The recent English High Court case of Porton Capital Technology Funds and others v 3M UK Holdings Ltd and 3M Company provides a practical analysis of the principles to be applied in determining whether or not a party to a commercial agreement has acted reasonably in refusing consent to a request from the other party (where the agreement requires that such consent should not be unreasonably withheld).  The use of the phrase “subject to consent, such consent not to be unreasonably withheld” will be familiar to anyone involved in any way in drafting or negotiating a commercial contract. 

There is a long line of established case law on the reasonableness of withholding consent in the context of leases and landlord and tenant law.  Cases involving the reasonableness for refusing consent in the context of a general commercial agreement are not as common. 

The agreement in question was a share purchase agreement in which the purchaser undertook to procure that the purchased business and a specific product line would not be ceased without the prior written consent of the vendors, which consent was not to be “unreasonably withheld”.  The vendors retained an interest in the business as the overall purchase price was linked to future net sales of the product.

The business subsequently failed with the purchaser arguing that the market moved against that product.  The judge in this matter held that the vendors had acted reasonably when they withheld their consent to the purchaser’s request to cease the business and production of the product.  In deciding that the vendor acted reasonably the judge relied on the principles developed in landlord and tenant cases in that:

• The party requesting consent must show that the other party’s refusal is unreasonable, which is a question of fact
• The refusing party is not obliged to show that its refusal is right, simply that it was reasonable; and
• The refusing party is not required to balance its own interests with those of the requesting party, unless the balance is completely disproportionate

The decision provides some useful guidance on the practical application of the test of unreasonableness in commercial situations.

The case largely concerned issues arising out of a commercial earn out arrangement. For a more detailed consideration of this aspect of the case, please click here to view Brendan Heneghan’s article – Failed Earn Out Arrangements – A Cautionary Tale.

Contributed by Leo Moore and Brian McElligott