It is quite common in commercial agreements for a party, who is generally the ‘supplier’, to not be able to do a certain thing under the agreement without the consent of the other party, who is generally the ‘customer’.
You may see this in numerous clauses, including those dealing with the ability for the supplier to assign or novate its rights or obligations, to subcontract performance, or to provide certain services from an offshore location.
During the process of negotiation, the supplier and the customer may agree to qualify this requirement somewhat so that the consent of the customer, although still required by the supplier, is “not to be unreasonably” withheld by the customer.
A lot of the time, this qualification is inserted simply on the basis that the supplier and the customer want to get the deal done and both parties tend to subscribe to the view that all it means is that the customer has to act reasonably if it is asked for its consent to the supplier taking a particular action under the agreement.
However, a recent decision of the Commercial Court indicates that matters are not always that straightforward.
Porton Capital Technology v 3M Holdings
This case concerned a purchase agreement whereby 3M was purchasing a company and it was agreed that 3M was not permitted “without the written consent of the vendors, which shall not be unreasonably withheld…to cease to carry on its business or the business of the development” of the company’s product. The product was not successful and 3M requested the consent of the vendors (which was not provided) to cease business in relation to the product. Consequently, a question was whether the withholding of consent by the vendors was unreasonable.
The Court considered the law from cases between landlords and tenants (where this qualification is quite common) and decided that the vendors were entitled to withhold their consent and, in terms of principles, that:
- 3M (the party requesting the consent) had the burden to show that the vendors’ refusal was unreasonable;
- the vendors did not have to show that they were right or justified in withholding consent, merely that they behaved reasonably;
- in determining what is reasonable, the vendors were entitled to have regard to their own interests;
- the vendors did not have to balance their own interests with those of 3M, or have regard to 3M’s costs and expenses.
What does it all mean?
Of the four main points from Porton v 3M identified above, the second and third are perhaps commonsense and clearly something that the supplier and the customer would consider to be intended by the phrase “not to be unreasonably withheld” when negotiating the finer points on a commercial deal.
However, the fact that the burden is with the party requesting the consent (so the supplier), and that the party being asked for its consent (so the customer) does not have to balance its own interests with those of the supplier, indicates that the phrase probably does not provide the supplier with the comfort that it may think it is getting by requesting this qualification.
In the end, providing the customer has a decent reason for withholding its consent, it is quite likely that it will be entitled to do so, even if the supplier will suffer hardship as a result. At a basic level, not including this qualification will mean that consent can be withheld by the customer “and no explanation is necessary”, and including the qualification will mean that the customer still has the clear ability to withhold consent, providing it has a good reason for doing so.