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“O reason not the need”: does it matter if it doesn’t matter?

08 March 2017

Where a party’s performance is conditional, that condition must be satisfied even where it has become futile to do so (Astor Management v Atalaya Mining).

Astor argued that a contractual obligation on Atalaya to pay deferred consideration had been triggered. Atalaya had bought Astor’s shares in a mining project. The deferred consideration was payable when Atalaya secured “senior debt finance… sufficient for the restart of mining operations.” The contract obliged Atalaya to use all reasonable efforts to secure the finance by 31 December 2010. Atalaya failed to get the specified finance, but, in 2015, managed to get alternative finance and began mining.

Astor alleged that the requirement to get debt finance had fallen away, and the payment obligation had been triggered. The court disagreed. There was no “principle of futility”, or of interpretation, which allowed a contractual precondition before an obligation (or right) accrued to be ignored. This was true even if the precondition served no useful purpose. Thus, payment could not be due as no senior debt finance had been secured.

It often happens that lawyers are asked “Does it matter whether this purely mechanical event has/hasn’t happened?” As far as preconditions to when rights/obligations arise go, the court has said yes, even if the precondition appears to be academic. On one view, this is helpful in producing certainty (and seems in line with the trend to more literal application of contractual terms). Against that, over time the judiciary’s “invisible hand” had largely produced an economically efficient approach to dealing with contractual rights. This judgment – which potentially forces parties to go through pointless contractual hoops – might lead parties to take otherwise commercially pointless steps purely in order to be able to pursue their contractual rights.

Update November 2018: the Court of Appeal dismissed Astor's appeal, agreeing with the judge who had said "There is, in my opinion, 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 holding".  This agreement with the judge was, however, subject to the following qualification from the Court of Appeal: "In our view the issue is not so much whether the futility principle exists, but as to what it involves. If, in the present case, a Spanish statute had been passed after November 2009 which provided that Permit Approval by the Junta de Andalucia was no longer required, the first condition precedent to the payment of the Deferred Consideration would simply have fallen away and become inoperative; and it would have been no defence to say that the first condition had not been complied with. The expression 'futility principle' is perhaps misleading. In the present context it reflects an approach to construction which recognises that in certain circumstances (depending on the terms of the contract) 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."

This post was written by Rainer Evers, part of the group of three that set up this blog, who sadly passed away on 23 September 2017.

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