When drawing up an agreement governing your business relationships, the meaning of words matters; it is important to ensure that the true meanings and implications of the words commonly used are understood. If there’s a disagreement or dispute in relation to a party’s obligations under a contract, difficulties may arise if words or phrases in fact have a meaning which one or both parties did not appreciate. The following example serves to demonstrate the risk of failing to (i) appreciate the real meaning and implications of the words used in practice; and (ii) give full consideration to the precise obligations you require the other party to a contract to undertake and vice versa.
When is consent unreasonably withheld?
The Commercial Court recently considered the meaning of the phrase ‘consent not to be unreasonably withheld’, which is commonly seen in leases whereby the landlord agrees not to unreasonably withhold consent to the assignment of the lease, for example. However, the phrase is also used in commercial contracts.
The facts of Porton Capital Technology Funds and others v 3M UK Holdings Limited and another are as follows:
- 3M purchased a company in exchange for £10.4m and an earn-out payment based on the 2009 net sales of the company’s product (a test for the detection of MRSA).
- 3M agreed that it would not cease to carry on the business of developing and marketing the product ‘without the written consent of the vendors, which shall not be unreasonably withheld’.
- Due to a number of factors, 3M sought consent to cease to carry on the business on several occasions in 2008, which was refused.
- 3M ceased to carry on the business with effect from 31 December 2008.
- The sellers sued 3M for breach of contract. The Court had to determine whether consent had been unreasonably withheld.
The Court found in the sellers’ favour. The Court considered case law on the meaning of ‘consent not to be unreasonably withheld’ and approved the applicability of principles derived from cases between landlords and tenants to cases involving commercial agreements, namely that:
- The onus is on the party alleging unreasonableness (i.e., 3M) to show that the refusal of consent was in fact unreasonable;
- The sellers did not need to show that they were correct or justified in refusing their consent, only that it was reasonable in the circumstances;
- The sellers were entitled to take their own interests into account (in this case, obtaining an earn-out payment which is as large as possible); and
- The sellers were not required to balance their own interests with 3M’s interests or the expense being incurred by 3M.
The Court found that the sellers were entitled to require further information from 3M in the circumstances and that it was reasonable not to have accepted 3M’s arguments in favour of ceasing the business at face value.
The inclusion of the proviso that the sellers’ consent could not be unreasonably withheld may have been intended to protect both parties’ interests. On one hand, the sellers’ consent to the cessation of the business was required, providing some comfort that 3M would not simply cease the business without sufficient reason, thereby jeopardising the earn-out payment. Conversely, from 3M’s perspective, the vendors could not withhold consent on an arbitrary basis if it was not ‘reasonable’ to do so (for example, for a reason completely unconnected to the circumstances of the parties’ relationship in relation to the agreement between them). However, as this case shows, the inclusion of the phrase ‘consent not to be unreasonably withheld’ may not in fact provide the reassurance envisaged by the party required to seek consent.
Common words, real business meanings
Each case will turn on its facts and will depend on the surrounding circumstances, meaning that there may be scope for argument as to the extent of the parties’ obligations. The interpretation of particular wording in a contract in light of the circumstances can therefore produce an outcome which differs in practice from that which may have been envisaged by the parties, which can have a significant impact on a business.
In order to avoid unwanted consequences or subsequent arguments in relation to the meaning of the words contained within a contract, it is important when drawing up a contract to consider what you want it to achieve and ensure that this is clearly set out. Detailing as far as possible each party’s obligations, including any steps which must be taken in order to satisfy the same, should reduce the scope for argument.
In our second article, Common legal terms , real business meanings: Reasonable, all reasonable or best endeavours?, we examine the meaning of other common contractual wording.