Type: Client Alerts
Astor Management AG & Another v Atalaya Mining Plc & Others  EWHC 425 (Comm)
Atalaya purchased Astor’s interest in a dormant copper mine. Most of the consideration was deferred and payable only when Atalaya obtained a senior debt facility to fund the restart of mining operations. Atalaya subsequently raised equity finance. Astor argued that this was a breach of Atalaya’s undertaking to use “all reasonable endeavours” to obtain a senior debt facility and was contrary to an implied duty to act in good faith. Astor claimed that it was entitled to the deferred consideration as a result of these breaches.
In considering the extent of Atalaya’s endeavours obligation, Leggatt J. found that it was sufficient that Atalaya had considered proposals for a senior debt facility. Atalaya was not required to enter into a senior debt facility if doing so would make the project commercially unviable. On the facts there had been no breach of the ‘all reasonable endeavours’ clause. Leggatt J. also declined to imply a duty of good faith on the basis that such an implied term was subsumed by the express endeavours obligation, of which there had been no breach.
The decision in Astor confirms that:
- a reasonable endeavours clause will almost always be enforceable;
- any duty of good faith that might be implied into a contract is a modest obligation requiring one party to act honestly in relation to the other without frustrating the purpose of the contract or acting in a commercially unacceptable manner; and
- a party will not be in breach of any implied duty of good faith if in fact the conduct complained of is within the scope of an express contractual term and a breach of that express term cannot be established.
Reasonable endeavours – a recap
Clauses requiring parties to exercise a certain degree of endeavour lead frequently to disputes as to whether the undertaking party has done enough to discharge its obligations. Such clauses often take one of the following forms:
- ‘best endeavours’: imposes the highest obligation on the undertaking party, requiring that all reasonable courses of action available be taken to produce the desired results. On the facts, this may require the undertaking party to take steps detrimental to its commercial interests (this may include acting to its financial detriment, but not to the extent that the undertaking party would face financial ruin)
- 'all reasonable endeavours’ (the obligation in Astor): imposes an obligation close to but less onerous than ‘best endeavours’; or
- reasonable endeavours’: imposes the least onerous obligation, permitting the undertaking party to balance its contractual obligations against all relevant commercial considerations.
Construction of the particular clause is invariably the crucial factor when it comes to enforcing an ‘endeavours obligation’. The English courts are unwilling to give effect to clauses which are not sufficiently certain.
In Astor, however, Leggatt J. held that it will almost always be possible to give meaning to – and therefore enforce – an express contractual undertaking to exercise reasonable endeavours (or a variant thereof): contracting is a means of achieving an object and that purpose provides a standard by which to analyse a party’s reasonable endeavours.
The decision in Astor
The clause provided an undertaking:
“… to use all reasonable endeavours to obtain the Senior Debt Facility … and to procure the restart of mining activities in the Project on or before 31 December 2010 ...”.
Leggatt J. cited a number of authorities, emphasising that the court’s primary role is to give legal effect to the parties’ agreement, even where such a task is not straightforward. He stated that:
“… it should almost always be possible to give sensible content to an undertaking to use reasonable endeavours .… It may sometimes be hard to prove an absence of endeavours or of best endeavours, but difficulty of proving a breach of a contractual obligation is an everyday occurrence and not a reason to hold that there is no obligation. … Where the parties have adopted a test of ‘reasonableness’ … they are deliberately inviting the court to make a value judgment which sets a limit to their freedom of action.”
Astor also argued that, as an alternative or in addition to the breach of the reasonable endeavours clause, Atalaya was subject to an implied obligation of good faith which it had breached by sourcing alternative funding.
While declining to further explore the law on the implied duty of good faith following his own comprehensive judgment in Yam Seng Pte Ltd v International Trade Corp Ltd  EWHC 111 (QB), Leggatt J. clarified that the implied duty of good faith “… does no more than reflect the expectation that a contracting party will act honestly towards the other party and will not conduct itself in a way which is calculated to frustrate the purpose of the contract or which would be regarded as commercially unacceptable by reasonable and honest people.”
In Yam Seng it was held that a duty of good faith could be implied into ordinary commercial contracts (as opposed to contracts of a fiduciary nature, for example) based on the presumed intention of the parties. Leggatt J. highlighted that certain types of contracts, such as some joint venture agreements, franchise agreements and long-term distributorship agreements “… may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty …”.
These so-called ‘relational’ contracts could be subject to an implied duty of good faith. However, Leggatt J. doubted that English law had reached the stage where it was ready to recognise an implied duty of good faith in all commercial contracts, even as a default rule. The position was confirmed by Jackson LJ in the Court of Appeal in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (Trading as Medirest)  EWCA Civ 200, who stated:
“I start by reminding myself that there is no general doctrine of ‘good faith’ in English contract law, although a duty of good faith is implied by law as an incident of certain categories of contract …”.
Astor therefore emphasises the limited scope of the implied duty of good faith under English law. The duty is a modest one and will generally be subsumed by an express obligation to use all reasonable endeavours.
A Principle of Futility?
Leggatt J. also considered the notion of a ‘principle of futility’; the concept proposed by Astor being that if the fulfilment of a precondition to the accrual of a contractual right becomes futile or unnecessary, the precondition should be ignored. Astor relied in particular on a dictum of Lord Denning in Barrett Bros v Davies  1 WLR 1334 that “The law never compels a person to do that which is useless and unnecessary”. Leggatt J. comprehensively rejected the idea of a ‘principle of futility’. No such principle exists under English law, even where compliance with a contractual precondition serves no useful purpose.
- English courts and tribunals will look to give effect to contractual provisions wherever possible. To hold that a clause is too uncertain to be enforceable is a last resort. A reasonable endeavours clause (and indeed a best endeavours clause) is likely to be almost always enforceable even if drafted in vague terms.
- The use of the word ‘reasonable’ or ‘best’ requires a value judgment to be made as to the degree of limitation to a party’s freedom of action. Therefore, in the interests of certainty, parties should consider expressly setting out the object of the clause, their expectations as to steps the undertaking party will take, and imposing criteria to measure performance of those endeavours.
- Even if a duty of good faith – or honest dealings – can be implied into the contract in question, it will add nothing if the conduct complained of is dealt with by an express clause (which it was in Astor). Put another way, a party cannot ‘fall back’ on alleging a breach of an implied duty of good faith if the contract expressly deals with the point by way of a reasonable endeavours clause and a breach of the express clause cannot be established.
- Where a party’s performance is conditional, that condition must be satisfied even where it has become futile to do so. Whilst this produces more contractual certainty, parties may be required to comply with preconditions even where they no longer serve a useful purpose.