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15 March 2017

The High Court considers reasonable endeavours and the duty of good faith

In the recent case of Astor Management AG v Atalaya Mining plc [2017] EWHC 425 (Comm) the High Court considered whether an obligation to use "reasonable endeavours" was enforceable. Finding that it was, the High Court also considered whether there was any cause to imply a general duty of good faith.

The facts

In Astor Management AG v Atalaya Mining plc [2017] EWHC 425 (Comm) (Astor) pursuant to the contractual terms payment for the claimants' interest in a dormant copper mine was deferred and would only be triggered after the defendant secured a senior debt facility. The defendant was required to use all reasonable endeavours to obtain the facility by 31 December 2010.

The facility was not obtained by the target date and the defendant raised the required funds via its parent company enabling mining to be restarted. The claimant argued that the deferred payment requirement had been triggered but the defendant denied this.

Amongst other things, the court considered whether, if the payment obligation had not been triggered, there was a legally enforceable obligation to use all reasonable endeavours to obtain the facility and, if so, whether that obligation expired on 31 December 2010. The High Court also considered whether the contract contained an implied obligation to perform it in good faith.

Reasonable endeavours

Endeavours obligations are often considered by the courts – the highest duty being imposed by 'best endeavours' obligations and the least onerous being 'reasonable endeavours' obligations. The commercial context and other provisions of the relevant agreement will always dictate what an endeavours clause actually requires of the obliged party.

In Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB) the court observed that a reasonable endeavours obligation is only enforceable if its object is sufficiently certain and there are objective criteria by which to evaluate the attempt. The High Court in Astor disagreed with these observations.

Where a contract includes a standard of reasonableness the parties, according to Leggatt J, are "deliberately inviting the court to make a value judgement which sets a limit to their freedom of action" and the burden of proof in such cases will rest on the party alleging failure to comply. In this case the court found that there had been no breach of the reasonable endeavours clause.

The obligation to obtain the facility did not end on the target date and failure to achieve the objective did not amount to a reason for releasing the party who gave the undertaking from further performance of the same.

Good faith

In English contract law there is no general doctrine of 'good faith' and it is very unlikely that the court will imply this general duty.

In Astor the claimant argued that the contract contained an implied duty to perform the contract in good faith. By securing finance in a manner that avoided the trigger of the payment of deferred consideration the defendant was, accordingly, in breach of this general duty.

Leggatt J referred to Yam Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB) where he considered the matter of good faith at length. In Astor he chose not to explore the doctrine further but did comment that a where the duty to act in good faith does exist, it will be a modest requirement.

The duty of good faith, simply put, reflects each party's expectations that the other will act honestly, not act in a manner as could be regarded as unacceptable by a reasonable or honest person or in such a way that aims to frustrate the contract.

Leggatt J concluded that in Astor there was no requirement to imply a duty of good faith and that the requirement was encompassed in the express requirement to use all reasonable endeavours to obtain the facility.

Conclusion

Endeavours obligations are often litigated. The simplest way to avoid the court making a 'value judgement' is to expressly set out the parties' expectations as to what such endeavours would entail. What are the minimum required steps that should be taken? Should attempts be reported and, if so, how should they be reported and how often? Are there other means to achieve the result? Do the obligations expire, if so, how and when? Are there any consequences for failure to achieve the result?

Adding to other recent case law about good faith obligations, we must also remember that where there is an express contractual obligation to use all reasonable endeavours to achieve a result, there is no scope for an implied duty of good faith.


This article was written by Caroline Swain. For more information, please contact Caroline on +44 (0)20 7203 5158 or at caroline.swain@crsblaw.com.

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