In many contracts, in particular, those dealing with landlord and tenant relationship, if some sort of consent is required from one party to enable the other party to do (or not to do) something, there is normally provision that such consent should not be unreasonably withheld. However, the issue whether consent has been unreasonably withheld or not is usually not easy to determine.
In the very recent case Apache North Sea Ltd v INEOS FPS Ltd, the Commercial Court decided that it was illegitimate and unreasonable to set onerous conditions prior to giving consent upon renegotiation of commercial terms where such terms would provide the consenting party a more enhanced financial advantage or rights which otherwise will not have been entitled under the original terms of the contract.
Background
Apache and INEOS FPS Ltd entered into contract for transportations of hydrocarbons produced by Apache though INEOS pipelines. Within the agreement, there were many attachments. Apache wished to revise attachment F which sets out its estimated production profile for the period January 2021 – December 2040. The clause was tied to a ‘consent provision’. The Commercial Court was invited to interpret the ‘consent provision’ because INEOS purported to impose a pre-condition on such consent by requesting Apache to pay more for their service to ship increased quantities of products.
Judgment
The Commercial Court revisited some of the basic principles of construction of contract in general and then went on to refer to well established landlord and tenant’s disputes case law in relation to the consent provision.
As Lord Briggs JSC’s judgment in the case Sequent Nominees Ltd v Hautford Ltd [2019] UKSC 47, [2020] 1 All ER 1003 states “the correct approach is to construe [the consent provision] so as to discover what, upon its express terms, it permits the landlord to do”, an exercise to not view consent provision terms in isolation.
The Judge further confirmed that even where a contractual provision is subject to the standard of reasonableness, the court must still construe the contract as a whole in order to establish what the consenting party is entitled to do under the relevant clause. Such clause should not re-construct the initial terms negotiated and results in placing one party at a more advantageous position whilst the other party is deprived.
More importantly, the Commercial Court judgment made a re-statement of the general principle when it comes to consent provision. The fact that by imposing such a condition, the consenting party may gain financial advantage which it is previously not entitled to renders the condition illegitimate and unreasonable. A condition may be legitimate to the consenting party if it addresses a legitimate concern whereby the result is compensatory or mitigatory in nature.
Comments
Although many may view that this is related to oil and gas transportation and processing agreement, such issue is widely seen in many commercial contracts and landlord and tenant’s contract. This case serves as an important reminder that:
- The refusal to consent is likely to be illegitimate and unreasonable if a condition tied to the consent places one party at a financial advantage or enhance that party’s right when the original terms does not provide for such rights.
- On the other hand, a refusal to consent may be legitimate when the condition imposed addresses a legitimate concern and the result arises from such consent is compensatory or mitigatory in nature.
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