Porton Capital Technology Funds and others v. 3M UK Holdings Ltd and another [2011] EWHC 2825 (Comm)
Defining what is meant by "reasonable" in contracts governed by English law is rarely straightforward. A contractual term providing for one or both parties to act reasonably automatically qualifies the relevant contractual obligation, so that it is not absolute. The question of reasonableness is one of fact to be decided by the court objectively according to the circumstances in each case. Nonetheless, the number of cases in recent years involving disputes as to what is or is not reasonable demonstrates that this is a perennial grey area when determining a party's obligations under a contract.
The phrase "not to be unreasonably withheld" is commonly found in commercial agreements, including in property leases. Such landlord and tenant agreements often provide for a landlord not to unreasonably withhold his consent to, for example, assignment of a lease or subletting a property. Much of the relevant case-law, therefore, relates to landlord and tenant disputes. One judge has commented that "there are few expressions more routinely used by British lawyers than 'reasonable', and the expression should be given a broad, commonsense meaning...". Another has said that "one should read 'reasonableness' in the general sense". These are very general propositions and not always easy to apply in practice.
The recent decision in Porton Capital v. 3M UK Holdings provides useful clarification as to the practical operation of this obligation to act reasonably in a commercial context. In Porton Capital, the court confirmed that the party withholding consent does not have to show that its refusal to consent was right or justifiable, only that it was reasonable. In other words, did it come to the same conclusion as might be reached by "a reasonable man" in the same circumstances? What the court considers a reasonable man might do in similar circumstances will depend very much on the facts of the particular case.
In a shipping context, the decision is relevant because the phrase is often incorporated into contractual terms, for example those providing for inspection of a ship's logs and other ship's records (voyage reports, loading and discharging port sheets etc), with such inspection usually taking place at charterers' request and owners'/master's consent "not to be unreasonably withheld". The owners might be reluctant to comply with such a request where, for example, the time and cost will be disproportionate to any relevance the documents might have for the charterers' purposes. Alternatively, the owners might consider the request to be a "fishing expedition" designed to find grounds for some complaint against the owners. Porton Capital suggests that, so long as the owners' decision is not arbitrary, they would not have to comply so as to prejudice their interest.
The background facts in Porton Capital
The defendants ("3M") purchased a company in exchange for an initial cash payment and a future earn-out based on the net sales of the business. 3M agreed that they would not terminate the business without the vendors' consent, such consent not to be unreasonably withheld. For various reasons, the main one being 3M's lack of confidence in the future profitability of the business, 3M sought the vendors' consent to terminate the business. The vendors refused to give their consent. 3M terminated the business anyway and the vendors sued 3M for breach of contract.
The Commercial Court decision
The court relied on principles previously established in landlord and tenant case-law and held that the vendors had not been unreasonable in withholding their consent. The key conclusions (points 4 and 5 perhaps being the most noteworthy) are as follows:
- The burden is on the party requesting consent to show that the refusal to give it is unreasonable.
- What is reasonable depends on the circumstances of each case.
- The party refusing to give its consent does not need to show that the refusal is right or justified, simply that it is reasonable in the circumstances.
- The party whose consent is required is entitled to take into account its own interest to determine what is reasonable (in this case, it was in the vendors' interest to obtain as large an earn-out payment as possible).
- The party whose consent is required does not have to balance its interest with those of the party requesting consent.
In the judge's view, it was reasonable for the sellers to require more information from 3M as to why they were terminating the business and not to take their decision at face value. Furthermore, the probability that, had the sellers still been running the business, they would have closed it down in light of the losses it was making was irrelevant because they had sold the business on the basis of an agreement that included an earn-out.
Comment
There is no duty of good faith in English contract law. Unless a contract provides otherwise, parties entering into contracts may prioritise their own interest over those of their counterparty without finding themselves in breach. To avoid uncertainty as to what is considered reasonable in terms of the parties' contractual obligations, it is recommended that the contract should where possible define the specific circumstances in which consent can and cannot be refused, as well as setting out expressly any conditions that must be met before consent is given.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
