In Astor Management AG & anr v Atalaya Mining PLC & ors  EWHC 425 (Comm) the High Court found that even arguably pointless contractual provisions must be met in the context of a condition precedent to payment of consideration, and has offered guidance on the meaning of “all reasonable endeavours”.
The Claimant (Astor) sold its interest in a Spanish mining project to Atalaya in exchange for largely deferred consideration of up to EUR 63.3 million. The consideration was payable in tranches upon the occurrence of certain trigger events.
The key triggers included Astor receiving authorisation for mining from the relevant local authority and Atalaya or one of its group companies securing senior debt finance and guarantee facilities. Atalaya undertook to “use all reasonable endeavours to obtain the Senior Debt Facilities … and to procure the restart of mining activities … on or before 31 December 2009”. As initially drafted, the agreement prevented Atalaya from borrowing, except by a Senior Debt Facility, without Astor’s consent.
The original terms were later amended including, crucially, to allow one of the Atalaya group companies to raise money by issuing new shares and channelling funds to Atalaya without Astor’s permission. A further key amendment allowed Atalaya to borrow from other group members. In the event, Atalaya did not get permission to mine until July 2015 and incurred large costs in maintaining the mine and getting it to a state where permits could be obtained. Atalaya entered into a large number of abortive negotiations with various parties in an attempt to raise money as well as undertaking rights issues.
Ultimately the group secured funds through a mix of equity and unsecured debt and entered into intra-group loans with Atalaya. Mining re-started in July 2016.
No “principle of futility”
Astor claimed payment of the deferred consideration on two bases:
− that once mining had re-started without the need for a Senior Debt Facility, that pre-condition fell away or, alternatively, that the loans the group had made to Atalaya amounted to a Senior Debt Facility; or
− that Atalaya had not used all reasonable endeavours to obtain such a facility.
In support of the first basis for its claim, Astor argued that there is a “principle of futility” in contractual interpretation, relying on Lord Denning MR in Barrett Bros v Davies  1 WLR 1334 that “the law never compels a person to do that which is useless and unnecessary”.
Giving judgment, Leggatt J rejected the idea of a principle of futility. He said that Lord Denning’s remark had been held in later cases to be obiter and so should not be followed. Leggatt J also rejected the submission that the parties had never contemplated the possibility that money might be raised by something other than a Senior Debt Facility. The relevant contract had been professionally drafted by people who were well aware that other forms of finance existed. If they had meant any form of finance would trigger the obligation to repay, the contract would have said so. The failure to say this “was plainly a deliberate choice”.
Leggatt J also rejected Astor’s claim that the intra-group loans were senior finance as they did not grant precedence for repayment, and he thought that the provisions for a Senior Debt Facility envisaged external financing.
The judgment: “all reasonable endeavours”
Astor also argued that Atalaya had failed to use all reasonable endeavours to raise senior debt financing. In response, Atalaya argued:
− the obligation to use all reasonable endeavours was unenforceable because the object of the endeavours – entry into a loan agreement with a third-party – was too uncertain and there were no objective criteria for assessing the reasonableness of the endeavours;
− if it was enforceable, it did not apply after 31 December 2009; and
− if it was enforceable and continuing, Atalaya was not in breach.
As to the first of these, Leggatt J noted that Lord Denning MR had once said that to hold a clause to be too uncertain to be unenforceable was “a counsel of despair” (Nea Agrex SA v Baltic Shipping Co Ltd  1QB). He also referred to Moore-Bick LJ’s remark in Whitecap Leisure Ltd v John H Rundall Ltd  EWCA Civ 429 that uncertainty was a conclusion “the courts have always been reluctant to accept … since the very fact that it [a clause] was included demonstrates that the parties intended it to have some effect”. Leggatt J held that “it should almost always be possible to give sensible content to an undertaking to use reasonable endeavours". The objective was clear, as there would be no difficulty in deciding whether an agreement with a third-party had been reached, and no uncertainty was created just because there was more than one form which a third-party contract could take. He accepted that it might be difficult to demonstrate that Atalaya had used all reasonable endeavours, but the burden was on Astor to show that it had not, and Astor had failed to do this. The clause was thus enforceable.
As to the argument that the obligation had fallen away on 31 December 2009, Leggatt J held that the date should be read as the earliest occasion on which there could be a breach, rather than the latest. In response to Atalaya’s argument that this meant the obligation could be unending, Leggatt J said that “all reasonable endeavours” do not require unlimited expenditure, because the cost of such endeavours is itself a factor in deciding what is reasonable. However, it was “inherently improbable” that if Atalaya was able to raise finance through reasonable endeavours, it “should nevertheless be free to arrange some other form of funding instead which would have the effect of leaving Astor unpaid.” The actual effect of the clause was “to require [the Group] … to use all reasonable endeavours to obtain the Senior Debt Facility … on or before 31 December 2009 provided that is practicable and, if not, as soon as practicable thereafter”.
As to whether Atalaya was in breach of its obligation to use all reasonable endeavours, “it was clearly in the defendant’s financial interest to fund the restart of mining operations … without obtaining a Senior Debt Facility, as this would avoid triggering payment of the Deferred Consideration”. There were various considerations: the fact that this would benefit Atalaya “cannot in itself be a legitimate reason for them to prefer another form of finance”. At the same time, the terms of any financing were relevant: if they were so onerous as to mean the project was not viable, this “would … defeat the contractual purpose as the … Group would not be able to pay the Deferred Consideration if it became insolvent”. On this basis, the Group was not required to obtain a Senior Debt Facility unless “there was a reasonable expectation” that the proceeds from mining would be enough to keep the Group as a going concern. On the evidence, it appeared that the Group could not service both senior debt and pay the Deferred Consideration. Atalaya had therefore not been in breach.
In the event, Astor did, however, succeed on its argument that Atalaya was obliged not to make any distributions or repayments to its lenders until the Deferred Consideration had been fully paid.
Leggatt J’s findings about “futility” are interesting and important. Questions often arise about whether parties must go through what may appear to be purely formal steps, in particular where they are required to follow “escalation procedures”, before they can begin legal proceedings. There has been limited case law on the topic, and this judgment may have significant implications in many circumstances. In particular, on one view, the effect was that Astor might never be paid even though, in economic terms, Atalaya had received the funding required to trigger a payment obligation. This appears to be an implausible result. However, Leggatt J felt that the parties had deliberately chosen a more limited trigger than Astor said should apply, and that there had been a commercial logic to this.
The case is also a useful exposition of some of the principles to be applied in considering the criteria to be used when judging whether a party has used all reasonable endeavours. This has been another common source of uncertainty for advisers and their clients, partly because it is always context-dependent. In this case, the fact that it seemed unlikely that mining activities could have produced enough revenue to service debt and pay consideration resulted in a fairly clear-cut place to draw the line: it can’t be reasonable for a company to make itself bankrupt and therefore never pay outstanding consideration. However, it remains difficult to know what the limits to “all reasonable endeavours” are, and contract drafters may want to consider making this explicit, or at least providing some sort of criteria when including this frequently used expression.
All reasonable endeavours was considered in the planning context by the Court of Appeal in Bristol Rovers (1883) Ltd v Sainsbury's Supermarkets Ltd  EWCA Civ 160. Parties should be aware that such an obligation can include having to take steps that are contrary to their own commercial interests – as held in Jet2.com v Blackpool Airport Ltd  EWCA Civ 417.