Contract interpretation: What does the futility principle involve?

Does the 'principle of futility' exist? The Court of Appeal recently considered the expression to be misleading: the question for the court is not whether the principle exists, but what it involves.

It reflects an approach to construction which recognises that in certain circumstances, a condition precedent may (in the light of subsequent events) cease to have effect.

Our previous insight on the case of Astor Management and another v Atalaya Mining plc [2017] focussed on the issue of 'all reasonable endeavours'. On appeal, this issue was not considered further and instead the Court of Appeal concentrated on Astor's main ground of appeal relating to the principle of futility.

Background

Under the terms of an agreement for the sale by Astor Management AG (Astor) of its interest in a dormant copper mine to Atalaya Mining plc (Atalaya), payment of deferred consideration was triggered by two events. The first was the grant of authorisation from the local authority in Spain to restart the mining activities. The second was the securing by Atalaya of a 'Senior Debt Facility' in a sum sufficient to restart the mining operations.

Mining restarted following permit approval and sufficient funds were raised via intra-group loans. The High Court judge agreed that since no senior debt facility had been obtained, the obligation to pay the deferred consideration had not been triggered.

Astor appealed on the following three grounds:

• The judge should have found that, where there was no need for a senior debt facility, the operation of that particular contractual trigger was rendered unnecessary based on the application of the 'principle of futility';
• Since the procuring of the necessary finance by other means had not been contemplated by the agreement, the intra-group injections of funds should be treated as the second trigger event; and
• The intra-group loans constituted senior debt facilities.

Principle of futility

Astor argued that both conditions were to be read as applicable only for as long as they remained necessary to restart the mining operations.  Compliance with a condition to obtain a senior debt facility which was no longer required would be unnecessary and make no commercial sense.   In support of its contention, Astor relied on what it described as the 'principle of futility' in the construction of contracts: if the fulfilment of a precondition to the accrual of a contractual right becomes futile or unnecessary, the courts do not insist upon its performance.

Following the High Court decision that there was no such principle, Astor asked the Court of Appeal to reconsider the previous case law, in particular the judgment of Lord Denning in Barrett Bros (Taxis) Ltd v Davies [1966].

The Court of Appeal stated that the issue is not whether the futility principle exists, but what it involves.  If permit approval had no longer been required due to a change in Spanish law, the first condition would have simply fallen away and it would not have been a defence to say the first condition had not been complied with.  The Court of Appeal considered the expression 'futility principle' to be misleading; instead 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".

Subject to this qualification, the Court of Appeal agreed with the High Court that the real argument was one of construction, namely that whether a contractual obligation has arisen in any case depends on what the contract says, interpreted in accordance with the ordinary rules of contract interpretation.  There is no interpretive presumption which enables a contractual precondition to be disapplied if it serves no useful purpose.

Presumed common intention

In relation to Astor's second ground of appeal, the Court of Appeal considered that the High Court was justified in concluding that the parties must have contemplated other forms of financing and further, that the agreement had been carefully constructed to protect Astor's shareholding.  Further, this was not a case where the court could be confident as to what the parties would have intended if they had envisaged what in fact occurred.

Senior debt facility

Astor's final ground of appeal was dealt with swiftly, with the Court of Appeal agreeing that the language used in the agreement expressly distinguished an intra-group loan from a 'Senior Debt Facility' provided by a lender outside the group and ranking in priority.

Deferred consideration due and owing

Despite the fact that the deferred consideration had not become payable, the High Court agreed with Astor that the requirement to pay had not disappeared.  It therefore decided that Atalaya should apply excess cash (as defined in the agreement) to pay the deferred consideration early before it could make any distribution or repayment of the intra-group loan. 

The Court of Appeal rejected Atalaya's appeal on this issue and declared that the deferred consideration had become 'due and owing' by Atalaya on the date the agreement was signed. Atalaya's liability to pay was not contingent on a future event, notwithstanding that it became 'payable' on dates that were linked with certain contingencies. 

Comment

This case has thrown up a number of interesting issues as it has progressed to the Court of Appeal.  The 'principle of futility' has rarely been considered by the courts and, although its existence may still be the subject of future debate, the court has at least clarified that the approach to be taken is one of construction.

Although it will not be possible to provide for all eventualities in a contract, the case acts as a reminder for the parties to consider a range of outcomes and set out their intentions accordingly.  This will avoid the need to ask the court to consider what reasonable parties may have intended in relation to unforeseen events.   Parties should also ensure that the contract clearly sets out when payments are due and owing, when they can be invoiced and when they are payable.  

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.