Cal. Pines Prop. Owners Ass’n v. Pedotti

Cal. Pines Prop. Owners Ass’n v. Pedotti, 141 Cal. Rptr. 3d 793 (Cal. Ct. App. 2012) (holding that Pedotti, acting in accord with typical practices of a rancher in Modoc County, acted within the definition of “best efforts,” defined by the court as the diligence of a reasonable person under comparable circumstances).

Robert Pedotti is the owner of the 1,761-acre Diamond C Ranch (“Ranch”) and California Pines Property Owners Association (“Association”) owns land nearby where Donovan Reservoir is located. In 1960 and 1972 the Ranch obtained two licenses for irrigation and other water purposes from the Rye Grass Swale, a source of water for both the Ranch and Donovan Reservoir. Both Pedotti and the Association are assignees of a 1986 water storage agreement (“1986 agreement”) between previous owners. In the 1986 agreement, the previous owner of Donovan Reservoir allowed the Ranch to divert water out of the reservoir for Ranch use. The 1986 agreement required that Pedotti use “best efforts” to maintain the water level of Donovan Reservoir at 4,353 feet above sea level. Since 1993 Pedotti irrigated the Ranch using flood irrigation ditches to divert water from the Reservoir.

Pedotti prevailed in the initial water diversion dispute over the Association. The Association alleged that Pedotti took more water then permitted and failed to use best efforts while maintaining the water level of Donovan Reservoir. Appealing the decision to California’s Third District Court of Appeals (the “court”), the Association made five assertions: (1) the term “best efforts” required fiduciary diligence by Pedotti; (2) the trial court should have considered extrinsic evidence; (3) some findings by the trial court are not supported by the evidence; (4) a showing of breach of contract is not required; and (5) Pedotti’s interest does not have priority over the Association’s. The court, however, only published its decision regarding the first assertion.

On appeal the Association had the burden to affirmatively demonstrate reversible error. The Association argued that the contractual duty Pedotti had, stemming from the 1986 agreement, required more then the trial courts finding of reasonably diligent efforts. The duty owed by Pedotti should be stronger and more akin to a fiduciary duty according to the Association. The 1986 agreement clause only required Pedotti to maintain the water level of Donovan Reservoir with “best efforts,” without defining best efforts. The court, however, disagreed with the Association’s argument.

The court analyzed the “best effort” clause by first looking at what other courts have done in the past. In non-binding but persuasive jurisdictions, the court found opinions holding that a “best efforts” clause does not solely create a fiduciary relationship because the promisor is not acting purely for the benefit of the promisee. Persuasive jurisdictions have instead defined “best efforts” to be “diligence of a reasonable person under comparable circumstances.” No courts in California, however, have explicitly defined the term “best efforts.” In California, courts have construed “best efforts” by using individual facts, while also reconciling the “best effort” clause with the contractual agreement as a whole. The court ultimately agreed that when the contractual language does not speak to the “best effort” requirement, the term “best effort” should mean “diligence of a reasonable person under comparable circumstances.” The court noted that “best efforts” should not require every conceivable effort and does not require performance of actions that will incur substantial losses to the promisor.

The court then looked back to the trial court’s findings to see if it applied an erroneous standard. The trial court explicitly stated that the “best efforts” clause does not create a fiduciary duty and found that using good or typical efforts satisfied the “best efforts” standard. The trial court looked mainly to the best practices of a rancher in the area and Pedotti’s own actions. In Modoc County, where the Ranch was located, flood irrigation was typical. The trial court found that Pedotti would check the irrigation system on a daily basis to make sure not to waste water while irrigating. Pedotti would also irrigated during the winter further ensuring efficiency because water would stay in the soil to the spring. Pedotti also on occasion irrigated when livestock were in the field. The court noted that although a typical practice in Modoc County, this is not necessarily a best practice. Livestock typically compact non-established soil, causing ponding when irrigating, and the court held that fields on the Ranch were established and would not encounter damage. Pedotti also measured the volume of water used so as to not overdraw water. Additionally, Pedotti took less water from the reservoir then his licenses permitted and in 2009 took no water from the reservoir at all because of a low water level. The court found that this evidence supported a “best effort” finding under the “diligence of a reasonable person under comparable circumstances” standard.

Accordingly, the court affirmed the determination that Pedotti acted within the “best efforts” clause of the 1986 agreement because the Association did not demonstrate reversible error.