In Search of Best Efforts: Reinterpreting Bloor v. Falstaff
Abstract
Bloor v. Falstaff has become the standard casebook example of judicial interpretation of a "best efforts" clause. The court held that Falstaff's lackluster promotional efforts for Ballantine beer violated its "best efforts covenant, a result that has met with near universal approval. However, when the problem is properly framed, the decision is clearly wrong. The court's failure to consider the purpose of the transaction led it astray. Falstaff almost certainly did not breach its obligation.
The essential feature of the contract is that Ballantine was exiting the beer business and was making a one-shot sale of some of its assets to Falstaff. Ballantine wanted to receive the highest possible price and, other things equal, the fewer post-sale restrictions on Falstaff's exploitation of the assets, the more Falstaff would be willing to pay. So, any restriction, like the best efforts clause, immediately raises a red flag: how might the particular restriction raise the value of the Ballantine assets, ex ante? The deal included an "earnout" designed to cope with the information asymmetries inherent in the transaction. A significant part of Ballantine's compensation was in the form of a per barrel royalty. The role of the best efforts clause was to guard against the possibility that Falstaff could obtain the value from the Ballantine assets in a manner which bypassed the royalty. The poor performance of Ballantine beer post-acquisition was due not to Falstaff's diversion of revenue, but to the poor quality of the Ballantine assets (and the changing conditions in the beer industry).