Introduction
Requirements for a party under a commercial contract to seek the consent of another party before taking a certain action are sometimes qualified by a condition that the other party’s consent cannot be unreasonably withheld. There is little guidance as to what constitutes unreasonable withholding of consent in a commercial context. However, a recent English law case Porton Capital Technology Funds and others v 3M Holdings Ltd and another [2011] EWHC 2895 (Comm) has confirmed that the principles developed in landlord and tenant disputes concerning this phrase may be applied in commercial cases.
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Relevant principles
The relevant principles to be applied in assessing when it is reasonable to withhold consent under a commercial contract are:
- It is for the party that requested consent to show that the other party’s refusal to give consent was unreasonable.
- What is reasonable in each case will depend on the facts.
- A legitimate refusal does not have to be right or justified. However, it must be based on reasonable commercial grounds.
- The party required to give consent is not obliged to have regard to the other party’s interests when making its decision.
- However, if the party requesting consent would suffer disproportionate detriment as a result of a refusal, that refusal may nonetheless be deemed unreasonable.
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The Porton case
In Porton, a sale and purchase agreement provided that part of the purchase price for an acquisition would be by way of deferred payment, such payment to be calculated on the revenue generated by the sales from a particular product following the acquisition. The contract also contained a provision that the purchaser was not entitled to cease operating the business without the consent of the vendors, such consent not to be unreasonably withheld. As the business was not performing as well as the purchaser had expected, it sought the vendors’ consent to cease operating the business. Consent was refused. Withholding consent was held to be reasonable as ceasing the business would have had a significantly detrimental effect on the purchase price payable under the contract.
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Determination of reasonableness in the Porton case
The following factors were taken into account by the court when holding that the vendors had not unreasonably withheld consent to the purchaser ceasing the business:
- There was a significant difference between the price offered by the purchaser when seeking consent and that originally provided for in the sale and purchase agreement under the deferred payment mechanism. Giving consent would have meant that the vendors would receive only a small proportion of what they had expected at the time of the sale and what might be due if the business was continued.
- The purchaser’s claim that the business had failed and that far fewer sales were achievable than originally expected would reasonably have caused considerable surprise to the vendors and would reasonably justify their scepticism.
- The vendors had not been involved in the management of the business since the sale and although they had been supplied with a considerable amount of information by the purchaser, it was reasonable not to accept all of the purchaser’s explanations for the failure of the business and to consider that further investigation into the causes of the failure of the business was warranted.
While the individual facts of each case will always have a large bearing on whether a party’s withholding of consent is reasonable, the Porton case will provide guidance as to how a court might give effect to the above principles in future commercial cases.
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