Introduction:
In various types of agreements, such as real estate sales agreements or entrepreneurial agreements, more often than not one of the parties to the agreement takes upon themselves, in the framework of their undertakings in the agreement, a duty of “best efforts”, namely, a duty whose existence is not examined according to the outcome, but rather in accordance with the examination of the efforts made to uphold the duty of best efforts in order to achieve the desired outcome.
The courts are not required to discuss the issue of the duty of best efforts in many cases, however one such case has recently ended up at the Supreme Court, which has ruled, in a rather out-of-the-ordinary manner, that a party who has taken upon themselves a duty of best efforts in the framework of a sales agreement, has violated said duty, has violated the entire agreement, and thus owing compensation towards the other party.
In this article, we will briefly review the ruling of the Supreme Court with regards to the duty of best efforts, while emphasizing the matters which must be taken into account by the parties engaging in an agreement, inter alia the importance which lies in the manner in which matters are phrased, the information exchanged between the parties to the agreement and their conduct prior to, during and after signing the agreement.
Description of the Judgment:
In the judgment of Daniel Alex vs. Lacassel Establishment[1] (hereinafter: “the Daniel Alex Judgment”), the Supreme Court has ruled (in a majority opinion of Justices Amit and Solberg and contrary to the disputing opinion of Justice Mintz), that the respondent has violated a duty of best efforts which it has taken upon itself in the framework of a real estate sales agreement, and therefore it owes the appellant compensation for violating the agreement, contrary to the position of the District Court, which has ruled in favor of the respondent.
We will briefly describe that in the framework of the sales agreement signed between the parties, the respondent has undertaken to act to change the planning state of the land, and that the agreement was conditioned upon the approval of an updated zoning plan which was attached to it. The desired change was not approved by the planning institute, and at that point, a dispute arose between the parties: the respondent argued that the pending condition in the agreement (which is the change to the zoning plan) has failed to be fulfilled and therefore the agreement is nullified; the appellant argued on its part, that the respondent has violated its contractual undertaking to promote the approval of the plan.
All three justices who have discussed the Daniel Alex Judgment (Amit, Mintz and Solberg) have agreed that there are two main questions which must be examined: (1) the deliberation of the parties (which affects the manner in which they have regarded the agreement and the main points therein which must be kept); (2) whether the respondent has upheld the duty of best efforts it has taken upon itself in order to cause the planning change, while keeping the essence of the agreement as stated.
Without going into the complex circumstances surrounding the Daniel Alex Judgment, we will state that a main point in the Judgment was that during the respondent’s attempts to change the planning state of the land in question, the planning institute has placed two options before it: one, to waive a certain designation of the land; the second, to keep that designation by removing that part of the land from the area of the plan it was requesting to approve (and as a result diminishing the appellant’s rights significantly).
The position of Justice Amit was that the respondent has failed to expose to the appellant the very importance of that land designation (special hotel accommodation), and the matter has not even been expressed in the agreement signed between the parties. Therefore, when the respondent has decided to prefer its own favor (in the form of preserving the Special Hotel Accommodation designation), instead of approving the plan in the manner which was agreed upon initially in the agreement, it has thwarted the duty of best efforts it has taken upon itself, whereas it could no longer obtain the planning change which was agreed upon.
Moreover, Justice Amit has also ruled that the respondent’s attempts to “fight” the condition placed on it by the planning institute with regards to the planning change have been summed by sending one laconic email, which does not amount to “taking all means necessary” as the respondent has undertaken in the framework of the agreement.
Therefore, the Judgment has ruled that the respondent has violated its duty of best efforts, and consequently the entire agreement, and therefore it owes compensation to the appellant.
Duties of Best Efforts in Common Commercial Agreements and Important Emphases:
Many real estate agreements, such as an entrepreneurial agreement, a combination agreement or even an urban renewal agreement, usually include a duty of best efforts by one party, usually with regards to the planning state of the sold property, such as a change of designation, approving a plan, obtaining a building permit and such.
These duties are legitimate and natural, but the Daniel Alex Judgment shows that there is importance in the way in which they are phrased, as well as the transparency which must take place between the parties, both regards to the matters in the agreement which are material to each party, as well with regards to the attempt of upholding the duty of best efforts by the relevant party.
Following are important points to be taken under consideration while creating a duty of best efforts:
The manner of phrasing the clause – the Daniel Alex Judgment ruled that there is a difference between a clause which is phrased in a relatively decisive manner, such as “taking all means necessary”, and a softer manner such as “taking reasonable means”. Of course, the more discerning and less vague the phrasing is, the higher the standard which the undertaking party has to meet.
The parties’ deliberation prior to and upon signing the agreement – the Judgment further ruled, that the parties must reflect to one another the subjects in the agreement which are material to them, inter alia pursuant to the principle of good faith, when the foregoing is expressed, inter alia, by including those material subjects in the agreement itself.
The parties’ deliberation after signing the agreement – the Judgment has ruled that the party who has undertaken upon himself the duty of best efforts, must update the other party in as much as there are any problems or delays rising along the way, in order to give that party the opportunity to voice their opinion, as well as to prepare themselves in a case where the duty is not fulfilled.
The nature and requirements of the duty of best efforts – the Daniel Alex Judgment has ruled that even though each case shall be examined individually according to its own circumstances, there are central principles which are considered while examining the duty of best efforts, such as reasonable skill, appropriate diligence and care, not delaying discussions or approvals of third parties, presenting a position which reflects the full picture and not just a position which promotes private interests, the lack of an absolute duty to approach legal proceedings in order to exhaust the duty of best efforts, as well as giving weight to the financial interests of the undertaking party, namely the “price” which that party shall have to incur in order to realize the duty.
Summary:
As we have stated above, the duty of best efforts is legitimate and even required in many types of agreements (mainly real estate, but not only those).
However, when a party to the agreement takes upon himself the duty of best efforts, he must know that there are agreed standards to the manner in which his meeting or his failure to meet this duty will be considered, and therefore he must “put his cards on the table” from the start, while placing special emphasis on the manner in which the duty is phrased in the agreement, as well as reaching an express agreement (as much as possible) between the parties with regards to the limits of that duty and/or of the outcome which the undertaking party is attempting to achieve.
[1] Civil Appeal 8389/17 Daniel Alex A.S. Holdings Ltd. vs. Lacassel Establihsments (published on Nevo 06/05/2019)