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Futility resisted

06.02.2019 Energy & infrastructure

Simon Hems

Simon Hems Head of Energy & Infrastructure, Partner

Ben Moon

Ben Moon Legal Director

In June 2017 we reported that the High Court had rejected the notion of a “principle of futility” in Astor Management AG v Atalaya Mining plc [2017] EWHC 425 (Comm). The case was appealed by both parties and, towards the end of 2018, the existence or otherwise of a principle of futility was re-examined by the Court of Appeal ([2018] EWCA Civ 2407).

Background

Briefly recapping, the agreement in question provided for the sale and purchase of an interest in a dormant copper mine, with the majority of the consideration being deferred until mining operations could be restarted. The deferred consideration did not become payable until Atalaya (the buyer) entered into a senior debt facility to fund the project, which Atalaya was to use all reasonable endeavours to do on or before a specified date. The agreement also provided that Atalaya would use any excess cash to pay outstanding amounts of the consideration early to Astor (the seller). Atalaya were unable to secure senior debt sufficient to commence mining and eventually (some six years later) funded the project through equity finance.

Astor argued that because mining had restarted, Atalaya was obliged to repay the deferred consideration. Atalaya instead argued that the obligation to obtain senior debt financing was a condition that had to be fulfilled before the obligation to pay the deferred consideration arose and that since no senior debt financing had been obtained (despite the reasonable endeavours requirement) the obligation to pay the deferred consideration had not yet arisen. Astor contended that there was a principle of futility by which the court will not insist upon the fulfilment of a precondition to the accrual of a contractual right if to do so is futile or unnecessary. 

Astor’s position was that the condition requiring Atalaya to obtain senior debt financing was unnecessary – and therefore to insist upon it was futile – in circumstances where Atalaya had obtained financing, albeit not senior debt financing, and the purpose for which financing had been required had been fulfilled, that is to say, financing had been obtained to put the mine back into production. In other words, Atalaya should not be allowed out of their obligation on a technicality.

At first instance, Leggatt J disagreed, holding that the obtaining of senior debt financing was a condition precedent to the obligation to pay the deferred consideration. Leggatt J also concluded that there was no principle of futility.

Appeal decision

The Court of Appeal, however, has been less black and white holding that “ … the issue is not so much whether the futility principle exists, but as to what it involves.” The court reflected on case law which appeared to support “the proposition that, in certain cases, compliance with a condition precedent … is not required if it is futile, useless and unnecessary” (Mansel Oil v Troon Storage Tankers [2008] 1 CLC 945). Instead of extoling it as a principle in its own right, however, the Court of Appeal concluded that it was an approach to construction of a contract such that “a condition precedent may, as a matter of construction, and in the light of subsequent events, no longer apply or may cease to have effect.” 

The Court of Appeal, decided, however, that was not the case here and dismissed Astor’s appeal.

Comment

Whilst not rejecting or confirming, definitively, the existence of a principle of futility, the Court of Appeal have instead indicated that whether a condition precedent is operative or not is a matter of construction in the light of the relevant circumstances.

For example, in the present case, if the relevant authorities had removed the need for a mining permit such that mining could be carried out without a permit and a permit could not be obtained, it might become futile to require compliance with the condition requiring a permit to be obtained.

As ever, the issue comes back to construing each contract on its own words in the first instance and not starting with a legal principle (assuming that such a principle exists). 

Article authors:

Simon Hems Ben Moon