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Is there a principle of ‘futility’ in English contract law?

Contract Document Print publication

13/02/2019

In light of a recent Court of Appeal decision, Managing Partner and Commercial Dispute Resolution specialist Malcolm Simpson asks: can the courts can disregard contractual drafting where a change in facts or circumstances renders a provision ‘futile’?

“The law never compels a person to do that which is useless and unnecessary” [1], but the courts will strive to uphold the clear wording of a contract wherever possible, even if that results in a ‘bad’ bargain for any party [2].  These two equally valid but seemingly competing legal concepts have led the Court of Appeal to consider, in Astor Management AG & Anor v Atalaya Mining plc [3], whether there is a principle of ‘futility’ in English contract law.

What if compliance with contractual conditions becomes futile?

In this recent case, the defendant’s contractual obligation to make a payment to the claimant was deferred until it had obtained a “senior debt facility”. In fact, the defendant failed to obtain such a facility, but instead it obtained funding via intra-group loans.  The claimant therefore argued that the contractual precondition as drafted had become futile, and that the payment to it should be made.

The Court of Appeal reviewed authorities dating back to the 1960s and concluded that it is misleading to think of a ‘principle of futility’. Rather, the question of whether, in light of subsequent events, a contractual provision may no longer apply or may cease to have effect, is a question to be considered as part of the overall contractual interpretation exercise.  The Court of Appeal explained that there is no principle of law, nor even an interpretative assumption, that clear contract drafting can be disregarded just because complying with it serves no useful purpose.

On the facts of the particular case, the court found that, at the time of entering into the contract, the parties had deliberately confined the contract to a particular mode of financing.  Unsecured intra-group loans are different to senior debt facilities and do not rank in priority over other repayment obligations in the same way.  The court rejected the claimant’s argument that the condition precedent to obtain a senior debt facility was rendered useless and unnecessary by the obtaining of intra-group funding instead.  The express language of the contract could not be ignored and the payment was not due to the claimant.

So what is the correct approach to contractual interpretation?

Contractual interpretation has hit the legal headlines several times in recent years. The Astor v Atalaya case adds the latest clarification to the correct approach, which can now be summarised as follows:

  • The starting point is the wording of the contract itself and the courts will strive to uphold the clear wording of the clause wherever possible, applying the objective test of what the reasonable businessperson would understand the clause to mean, even if that results in a ‘bad’ bargain for any party.
  • The court’s task is to ascertain the meaning of the language which the parties have chosen to express in their agreement when read in the context of the factual background known or reasonably available to the parties at the time of the agreement [4].
  • However, where a contract term might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense [5].
  • Alternatively, where it is commercially and practically necessary, a court may imply terms into the contract to ensure business efficacy [6].
  • Where drafting has become futile as facts/circumstances have changed, that can be taken into account as part of the overall contractual interpretation exercise. The court may be able to disregard express contractual provisions if the changed facts or circumstances were neither intended nor contemplated at the time the contract was completed and if the court is clear what the parties did intend.  However the courts cannot ignore futile drafting just to achieve a sensible commercial bargain.

Practical advice

As well as enhancing our understanding of the correct approach to contractual interpretation, the Astor v Atalaya case highlights just how vital it is that parties get the drafting of any contractual preconditions, or other similar provisions, right.  Falling back on a ‘futility’ argument is likely to be inadvisable in the majority of cases.

Conditional provisions should be clear, certain and should accurately reflect both parties’ intentions. They should not generally involve indefinite obligations, and they should therefore contain long-stop dates or other mechanisms for ascertaining times for compliance.  They should set out fully any steps that are required for compliance and, if necessary, any procedure for ascertaining or confirming compliance.  Ideally, the parties should also pre-emptively consider, and the contract should expressly provide for, the consequences of a failure to comply.

If you would like any advice or assistance in connection with contract drafting or interpretation, or if you would like any legal and practical training on commercial contract issues, please do not hesitate to get in touch.

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[1] Lord Denning in Barrett Bros v Davies [1966] 2 All ER 972
[2] Arnold v Britton [2015] UKSC 36
[3] [2018] EWCA Civ 2407
[4] Wood v Capita Insurance Services Ltd [2017] UKSC 24
[5] Rainy Sky SA v Kookmin Bank [2011] UKSC 50
[6] M&S v BNP Paribas [2015] UKSC 72

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