Parties to a contract will often agree that one of them will use a specified level of endeavours to achieve a desired end (often with further steps being conditional upon that end being achieved).
The question of whether a party subject to an obligation to use endeavours has fulfilled their contractual obligations, perhaps predictably, is the subject of comparatively frequent litigation (see the recent blogs written on this subject).
The case of Astor Management A G v Atalaya Mining Plc is another case in point. The defendant purchased the claimant’s interest in a copper mine. Payment of part of the consideration was linked to the defendant obtaining funding arrangements which enabled mining operations to restart.
The defendant was required to use all reasonable endeavours to obtain the banking facility. The facility wasn’t obtained and funds were instead provided by the defendant’s parent company to recommence mining. A situation therefore arose which wasn’t envisaged by the contract. The claimant argued payment of the deferred consideration was due.
The court was asked to consider whether:
- securing the senior debt facility was necessary in order to trigger payment of the consideration;
- the requirement to use ‘all reasonable endeavours’ to obtain the bank facility was enforceable;
- there could be implied an obligation to act in ‘good faith’; and
- there was a ‘principle of futility’ (that if the fulfilment of a precondition became futile or unnecessary the courts wouldn’t insist upon it).
The court concluded:
- The payment of the consideration was clearly linked to the bank facility. The commencement of mining operations / provision of finance by a parent company didn’t satisfy that condition.
- The obligation to use reasonable endeavours was enforceable (dismissing arguments as to whether the object of the endeavours was sufficiently certain). There wasn’t therefore a need to consider the obligation to act in good faith (given the express obligation which the defendant had assumed).
- The “principle of futility” was rejected – the court took the view that whether or not fulfilling an obligation served a useful purpose wasn’t relevant to the interpretation of a contract.
The court didn’t go into detail as to what a duty to act in good faith might amount to. The judgement did however suggest that where such an obligation is implied, its unlikely to be construed as being an extensive or onerous requirement. A duty to act in good faith is at most, likely to merely require the burdened party to act honestly and not conduct itself in a way which aims to frustrate the purpose of the contract or which might be regarded as unacceptable by a reasonable person.
On the basis of the facts, the court concluded there was no breach of the obligation to use all reasonable endeavours to obtain the funding facility.
This case is another example of the difficulties which can be encountered when assuming an obligation to use ‘reasonable endeavours’. A party considering such an obligation should consider outlining what those endeavours amount to or alternatively simply specifying precisely those steps its expected to take.
If you wish to discuss any of the issues raised in this blog please contact Nicola Davies.