Blog - 29/03/2017
Reasonable endeavours, the principle of futility and good faith
In the recent case Astor Management AG and others v Atalaya Mining plc and others  EWHC 425 (Comm), the courts have considered, amongst other things, whether an express obligation to use all reasonable endeavours to obtain a senior debt facility was enforceable.
Under a contract for the purchase of an interest in a dormant copper mine, the majority of the consideration payable by the Purchaser was deferred and payable only once the Purchaser had secured “Senior Debt Finance for a sum sufficient for the restart of mining operations”. The Purchaser was required to use all reasonable endeavours to obtain the debt facility before 31 December 2010.
The financing was not secured by the target date but instead the necessary funds to resume mining were provided by an intragroup loan from the Purchaser’s parent company. The Seller argued that this triggered the payment of the deferred consideration whilst the Purchaser argued it had not, and never would be.
The Seller, in bringing a claim, relied upon the ‘principle of futility’ and argued that as the securing of senior debt finance had become futile or unnecessary, it be disregarded as a precondition for the payment of the deferred consideration and should fall away. This was rejected by the court who stated that whether the consideration had been triggered depended on the wording of the contract, interpreted in accordance with the ordinary rules of interpretation. In Leggatt J’s words, “no principle of law or even interpretive presumption which enables a contractual precondition to the accrual of a right or obligation to be disapplied just because complying with it is considered by the court to serve no useful purpose”.
The Seller’s second argument was that the Purchaser had not used all reasonable endeavours to obtain the debt facility. Leggatt J first considered whether the “all reasonable endeavours” clause was enforceable and in doing so disagreed with the findings in Dany Lions Ltd v Bristol Cars Ltd  EWHC 817 (QB) in which the court stated that for a reasonable endeavours clause to be enforceable, there must be certainty of its object and an sufficient criteria by which to measure the endeavours. The Purchaser’s counsel submitted that there were no objective criteria by which to determine the reasonableness of the Purchaser’s endeavours to obtain the debt facility. Leggatt J stated that the court’s role in a commercial dispute is to give legal effect to what the parties have agreed and not to “throw its hands in the air and refuse to do so because the parties have not made its task easy.” Where a contract adopts a test of “reasonableness”, the parties are “deliberately inviting the court to make a value judgement which sets a limit to their freedom of action“. In summarising the matter, Leggatt J stated that “the burden of proof is on the party alleging failure to comply with the obligation. Where the criticism involves a matter of fine judgment, it may be impossible to establish a breach. In other cases, however, the absence of reasonable endeavours may be obvious. It does not follow from the fact that there may often be difficulty in proof that there is no obligation at all or that the obligation has no sensible content.” Whilst, in the judge’s opinion, the obligation on the Purchaser’s to use all reasonable endeavours to obtain a Senior Debt Facility was enforceable and continued after 31 December 2010, the Seller had failed to show a breach of this obligation on the facts of the case.
Finally, a further argument put forward by the Seller was that the agreement contained an implied duty to perform it in good faith and that the Purchaser had acted in breach of that duty by financing the Company in such a way that deliberately avoided triggering the payment of the deferred consideration. The judge chose not to explore this argument in detail but commented that a duty to act in good faith reflects the expectation that parties will act honestly towards each other and not act in ways that aims to frustrate the purpose of the contract, or which would be regarded as unacceptable by reasonable and honest people. Leggatt J concluded that there was no need to imply a duty of good faith into the requirement to obtain senior debt finance as that requirement was contained in the express obligation to use all reasonable endeavours.
If you have any further questions or concerns regarding the above topic please contact Eoin Broderick – Associate, or any member of Edwin Coe Corporate & Commercial team.
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