When is it reasonable to withhold consent under a contract?

Contracts often state that a party must not unreasonably withhold its consent. Clients often ask us when it might be unreasonable to withhold consent…here’s a recent case that confirms the existing law and sets out some factors to consider.

In the case of Porton Capital Technology Funds and others v 3M UK Holdings Limited and 3M Company [2011] EWHC 2895 (Comm) the High Court applied existing law to determine whether or not consent had been unreasonably held by a party in a commercial situation.

In brief, the background to this particular case was a purchase by 3MUK of the entire shareholding of Acolyte by way of a share purchase agreement with Acolyte’s shareholders (Porton holding 60.4% of shares). Acolyte’s key, and indeed only, commercial product was ‘BacLite MRSA’ which is used to detect the hospital super-bug MRSA. The purchase price was an initial figure of £10.4 million coupled with a second payment based on net sales, with a (not inconsiderable) potential value of £41 million.

The share purchase agreement had a clause to the effect that Acolyte could only cease to develop and market the BacLite MRSA product if the vendors consented, such consent “not to be unreasonably withheld”. Acolyte did request consent to discontinue the product, but unsurprisingly – considering the potential £41 million payment – the vendors refused to consent. Or at least they said they would only consent if they received the £41 million. They were offered a payment of £1 million instead: deadlock, termination of the BacLite business and a breach of contract claim ensued.

The case considered the issue of whether or not it was reasonable for the vendors to have withheld consent, and made the following key findings:

  • the burden was upon 3M to show that the vendors’ refusal to consent to the closing of the BacLite business was unreasonable;
  • it was not for the vendors to show that their refusal of consent was right or justified, simply that it was reasonable in the circumstances;
  • in determining what is reasonable, the vendors were entitled to have regard to their own interests in earning as large a payment as possible;
  • the vendors were not required to balance their own interest with those of 3M, or to have any regard to the costs that 3M might be incurring in connection with the ongoing business of Acolyte.

The issue of reasonableness will always turn on the particular facts in question, however, the findings in this case do offer useful guidance when considering whether to accept an obligation not to act unreasonably, or when trying to assess your exposure before refusing consent. If there are specific circumstances that the parties think are unreasonable (or reasonable), then the parties should consider expressly setting these out in the contract.

Leigh Kirktpatrick

1 Response to “When is it reasonable to withhold consent under a contract?”

  1. 1 What does an obligation to act in good faith actually mean? « Brodies TechBlog Trackback on April 25, 2012 at 2:18 pm

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