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It is commonplace for commercial contracts to contain requirements for one party to seek consent from the other party before taking certain action. The party who must obtain consent will want to qualify this by providing that such consent should not be unreasonably withheld. This is an area where there is little, if any, guidance on what constitutes a situation whereby the withholding of consent would be unreasonable. The High Court has recently debated this issue, in the case of Porton Capital Technology Funds and others v 3M Holdings Ltd and another [2011] EWHC 2895 (Comm) (“Porton”), and confirmed that the principles in place for landlord and tenant disputes could apply to commercial cases.

The facts of the Porton case centred on a Sale and Purchase Agreement (“SPA”) under which the consideration for the acquisition was to be partly satisfied in cash on completion and partly deferred. The deferred consideration was to be calculated on the basis of the revenue generated from the sales from a particular product following the acquisition.  The SPA also contained a provision that 3M Holdings Limited (“3M”), the purchaser, could not cease the operation of the business without gaining consent from the vendors and consent was not to be unreasonably withheld. The business was not successful and 3M wrote to the vendors to ask for consent to cease the operation of the business, but consent was refused. 3M ceased the operation of the business anyway and the sellers brought proceedings against 3M. The court held that withholding consent was not unreasonable, due to the significant impact it would have on the purchase price under the SPA and further held that the cessation of business had been a repudiatory breach of the SPA.

 Mr Justice Hamblen took the following points into consideration in reaching his conclusion:

1. Giving consent would mean that the vendors would receive significantly less deferred consideration than they expected and the consideration paid would represent only a small proportion of what they would expect to receive if the business were to continue;
2. The fact that the business had failed and that sales of no more than US$ 1.07m would be made, in comparison to forecasts of US$33m, would reasonably cause considerable surprise to the vendors and would reasonably justify their scepticism; and
3. The vendors had little knowledge of, and no involvement in, the business after the sale to 3M, which made it reasonable not to accept all the reasons for cessation of the business given to them by 3M, and further that it would need further inquiry and investigation on behalf of the vendors.

The court applied a number of landlord and tenant decisions, namely, International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 ALL ER 321, which held that it is not necessary for the landlord to prove that withholding consent was justified. Also, Ashworth Frazer Ltd v Gloucester City Council [2001] UKHL 59, in which whether or not consent is unreasonably withheld is a matter of fact in the particular circumstances. The vendors also relied on the case of British Gas Trading Limited v Eastern Electricity [1996] EWCA Civ 1239, which provided that the landlord and tenant authorities could apply to the aspects of that particular commercial case.

Mr Justice Hamblen further confirmed that the principles to be applied in assessing whether consent has been reasonably withheld under a commercial contract are as follows:

1. The party that requested consent must prove that a refusal was unreasonable;
2. Reasonableness is to be construed in accordance with the facts of each case;
3. A legitimate refusal should be based on reasonable commercial grounds;
4. The party required to give consent is not required to have regard to the other party’s interests, although, if refusal would cause disproportionate detriment, then refusal may be deemed unreasonable.

This decision will now give more guidance to those considering refusing consent and an idea of how the court may interpret the principles in commercial situations.

Chris Smith
Trainee

This guide is for general information and interest only and should be relied upon as providing specific legal advice.