‘All reasonable endeavours’
ASTOR MANAGEMENT v ATALAYA MINING [2017]
The Court considered the effect of an express obligation to use ‘all reasonable endeavours’ and found that where an express term exists, there was no need or scope to imply a lesser term requiring the party to act in good faith.
Facts:
- Atalaya Mining (“Defendants”) bought out the interest Astor Management (“Claimants”) had in a dormant copper mine and payment of most of the consideration was deferred. Under the parties’ agreement:
- payment of the deferred consideration would be triggered when the Defendants secured “senior debt finance ... for a sum sufficient for the restart of mining operations”;
- the Defendants were required to use “all reasonable endeavours” to obtain the debt facility by 31 December 2010;
- the Defendants had to apply any excess cash to pay any outstanding amounts of the consideration early.
- The Defendants failed to obtain the debt finance but funds were raised from its parent company instead and mining restarted.
- The Claimants argued that payment of the deferred consideration had been triggered. The Defendants claimed that this was not the case and that there had been no breach of the agreement.
- The issues for the Court relating to reasonable endeavours included:
- If payment of the deferred consideration was not triggered:
- Was the requirement to use ‘all reasonable endeavours’ to obtain a senior debt facility a legally enforceable obligation?
- If so, on the proper interpretation of the clause, did that obligation expire on 31 December 2010 or did it continue after that date?
- Did the agreement contain an implied obligation to perform it in good faith?
- If payment of the deferred consideration was not triggered:
Decision:
Reasonable endeavours:
- The Defendants submitted that an obligation to use 'reasonable endeavours' will only be enforceable if (a) the object of the endeavours is sufficiently certain; and (b) there are sufficient objective criteria by which to evaluate the reasonableness of the endeavours. They said that as there were no objective criteria by which the Court could judge the reasonableness of the Defendants’ endeavours, the obligation was unenforceable.
- The Court disagreed and concluded that the obligation was enforceable. It said that its role, “is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy. To hold that a clause is too uncertain to be enforceable is a last resort”.
- The Court went on to say that whether a party has performed an undertaking to use ‘reasonable endeavours’, ‘all reasonable endeavours’ or ‘best endeavours’ is a question of fact for the Court to decide. The burden of proof is on the party alleging failure to comply with the obligation. The fact that it may be difficult to prove a breach does not mean that there is no obligation to use ‘reasonable endeavours’.
- It was also decided that the obligation did not end on 31 December 2010. The Court said that in order to give the obligation business sense, failure to achieve the objective by a given date would not be a reason for releasing the Defendants from further performance. The judge construed the clause as requiring the Defendants to use all reasonable endeavours to obtain the senior debt facility and procure the restart of the mining activities on or before 31 December 2010 provided that was practicable and, if not, as soon as practicable thereafter.
- An ‘endeavours’ commitment invites the Court to make a value judgement. Having considered the evidence, the judge found that there had been no breach of the ‘all reasonable endeavours’ provision.
Implied duty of good faith
- The Claimants argued that the agreement contained an implied duty to perform it in good faith and that the Defendants were in breach of that duty by securing funding in a way that avoided the trigger of payment of the deferred consideration.
- The judge referred to Yam Seng Pte v ITC [2013] and commented that, “a duty to act in good faith, where it does exist, is a modest requirement. It reflects the expectation that the other party will act honestly towards the other party and not conduct itself in a way that aims to frustrate the purpose of the contract, or which would be regarded as unacceptable by reasonable and honest people”.
- The Court concluded that there was no need or scope to imply a duty of good faith to obtain senior debt finance as this was a lesser duty subsumed by the positive obligation to use all reasonable endeavours to achieve the specified result, which the contract in this case imposed. Even if an obligation to act in good faith had been implied, because the Claimants had failed to establish a breach of the more onerous 'all reasonable endeavours' obligation, there was no basis for saying that the Defendants were in breach of the less onerous good faith obligation.
Points to note:
- The phrases ‘reasonable endeavours’, ‘best endeavours’ and sometimes even ‘all reasonable endeavours’ as in this case, are commonly found in commercial contracts to qualify what would otherwise be absolute obligations. However, there is no exact legal definition of the meaning of such terms so it can be helpful to try to define exactly what is meant either by including an express definition or by including some objective criteria to benchmark performance.
- An overriding duty of ‘good faith’ is a concept imposed by law in many continental European jurisdictions but not one which is generally implied under English law. The Courts may occasionally imply a general duty of good faith in certain so-called ‘relational’ contracts (see the Yam Seng case referred to above) which require a high degree of co-operation based on mutual trust and confidence, but this is heavily dependent on the context of the contract in question and particularly the identity and sophistication of the contracting parties. It would seem that this is very much the exception rather than the rule. Arguments based on ‘good faith’ are rarely successful under English law.
- Another aspect to note is that the Court had to consider a claim based on the alleged existence of a ‘principle of futility’, namely that if the fulfilment of a precondition to the accrual of a contractual right becomes futile or unnecessary, the Courts do not insist upon it. The Court rejected the notion that any such principle exists. Instead it adopted a more literal approach to interpreting the contract and decided that the language used specifically made payment conditional on securing a particular type of finance in the form of the Senior Debt Facility. That was said to plainly be a deliberate choice and the ‘bad bargain’ received by the Claimants as a result was not a reason for the Court to rewrite the agreement and dispense with a requirement that was expressly made a precondition to the obligation to make the deferred payments. This emphasises the primacy and critical importance of the words used in the contract.