Not to be unreasonably withheld – whose reason is it?

| Insight

How do English courts construe the legal phrase "[consent] not to be unreasonably withheld", and whose reason is it that prevails? This legal phrase is found in most type of commercial contracts, not least in shipping, energy and finance, and there is arguably more to this seemingly innocuous phrase than meets the eye.

Introduction

In negotiating contracts, we so often come across provisions whereby one party has to seek the consent of the other for certain rights, and such consent is «not to be unreasonably withheld». When the contract is negotiated, the parties often will perceive that «reasonableness» will be their ally. Only, when such provisions are disputed, one of the party’s subjective view might not concur with how a court or tribunal will construe it.

There are a number of cases adjudicated in the English courts, which provide guidance in this regard. Or rather, some guidance, given that «reasonableness» depends on the factual and contractual context. In this article, we will explore some guiding English courts’ decisions of this decade.

Guiding cases

In a 2011 High Court judgment in the Porton Capital Technology Funds v 3M UK Holdings Limited ([2011] EWHC 2895 (Comm)). The facts in brief: 3M purchased a company in exchange for £10.4m and an earn-out payment based on the 2009 net sales of the company’s product (a diagnostic for the detection of the MRSA medical condition). 3M agreed in the share purchase agreement with the vendor that 3M would not cease to carry on the business of developing and marketing the product «without the written consent of the vendors, which shall not be unreasonably withheld». Consent was sought and was refused. 3M ceased its business despite the refusal, and was then sued for breach of contract. The Court found for the vendors. It decision was guided by the principles laid down in cases between landlords and tenants: (1) The onus is on the party alleging unreasonableness to show that the refusal of consent was in fact unreasonable. (2) The party, whose consent is sought, need not show that they are correct or justified in refusing their consent, only that it was reasonable in the circumstances, and in doing so, are entitled to take their own interests into account (in this case, obtaining the agreed earn-out payment was squarely in the interest of the vendors). Lastly, (3) the party whose consent is sought is not required to balance its own interests with the interest of its counterparty (in this case, 3M).

The next case we look at is from 2018, the phrase found in a financing agreement. In Crowther v Arbuthnot Latham & Co Ltd [2018] EWHC 504 (Comm), the defendant bank would continue a remaining loan facility of around €5.9 million for five years, secured (rather under-secured) against a property in France valued at around €4 million. The relevant provision in the loan agreement read: «If, with the prior approval of the bank (such approval not to be unreasonably withheld or delayed), the property is sold, you shall immediately repay to the bank the net proceeds of sale». The borrower sought to sell the property for an amount higher than the valuation, at €4.1 million. The bank did find the offer «agreeable» but refused to provide its consent, frustrating thus the sale and depriving the borrower from other means to serve the loan. The bank argued that it required additional security for the remaining indebtedness (€1.8 million) as a condition to its consent. The Court found in favour of the claimant-borrower: the condition of additional security was simply not stated as determinant factor for providing its consent and therefore the bank should have allowed the sale.

In 2019, the Supreme Court in a landlord-tenant case, Sequent Nominees Ltd (formerly Rotrust) v Hautford Ltd [2019] UKSC 47, delivered a remarkable judgment, albeit by a slim majority. The tenant, Hautford, had agreed under the lease with landlord Sequent «not to apply for any planning permission without the prior written consent of [Sequent], such consent not to be unreasonably withheld». The lease also contained a clause stating that Hautford was not to use the leased premised other than for «(a) retail shop (b) offices (c) residential purposes (d) storage […]». In 2017, Hautford sought Sequent’s consent to apply for planning permission to change the use of part of the property to residential use (a use that was permitted already under the lease, but, as it transpired, it did not annul the requirement for consent or its withholding). The first instance and the Court of Appeal, both found in favour of the tenant, on the basis that denying consent resulted in a further restriction than originally agreed as to the permitted use of the property.

The Supreme Court overturned the decisions of the two Courts. Lord Briggs gave the leading judgment assented by Lord Carnwath and Lord Hodge (and dissented by two). Lord Briggs to the three most significant established principles, citing the House of Lords decision in Ashworth Frazer Ltd v Gloucester City Council [2001] UKHL 59. This 2001 HL decision involved refusal of consent for assignment and refined the test of reasonableness: the question of reasonableness is one of fact; the grounds for withholding consent must be relevant to the relationship of the parties; and the obligation (of the entity whose consent is sought) was merely to show that the refusal was reasonable, not right or justifiable.

In July 2020, the High Court delivered yet another interesting decision on this very issue. In Apache North Sea Limited v INEOS FPS Limited [2020] EWHC 2081 (Comm), the Commercial Court further defined the scope within which a party whose consent is required may reasonably withhold it. The dispute between the parties concerned the proper construction of an agreement, concluded in 2003, for the transportation and processing of hydrocarbons (the TPA). The TPA included an attachment with estimated production profile which Apache sought to amend. A provision in the TPA stipulated that INEOS (the defendant) «shall not unreasonably withhold its consent to such increase». The defendant stated that it would consent to the amendment only if the claimant agreed to revise the tariff payable under the TPA for the transportation and processing of hydrocarbons. Apache claimed that INEOS was not entitled to impose a condition on its consent to the increase. The Court found in favour of Apache argument, stating that it would be «inconsistent with the terms and scheme of the TPA if INEOS was entitled to make its consent to the amendment of the production profile conditional on Apache agreeing to a fundamental revision of the parties’ bargain in the form of a new tariff». Though it has to be noted that the Court accepted that the imposition of a condition against granting consent is not illegitimate per se; even where the consent-provider may acquire an entitlement to something it did not previously have. But limited such imposition of condition where it results to a benefit that is «compensatory or mitigatory» against the consequences of providing consent. (INEOS’s refusal of consent was found more aggressive in nature that «compensatory or mitigatory».)

Conclusion

Even if one wishes that the English courts’ decisions that have grappled with the «reasonable withholding of consent» were more consistent with one another, we still have a number of decisions and factual settings that allow us to sketch an area within which reasonableness (or lack of it) can be discerned. Each such dispute-attracting clause will be interpreted by, and depend on, its facts and the surrounding circumstances, granting guilty excitement to lawyers and tension to the parties. In order to avoid unwanted surprises, and give such phrase the intended meaning within a contract, it is to the benefit of the parties that they clarify and set out their intention. In each such case, the parties should assess whether it is possible to stipulate expressly any conditions (or type of parameters) on which consent should be deemed reasonable or unreasonable to expect or deny.