Bloor v. Falstaff Brewing Corp. – Case Brief Summary
Summary of Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2d Cir. 1979).
Facts
Investors Funding Corporation (IFC) owned Ballantine brewery. Falstaff Brewing Corp. (D) bought the rights to Ballantine’s trademarks and other property for $4 million, plus a royalty of fifty cents for each barrel of beer sold. Under the contract Falstaff was to use best efforts to promote and maintain a high volume of sales, and the contract contained a liquidated damages clause to take effect if Falstaff ceased to distribute Ballantine products.
Falstaff lost $22 million distributing Ballantine products over three years and a new brewer (Paul Kalmanovitz) took control of the enterprise. The new management made drastic changes to the marketing strategy for Ballantine products and profit took priority over sales volume. Ballantine sales fell sharply but the operation became profitable.
Bloor (P), the reorganization trustee for Ballantine, sued in diversity for breach of contract for failing to use best efforts to maintain sales volume. Bloor asserted that the liquidated damages clause had been triggered. The trial court held that Falstaff was liable for breach of contract and awarded damages, but dismissed the claim for damages under the liquidated damages clause. Both parties appealed.
Issue
What obligations does a party assume when it promises to use “best efforts”?
Holding and Rule
A “best efforts” clause imposes an obligation to act with good faith in light of one’s own capabilities. The party meets the obligations under a “best efforts” contract by performing as well as the average prudent comparable business person.
While the best efforts clause required Falstaff to treat the Ballantine brands as well as its own, it does not follow that it required no more. For its own brands, Falstaff was free to decide for itself how to maximize profit even if it meant a serious loss in volume. The same was not true for its obligation regarding Ballantine. The royalty of $.50 a barrel on sales was an essential part of the purchase price. Citing Wood v. Lucy, Lady Duff-Gordon, the court held that even without the best efforts clause Falstaff would have been bound to make a good faith effort to achieve substantial sales of Ballantine products.
The contract imposed an added obligation to use best efforts to promote and maintain a High volume of sales. Falstaff was not required to spend itself into bankruptcy to promote the sales of Ballantine products, but the contract did prevent the company from emphasizing profit without fair consideration of the effect on volume of sales. The plaintiff was not obliged to show what Falstaff should do to maintain a high volume of sales. It was sufficient to show that it simply didn’t care about Ballantine’s sales volume and was content to allow it to plummet as long as it was best for Falstaff’s profits. The burden then shifted to Falstaff to prove there was nothing significant it could have done to promote Ballantine sales that would not have been financially disastrous.
Regarding plaintiff’s appeal of the trial court’s denial of damages under the liquidated damages clause, the court held that changing to a system whereby beer was sold from the brewery directly to wholesalers was not a “substantial discontinuance of distribution” because “distribution” included transport of beer on the trucks of the wholesalers.
Disposition
Affirmed.