Best Endeavours/Best Efforts and Good Faith Clauses

Important “Health Warning”:

This table provides a high-level overview on contract law principles of England, Germany, Switzerland and Quebec, Canada and does not constitute legal advice. If you have a query on a specific matter, you should take advice from a qualified lawyer in the relevant jurisdiction.

BEST ENDEAVOURS/BEST EFFORTS AND GOOD FAITH CLAUSES

CLAUSE / England / Germany / Switzerland / Quebec, Canada
THE DISTRIBUTOR AGREES TO PURCHASE MINIMUM QUANTITIES OF PRODUCTS IN EACH YEAR AS SET OUT IN SCHEDULE A. BOTH PARTIES WILL USE THEIR BEST ENDEAVOURS [I.E. BEST EFFORTS] TO AGREE MINIMUM QUANTITIES FOR SUBSEQUENT YEARS IN WRITING NOT LATER THAN 20 BUSINESS DAYS BEFORE THE LAST DAY OF THE PRECEDING YEAR. / Best endeavours/Good faith
Principle:
A party who has a “best endeavours” obligation must do all it can within its powers to ensure the fulfilment of a particular contractual obligation:
“being steps which a prudent, determined and reasonable [person], acting in his own interest and desiring to achieve that result would take”.
In practice, a company that is subject to a best endeavours obligation will usually be required (a) to take all commercially practicable action and incur reasonable expenses in the performance of the obligation and (b) if necessary, divert resources from elsewhere within its business in order to fulfil the obligation.
The courts have, however, pointed out that a “best endeavours”/”all reasonable endeavours” obligation is not an absolute obligation to achieve a result nor is it the next best thing to such an absolute obligation.
A “best endeavours” obligation will not be unenforceable as being too uncertain, so long as the object of the endeavours can be ascertained with sufficient certainty and evaluated by reference to a sufficient, objective criterion.
Good faith
Principle:
Unlike other legal systems around the world, English law has historically not recognized a general contractual duty to act in good faith either when negotiating or performing contracts. Pre-contractual negotiations are not normally legally binding on the parties. As a general rule, either party may terminate negotiations when it chooses without liability.
A duty of good faith under English law has usually only been implied in contracts which involve a fiduciary relationship (employment; agency; trusts) and, more recently, in contracts that are subject to legislation which is based on EU Directives, such as consumer protection laws.
In addition, English courts have narrowly construed express contractual obligations to perform contractual duties in good faith.
More recently, however, English courts have shown an increasing willingness to imply good faith obligations in the performance of contracts.
Several English courts have recently held that an implied duty to perform contractual obligations in good faith may exist if the parties are in a long-term “relational” contract, such as a joint venture agreement, a franchise agreement or long-term distribution arrangements.
The courts in these recent cases have found that the implied duty of good faith under English law as regards performance of contractual obligations includes a duty to act honestly and a requirement that a reasonable person would view the party’s conduct as being commercially acceptable in the context of the particular contract and the particular facts. / Best Efforts/Good Faith
Principle:
The term best efforts (or reasonable efforts) is usually not used in German contracts but it is an aspect of evaluating if a party has acted in good faith.
The general obligation to act in good faith (as provided for in section 242 of the German Civil Code”) applies during the pre-contractual and negotiation period as well as to the performance of the contract.
(Section 242 - Performance in good faith - An obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.)
Pre-contractual Phase/Negotiations
During the negotiations or even in the pre-contractual phase a party can be liable for damages as a result of “culpa in contrahendo” which can be translated as “default on contract conclusion” or “breach of precontractual relationship”.
According to section 311 of the German Civil Code an obligation with duties comes into existence by
1.the commencement of contract negotiations
2.the initiation of a contract where one party, with regard to a potential contractual relationship, gives the other party the possibility of affecting its rights, legal interests and other interests, or entrusts these to him, or
3.similar business contacts.
As a major result the parties have certain obligations, i.e. to disclose information which might be relevant to the other party for this specific contract, not to provide false information, keep information provided by the other party confidential. But it also includes obligations like a duty of care which e.g. allows a potential customer tumbling on a slippery floor when entering a shop to claim damages.
The German law in principle does not give a right to request to sign a contract even if one party already made an investment.
However, under certain rare circumstances a party could claim breach of faith as a result of breaking off negotiations if the other party without justifiable reason stops the negotiations after it has created a high level of trust that the contract will be signed (e.g. the statements like “The contract will be signed in any case” or the party has caused the other party to start with the performance). This could also apply if the level of trust was created by an agreement to negotiate in good faith. In such case parties should specify their obligations and the remedies to avoid any unexpected obligations.
The above obligations may also apply in relation to persons who are not intended to be parties to the contract. Such an obligation comes into existence in particular if the third party, by laying claim to being given a particularly high degree of trust, substantially influences the pre-contract negotiations or the entering into of the contract. (section 311 (3) German Civil Code). In particular a third party influencing one party and representing certain level of qualification or trust can be held liable (e.g. agent or broker).
A party wishing to invoke a breach of good faith by the other negotiating party (for example in a case where the latter decided to discontinue the negotiations) has the burden of proof that this latter’s actions or omissions during the negotiation period were excessive and unreasonable so as to amount to bad faith while the latter has the burden of proof that it did not act culpably.
Contract Phase
As such, a contract is arelationship between two parties that must be governed by good faith and the principle applies also to the performance of the contract and has an impact on the interpretation of the contract. / 1) BEST EFFORTS IN PERFORMING AN ACTIVITY
Principle:
•Swiss law does not have a general definition of “best efforts” or a general distinction from “reasonable efforts”.
•One must interpret the agreement as to what level of effort the other party was entitled to expect.
•Often a “best effort” clause is understood to express that a party does not owe and guarantee a specific result, but only owes diligent efforts that are suitable to achieve this result.
•Interpretation might also be guided by Art. 5.1.4(2) of the 2010 UNIDROIT Principles of International Commercial Contracts: “To the extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances.”
2) BEST EFFORTS TO AGREE / GOOD FAITH IN NEGOTIATIONS
Principle:
Each party is free to break off (even long-lasting and expensive) negotiations at any time and for any reason.
Three exceptions:
(1) Agreement to agree / preliminary agreement (Art. 22 Code of Obligations, “CO”)
•Enforceable, including claim for performance of the main contract or full damages to give you the benefit of the bargain (“positive interest”);
•Requires essential conditions of the main contract to be at least determinable; in certain cases there are contract formality requirements.
(2) Agreement to negotiate
•Most likely interpretation of a “best efforts” clause.
•No obligation to conclude contract, but only to seriously negotiate (required standard not well defined in Swiss law; contract interpretation required).
•Damage claim limited mainly to compensation for expenditures (“negative interest”).
(3) Breach of good faith in negotiations (“culpa in contrahendo”)
•Statutory duty to earnestly negotiate (difference to “best efforts” standard not well defined in Swiss law);
•Damage claim for “negative interest” (see above). / Best efforts/Good Faith
Principle:
While many contracts in Quebec will include provisions where a party undertakes to use its “best efforts” and/or "reasonable efforts" to perform its obligations the distinction was not as developed in Quebec.
In late 2014, inCemar Electro Inc. v. Grob Textile, A.G., 2014 QCCS 5814 the Quebec Superior Court touched on the matter and recognized thedistinction between “best efforts” and “reasonable efforts.” This decision of the Superior Court is consistent with the common law decisions on the subject. See attached in supplemental materials.
Good faith:
Principle:
The general obligation to act in good faith (as provided for in the Civil Code of Quebec (“CCQ”: Article 1375) applies during the pre-contractual and negotiation period.
(Article 1375 CCQ:The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished.)
The breakdown of negotiations stemming from a party’s failure to negotiate in good faith may give rise to damages if such failure causes direct and certain damage to the other negotiating party.
In Quebec civil law, “good faith is always presumed, unless the law expressly requires that it be proven”. (Article 2805 CCQ).
A party wishing to invoke a breach of good faith by the other negotiating party (for example in a case where the latter decided to discontinue the negotiations, or decided to contract on the same issues with a different party) has the burden of proving that this latter’s actions or omissions during the negotiation period were excessive and unreasonable so as to amount to bad faith.
As such, a contract is arelationship between two parties that must be governed by good faith and the principle applies without question to the formation of the contract during negotiations and/or when the relationship begins.
A party who negotiates unreasonably and not in good faith, and whose actions or omissions result in direct and certain damages to the other negotiating party, may be exposed to a claim in damages.
Examples of situations demonstrating a lack of good faith during negotiations:

A seller is in parallel negotiations with a third party, however, fails to disclose this fact when asked by the other party.

One party obtains confidential information during negotiations and uses it for its own profit causing damages to the other party, which disclosed the information.

WARRANTY CLAUSES

CLAUSE / England / Germany / Switzerland / Quebec, Canada
PARTY A REPRESENTS AND WARRANTS THAT ANY DELIVERABLES IT PROVIDES UNDER THIS CONTRACT SHALL NOT INFRINGE ANY PATENT, COPYRIGHT, OR TRADE SECRET OF ANY THIRD PARTY. EXCEPT AS EXPRESSLY STATED ABOVE, PARTY A MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, RELATED TO DELIVERABLES PROVIDED BY PARTY A UNDER THIS CONTRACT. / Principle:
Differences between concepts of contractual representations and contractual warranties:

Representation is a statement of fact made by one party to another party. If untrue, may create grounds for a claim under tort law for misrepresentation.

Warranty is a contractual promise/assurance that, if untrue, may create a cause of action for breach of contract.

Crucial difference: measure of damages for each cause of action is significantly different:

Damages for breach of a contractual warranty are to be calculated so as to put the claimant in the position it would have been in but for the breach (i.e. as if the warranty had in fact been true rather than untrue). Damages for breach of warranty will be reduced to the extent that the party claiming damages for the breach failed to mitigate its loss or that its loss is held to be too remote. (Hadley v. Baxendale)
Damages for tortious misrepresentation that induced the contract are calculated to put the parties back to their pre-contract positions.

The question of whether a statement is a warranty, a representation or both will depend on the wording used and the context of the contract in question. / Principle:
The German Civil Code introduces certain types of contracts (e.g. sale, lease, service, work). Depending on the contract type the Civil Code defines different statutory warranties or other remedies.
In cases of a sales or a work contract the vendor warrants that the deliverable is free of defects at the time of delivery (sales contract) or acceptance (work contract).
The Civil Code does not define warranties for each contract type. In particular a service contract does not lead to statutory warranties. However, a defective performance or defect may still result into a breach of contract and a related liability.
The typical remedies under a warranty are (regardless of fault) in particular a right to get a correction or replacement, a right to adequately reduce the fee, to terminate the agreement and request a refund, the substitute performance by customer to be paid by vendor and ultimately but subject to the vendor’s fault (negligence or wilful misconduct) liability.
Notwithstanding statutory warranties above the parties to a contract may add contractual warranties. In such case the remedies should also be defined.
The parties may limit or exclude statutory warranties in individually negotiated agreements. It is not possible to exclude and only hardly possible to limit warranties in standard terms. However, it is e.g. possible to limit the warranty period to one year (usually 2 years under the Civil Code) in commercial contracts.
Please note that the civil code distinguishes between warranties and guarantees (in German “Garantie”) (e.g. for the qualities of a work product or sales object). Such guarantees lead to unlimited liability which cannot be restricted or excluded. It is therefore recommended to include a German translation of the legal terms to avoid any surprises resulting from a translation or interpretation of the contract. / Principle:
“Positive” rep and warranties:

Affirmations as to subject matter of the contract.
A breach triggers contractual and/or statutory claims for non-conformity

Statement that no (other) warranties are made:

Term “warranty” can have different meanings under Swiss law; contract interpretation required to determine what is meant.
It could mean that no positive warranties, guarantees and assurances are given, but that statutory remedies for “objective” non-conformity still apply.
It could also mean that statutory remedies for “objective” non-conformity are excluded as well.
In any event, limitation of liability subject to the general rules (see below).

/ Principle:
While subject to the provisions in the contract, the CCQ provides for implied (legal) warranties in sale, leases and services.
Notwithstanding legal warranties (outlined below) the parties to a contract may add to the obligations of legal warranty, diminish its effects or exclude it altogether but in no case may the seller exempt himself from his personal fault.
Examples of warranties and obligations as per the CCQ:
1726 CCQ: freedom from latent defects.
The seller is bound to warrant the buyer that the property and its accessories are, at the time of the sale, free of latent defects which render it unfit for the use for which it was intended or which so diminish its usefulness that the buyer would not have bought it or paid so high a price if he had been aware of them.
The seller is not bound, however, to warrant against any latent defect known to the buyer or any apparent defect; an apparent defect is a defect that can be perceived by a prudent and diligent buyer without the need to resort to an expert.
2099 CCQ: service provider must act in best interest of customer.
The contractor or the provider of services is free to choose the means of performing the contract and, with respect to such performance, no relationship of subordination exists between the contractor or the provider of services and the client.
2113 CCQ: warranty against poor workmanship.
A client who accepts without reservation nevertheless retains his right to pursue his remedies against the contractor in cases of nonapparent defects or nonapparent poor workmanship.

INDEMNIFICATION CLAUSES

CLAUSE / England / Germany / Switzerland / Quebec, Canada
PROVIDER SHALL INDEMNIFY, HOLD HARMLESS AND DEFEND CLIENT FROM AND AGAINST ANY AND ALL CLAIMS, LIABILITIES, LOSSES, EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES), FINES, PENALTIES, TAXES OR DAMAGES (COLLECTIVELY "LIABILITIES") INCURRED BY OR ASSERTED AGAINST CLIENT, TO THE EXTENT SUCH LIABILITIES
(i)ARISE DIRECTLY OUT OF PROVIDER'S GROSS NEGLIGENCE OR WILFUL MISCONDUCT, OR
(ii)RESULT FROM A THIRD PARTY CLAIM THAT DELIVERABLES INFRINGE UPON THAT THIRD PARTY'S TRADE SECRET, TRADEMARKS, COPYRIGHTS, OR PATENTS, UNLESS THE INFRINGEMENT IS CAUSED BY CLIENT’S MISUSE OR ALTERATION OF THE DELIVERABLES. / Principle:
An indemnity is a promise by a contract party to reimburse the indemnitee for a specific loss suffered by it.
The key advantage of an indemnity claim over a warranty claim is that, as a claim under an indemnity can be framed as a claim in debt, claims under indemnity clauses avoid the requirements that apply to recovering on a warranty clause claim for a breach of contract.
For example, a claimant under an indemnity is not required to show fault or negligence of the indemnifying party or to prove the quantum of the loss for which compensation is being sought: in general, the indemnifying party must compensate the indemnitee for all loss it actually suffers. In addition, unless the indemnity expressly provides otherwise, the indemnitee can enforce the indemnity even before it has made payments in respect of the liability that the indemnity covers.
In general, the party who is claiming under a contractual indemnity is also not required to have mitigated its loss.
In order to be enforceable, an indemnity clause must clearly identify the scope of the indemnity (e.g. “indemnify” vs. “indemnify and defend”; “hold harmless” vs. “make good”), the party/parties to be indemnified and the types of liability, if any, to be excluded from the indemnity. / Principle:
Indemnities are not standard in German contracts but as a result of international contracts get more and more common. They are enforceable in individually negotiated contracts.
Liability under German law usually requires a default (wilful misconduct or negligence) while indemnities usually apply regardless of fault. According to section 307 German Civil Code clauses are considered to be unfair if they significantly deviate from the statutory provisions. This is clause is applied by some courts in case of indemnity clauses in standard terms. Also in this case a clause introduced by the owner of the standard terms to protect the other party would still be enforceable while the protection of the owner of the standard terms is not enforceable. / Principle:
Term “indemnity” can have different meanings under Swiss law – general damage compensation or specifically related to third party claims.
Indemnity for third party claims:

Not enforceable if indemnified party caused its liability intentionally or with gross negligence, and the indemnifying party did not act with fault.
Legal consequences not much developed in Swiss law.
Indemnifying party likely entitled to choose whether it pays directly to the third party, pays the indemnified party the amount likely required to satisfy the claim, or agrees with the third party to become its direct debtor.
No established rules, but contract interpretation required to determine whether only established or also alleged third party liability triggers the indemnity; whether and under what conditions settlement amounts are covered; and whether and how the indemnifying party shall be involved in any third party litigation.

/ Principle:
While quite standard in commercial and other agreements there are limits as per provisions in the Civil Code.
It is quite common in commercial and other contracts to stipulate that in certain circumstances and under certain conditions one party accepts to indemnify the other financially and /or hold them harmless, etc. party agreeing to indemnify, defend, and hold a party harmless against a list of possible harms.
The scope of the indemnity is triggered based upon a pre-determined threshold.
It allows one party recourse against the indemnifying party which may not otherwise have been available. Typically it will also establish the procedural recourse for third party claims. The clause can hold harmless parties and directors, officers, employees and all other that can suffer damages. There is also a possibly to limit the monetary amount of the claim.
Again, will not be applicable where liability arises out of "gross negligence" or intentional fault or for manufacturer's warranty which are of public order.
When drafting indemnity provisions, parties must consider limits imposed by the civil code.

CLAUSES LIMITING OR EXCLUDING LIABILITY