore other sources of financing the purchase from Kenco if the Vancouver sale proceeds were not forthcoming. As there was no evidence that it did so, Litke Developments Corporation failed to fulfill the conditions of the Option Agreement. Automaster's claim for specific performance was dismissed.

This case illustrates that a commitment to use "best efforts" imposes a high standard and serves as a reminder that, in negotiating agreements, parties should not give such commitments without consideration of the consequences. Other standards, such as "reasonable efforts" or "reasonable commercial efforts" can be considered. Or better yet, if possible the exact actions required of the party should be set out.

By Robert Fraser

This article appeared in Lang Michener's Real Estate Brief Fall 2010.