"But what’s the point?" – Futility Principle Case Law Briefing

However, there have previously been a (very) few cases where such an approach might appear to have been adopted.

In Barrett Bros Taxis –v- Davies (1966) the Court of Appeal held that compliance with a condition precedent to the exercise of rights is not required if it is futile, useless and unnecessary, so that compliance with a condition under an insurance policy to notify the insurer of a notice of prosecution was unnecessary where the insurer had received that information from the police.

Then in Mansel Oil v Troon Storage Tankers (2008) the Court said that a condition precedent in a charter party to nominate a port did not have to be fulfilled if that nomination would be futile because the vessel would not reach the nominated port before the right to cancel arose – the charterer was not to be obliged to nominate “notwithstanding the futility of the exercise” and the Court referred to Barrett Bros as authority for this determination.

And so to the current case of Astor Management –v- Atalaya Mining (2018) where Atalaya’s contractual obligation to pay a sum to Astor as deferred consideration for the purchase of a Spanish copper mine was to be triggered by Atalaya obtaining a “senior debt facility” sufficient to restart mining operations. Atalaya in fact restarted the mining operations using intra-group loans which led Astor to claim that the payment of the deferred consideration had been triggered because there was now no need for the senior debt facility and accordingly, under the ‘futility’ principle, the fulfilment of that contractual requirement was unnecessary in order to trigger the payment.

The Court of Appeal rejected Astor’s argument and, indeed, the existence of a ‘futility’ principle. The Court instead categorised the principle for which Astor had argued, and the approach of the courts in the Barrett Bros Taxis and Mansel Oil cases, as simply “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.”

The Court gave the example of a condition precedent of regulatory approval where the law changed so that the regulatory approval was no longer required, in which case the condition would simply fall away and become inoperative. But that example is to be distinguished from the present circumstances where the obtaining of an intra-group loan cannot be construed as having satisfied a requirement to obtain a senior debt facility. Not only would such a construction be inconsistent with the express language of the contract, but commercially a senior debt facility and an intra-group loan are not the same thing and so should not in effect be construed as if they were when considering whether or not the contractual requirement for a senior debt facility no longer applies.

The Court went on to say that if an event occurred which was plainly not intended or contemplated by the parties, based on the terms of their contract, and if it was clear what the parties would have intended, then the court will give effect to that intention. But in the present case the possibility of restarting mining operations with finance other than from a senior debt facility must be taken to have been within the contemplation of the parties and yet they chose to specify a ‘senior debt facility’ and that specification was not unreasonable or nonsensical, and consequently the court could not be confident as to what the parties would have intended if they had contemplated what did in fact occur.

This case provides a useful reminder of the importance of drafting contract terms that properly reflect the parties’ intentions particularly in relation to provisions which act as conditions precedent or trigger points. In the Astor –v- Atalaya Mining case, did it matter whether Atalaya had a senior debt facility or only that it had the finance to restart the mine? If Astor’s view was that it did not matter then why did Astor accept the reference to the senior debt facility in the contract? Probably because that is what Astor, and perhaps Atalaya as well, thought would be the relevant finance at the time that they entered into their contract; but if that is correct then the drafting of the contract set out the wrong hurdle to be cleared in order to trigger the payment to Astor – at least from Astor’s point of view!