Commercial Litigation and Arbitration

Duty Imposed by Contract Clause Requiring “Best Efforts” — Good Faith and Fair Dealing Claim Redundant of Breach of Contract Claim

Cruz v. FXDirectDealer, LLC, 2013 U.S. App. LEXIS 12448 (2d Cir. June 19, 2013):

C. Breach of Contract Claim

Cruz claims that FXDD breached the Agreement by failing to use its "best efforts" to execute customer trade orders. FXDD responds that Cruz's breach of contract claim fails because the Agreement warns that FXDD may be unable to execute orders at the customer-entered price and bears no liability for failing to do so. In dismissing the breach of contract claim, the District Court adopted FXDD's view. A principal issue on appeal, therefore, is whether the Agreement limits the scope of FXDD's obligation to use its "best efforts" to execute customer orders in the way that FXDD urges. Based on the clear language of the Agreement, we hold that it does not.

Over thirty years ago, Judge Friendly wrote that New York law on "best efforts" clauses is "far from clear," but that certain "cases suggest that a 'best efforts' clause imposes" at least "an obligation to act with good faith in light of one's own capabilities." Bloor v. Falstaff Brewing Corp., 601 F.2d 609, 613 n.7 (2d Cir. 1979) (Friendly, J.). That obligation persists today. See Aeronautical Indus. Dist. Lodge 91 v. United Techs. Corp., 230 F.3d 569, 578 (2d Cir. 2000); Town of Roxbury v. Rodrigues, 716 N.Y.S.2d 814, 815 (3d Dep't 2000) ("[T]he term ['best efforts'] requires that plaintiffs pursue all reasonable methods for satisfying the necessary contingencies . . . ." (quotation marks omitted)); see also Kroboth v. Brent, 625 N.Y.S.2d 748, 749 (3d Dep't 1995) ("'[B]est efforts' requires more than 'good faith', which is an implied covenant in all contracts . . . .").

Some New York state courts have required "clear guidelines against which to measure" a party's efforts before they will enforce a "best efforts" clause. Strauss Paper Co. v. RSA Exec. Search, Inc., 688 N.Y.S.2d 641, 642 (2d Dep't 1999); see Timberline Dev. LLC v. Kronman, 702 N.Y.S.2d 237, 241 (1st Dep't 2000). However, the New York Court of Appeals has not endorsed this requirement. See, e.g., Van Valkenburgh, Nooger & Neville v. Hayden Publ'g Co., 30 N.Y.2d 34, 46-47 (1972) (affirming a decision that defendant failed to use its best efforts and thus breached its contract without discussing whether there were guidelines in the agreement). Using a somewhat less stringent requirement, one New York state court recently held that a "best efforts" clause is enforceable when "external standards or circumstances impart a reasonable degree of certainty to the meaning of the phrase best efforts," Maestro W. Chelsea SPE LLC v. Pradera Realty Inc., 954 N.Y.S.2d 819, 825 (Sup. Ct. 2012) (quotation marks omitted). Regardless of the standard, the "best efforts" clause in the Agreement clearly obligated FXDD to attempt in good faith at least to execute customer orders at the specified level. See JA Apparel Corp. v. Abboud, 568 F.3d 390, 397 (2d Cir. 2009) (discussing interpretation of unambiguous contracts). To be sure, the Agreement warns that "due to market conditions or other circumstances, FXDD may be unable to execute [an] Order at the Market or specified level," and it disclaims liability "for failure to execute such orders," J.A. 67 (emphasis added), as well as for delays in order transmission due to disruption, market conditions, malfunction of communications facilities or its own negligence. Id. Through those warnings along with a variety of other qualifications, FXDD warned its customers that they might not be able to execute trades at the specified level even if FXDD acted in good faith. But the Agreement did not warn FXDD's customers that it might not act in good faith at all, which is the thrust of Cruz's amended complaint.

The amended complaint alleges that FXDD failed to act in good faith and, to the contrary, intentionally delayed trades or caused them to fail in order to enrich itself at the expense of its customers. Because these alleged practices are incompatible with a promise to execute orders on a "best-efforts basis," we vacate the District Court's dismissal of the breach of contract claim.

D. The Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing

Cruz also claims that FXDD breached the implied covenant of good faith and fair dealing. The District Court correctly dismissed this claim. "Under New York law, parties to an express contract are bound by an implied duty of good faith, but breach of that duty is merely a breach of the underlying contract." Harris v. Provident Life & Accident Ins. Co., 310 F.3d 73, 80 (2d Cir. 2002) (quotation marks omitted). "New York law . . . does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled." Id. at 81. Therefore, when a complaint alleges both a breach of contract and a breach of the implied covenant of good faith and fair dealing based on the same facts, the latter claim should be dismissed as redundant. See L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 434 n.17 (2d Cir. 2011). Here, Cruz's claim for breach of the implied covenant of good faith and fair dealing and his breach of contract claim clearly rest on the same alleged deceptive practices, see J.A. 58, 60, so the claims are redundant.

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