Commercial lawyers will be familiar with the phrase "subject to consent, such consent not to be unreasonably withheld", but what does it actually mean?
There are numerous cases providing guidance in a landlord and tenant context, but little judicial assistance with its application in a commercial situation, until recently.
In Porton Capital Technology Funds and others v 3M UK Holdings Ltd and 3M Company (2011) the High Court considered the application of this wording in a dispute arising from a sale of a company where a substantial part of the sale
proceeds were payable based on an earn-out following completion.
As part of the sellers’ earn-out protections in the sale agreement, the buyer had undertaken not to cease trading without the sellers’ consent, such consent not to be unreasonably withheld. Unfortunately the business was not as
successful as the buyer had anticipated and it would have had to incur substantial costs to keep the business running. The buyer therefore wished to cease trading the business, thus denying the sellers the opportunity to maximise their earn-out payment. The
sellers refused to give their consent.
The court took the following approach:
- 1. The burden is upon the party seeking consent to show that the other party’s refusal is unreasonable.
- 2. The party refusing consent does not have to show that it is right or justified, simply that it is reasonable in the circumstances.
- 3. The party withholding consent is entitled to have regard to its own interests in determining what is reasonable.
- 4. The party withholding consent is not required to balance its own interests with those of the party seeking consent.