When is consent unreasonably withheld?

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Posted in:HR and Employment|July 16, 2012 | Join the mailing list

The true meaning and implications of the words used in an agreement governing a business relationship must be understood by all parties to the agreement.  In the event of a dispute, problems may arise if the words used have meanings
that either party did not understand to be the case.

When is consent unreasonably withheld?

The meaning of the phrase "consent not to be unreasonably withheld" has recently been considered by the Commercial Court (the "Court") in the case of Porton Capital Technology Funds ("Porton") and others v 3M UK Holdings Limited and another ("3M").  This phrase
is commonly found in leases (where a landlord will agree not to unreasonably withhold consent to the assignment of a lease) and in commercial contracts.

Upon 3M purchasing a company it agreed that it would not cease to carry on developing and marketing a particular product "without the written consent of the sellers, which shall not be unreasonably withheld".  On a number of occasions 3M sought consent to cease
to carry on the activities but this was refused each time.  3M then ceased to carry on the business from 31 December 2008 and the sellers sued for breach of contract.

The Court considered case law on the meaning of this phrase and found in the sellers’ favour.  The sellers were entitled to require further information from 3M in the circumstances and it was reasonable not to have accepted at face value 3M’s arguments in favour
of ceasing the business at face value.

The Court found that the inclusion of the phrase "consent not to be unreasonably withheld" may have been inserted to protect both parties’ interests.  In respect of the sellers, consent to the termination of the business was required providing comfort that
3M would not simply cease the business without good reason thereby jeopardising an earn-out payment.  Further, from 3M’s perspective, the sellers could not withhold consent if it was not ‘reasonable’ to do so. 

Practical Business Advice

When drawing up an agreement, careful consideration should be given to the wording used in order to avoid arguments regarding the meaning of those words.  The interpretation of particular wording in an agreement will be affected by the circumstances between
the parties and this can significantly impact on a business.

When drawing up an agreement the parties should consider what they want to achieve and ensure that this is clearly set out.  Inserting detail regarding each party’s obligations and any steps to be taken in order to satisfy the same should help reduce the scope
for argument.

For further information, please contact Stephen Foster, Head of Corporate at stephenf@berg.co.uk or by telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice.  No responsibility for this article’s accuracy or correctness is assumed by Berg or any of its partners or
employees.  Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.

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