Commercial Contracts

Three recent cases highlighted how important it is for the parties to carefully consider what they would like to achieve under the certain provisions of an agreement, as opposed to over-relying on contractual phrases.

"Consent not to be unreasonably withheld"

One commonly found contractual phrase is "such consent not to be unreasonably withheld". The case of Porton Capital Technology Funds & Others v 3M UK Holdings Ltd & Another [2011] EWHC 2895 (Comm) is a notable example confirming that the party's reasons for withholding consent do not need to be accurate or justified, they just need to be reasonable taking into account their own interests and not those of the counterparty seeking consent.

The purchasers who were the defendants in the proceedings (together 3M) purchased the entire shareholding in Acolyte Biomedica Limited (Acolyte).

Payment for the shareholding was structured so that the sellers received £10.4 million on completion and a future earn-out of up to £41 million based on Acolyte's 2009 sales. The sellers therefore had an interest in Acolyte's on-going performance. The sale agreement included a clause stating that Acolyte would not cease to carry on its business "without the written consent of the sellers, which shall not be unreasonably withheld".

Acolyte's business failed and 3M asked the sellers to consent to Acolyte ceasing business and offered the sellers US$1.07 million compensation. The sellers refused to consent unless 3M paid them the maximum £41 million earn-out. 3M refused and closed down the operations of Acolyte, resulting in no sales in 2009 at all and, therefore Alcolyte not able to afford to pay the earn-out.

The sellers maintained the cessation of business of Acolyte was due to 3M's breach of the sales agreement and sued for loss of profits (the potential earn-out). 3M argued that the sellers had acted unreasonably in withholding consent to Acolyte ceasing business and 3M accordingly had the right to simply shut down Acolyte.

The question before the High Court was whether the sellers had acted reasonably in withholding consent to Acolyte ceasing business. Applying existing case law the judge held that the sellers had indeed acted reasonably. The following main points can be inferred from this judgment:

It is for the party seeking consent to prove that the withholding party's refusal to consent is unreasonable The withholding party does not need to show that its refusal to consent was correct or justified. It...