March 6, 2017

Principle of Futility - Astor Management v Atalaya (High Court)

Whether there is a general principle that a futile action needn't be performed/the requirement for reasonable endeavours

In this (non-insurance) contractual dispute, Leggatt J considered whether there is a "principle of futility" in law, i.e. a principle that if the fulfilment of a pre-condition to the accrual of a contractual right becomes futile or unnecessary, the courts do not insist on it. Reliance was placed on the Court of Appeal's decision in Barrett v Davies [1966], in which an insured failed to give notice to his insurers (as required under the policy), but the insurers were nevertheless informed by the police. Lord Denning MR said that "the law never compels a person to do that which is useless and unnecessary". However, other cases have held that the insurer can rely on the breach of a condition precedent even if it suffers no prejudice.

In this case, Leggatt J held that there is no "principle of futility" and that Lord Denning's comment was only obiter dicta: "There is, in my opinion, no principle of law or even interpretive presumption which enables a contractual precondition to the accrual of a right or obligation to be disapplied just because complying with it is considered by the court to serve no useful purpose".

A further issue in this case was that the contract required the defendants to use "reasonable endeavours" to obtain an agreement with a third party. The defendants argued that this requirement was only enforceable if its object was sufficiently clear and there were sufficient objective criteria by which to evaluate the reasonableness of the endeavours. The judge rejected those arguments: "The role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy. To hold that a clause is too uncertain to be enforceable is a last resort". Furthermore, "Far from being "exceptional", I would say that it should almost always be possible to give sensible content to an undertaking to use reasonable endeavours (or "all reasonable endeavours" or "best endeavours") to enter into an agreement with a third party", since it is clear when an agreement had been made. It is then a question of fact whether reasonable endeavours have been made: "Where the parties have adopted a test of "reasonableness", .. it seems to me that they are deliberately inviting the court to make a value judgment which sets a limit to their freedom of action".

COMMENT: The issue about whether it matters whether someone other than the insured gives notice under the policy was considered in Thermonex v Axa, where the policy required the insured to give immediate notification. It was held that only the insured could give notice, and notification by a third party would not suffice. This is an issue which normally matters where an insured has become insolvent and so can no longer notify insurers itself. However, this has become less of a problem following the coming into force on 1st August 2016 of the Third Parties (Rights against Insurers) Act 2010, since it specifically provides that if an act by a third party fulfils a policy condition, it is to be treated as if done by the insured.