What exactly does ‘consent not to be unreasonably withheld’ mean?
PORTON CAPITAL v 3M [2011]
This case revealed some interesting comments from the High Court when determining whether a party to a contract has withheld consent reasonably or not.
Facts:
- Pursuant to the terms of a Share Purchase Agreement (SPA), 3M had agreed to make an initial payment in cash for the shares of a company followed by an earn out based on net sales of the company’s product. The only commercial product was one known as ‘BacLite MRSA’ used to detect the presence of a MRSA infection.
- Under the SPA, 3M undertook not to “… cease to carry on its business or the business of the development and marketing of the Earn Out Products without the written consent of the vendors, which shall not be unreasonably withheld”.
- BacLite was not as successful as 3M would have liked. In both July and August 2008, 3M invited the sellers to consent to the cessation of the development and marketing of the Earn Out Products in return for a payment of just over US $1m. The sellers declined to provide such consent, wanting a much higher payment instead. 3M's case was that such consent was unreasonably withheld and that it was therefore released from its obligations under the SPA. The sellers maintained that they were entitled to withhold their consent.
Decision:
- The Judge decided that the following principles applied to the withholding of consent (applying principles established in landlord and tenant cases to other forms of commercial contracts):
- first, the burden was on the party seeking consent (3M) to show that the withholding of consent was unreasonable;
- second, it was not for the other party to show that its refusal of consent was right or justified, simply that it was reasonable in the circumstances;
- third, in determining what was reasonable, the party withholding consent was entitled to have regard to its own interests in earning as large an earn out payment as possible; and
- fourth, the party withholding consent was not required to balance its own interests with those of the party seeking consent, or to have any regard to the costs that 3M might be incurring in connection with the ongoing business.
- Applying these principles to the facts, the Judge decided that P was justified in withholding consent.
Points to Note:
- It seems to us that there is an inherent contradiction between the first and second principle above. Under the first principle the onus of proof seems to be on one party but then in the second principle the burden seems to be reversed.
- What does, however, seem clear is that in determining reasonableness one does not have to balance the competing interests of the respective parties as one might perhaps have expected. The reasonableness of the withholding of consent was judged primarily from the perspective of the vendors who were reasonable in believing that they would have earned more had the business been continued. In this respect 3M was not helped by the fact that there were a number of internal 3M estimates at the relevant time which exceeded the amount offered by way of compensation, which was apparently put forward as a conservative ‘bargaining position’. It is not entirely clear from the judgment how much, if at all, the costs which 3M would have incurred in continuing to operate the business ought properly to be taken into account in determining reasonableness.
- This therefore begs the question as to whether those drafting ‘consent’ clauses perhaps need to consider amending their drafting and whether in future it might be advisable to say something along the lines of ‘such consent not to be unreasonably withheld taking into account all relevant circumstances and the legitimate interests of both parties’ (emphasis added).