When is it reasonable to impose conditions on contractual consent?

Commercial contracts frequently require consent to be given by one or more of the parties before a particular action can be taken or the contractual relationship varied. In many cases, that consent should not be "unreasonably withheld or delayed".

In the recent case of Apache North Sea Limited v INEOS FPS Limited [202] EWHC 2081 (Comm), the High Court has given welcome guidance on how the "reasonableness" of a decision to withhold consent can be assessed. The Court in that case decided that it was not reasonable for a party to withhold consent to a proposed contractual amendment in order to obtain a benefit from the counterparty that it was otherwise not entitled to.

What were the facts of the case?

The dispute related to a transportation and processing agreement (TPA) which allowed Apache to move oil through a pipeline system owned by INEOS.

Apache wanted to amend one of the attachments to the TPA to set out its increased estimated production profile for the period January 2021 to December 2040. As required by the TPA, Apache sought INEOS' consent to this amendment but INEOS would only provide its consent if Apache agreed to pay an increased tariff under the TPA. The TPA provided that if Apache requested an amendment to its production profile and, subject to there being unlimited capacity in the pipeline system, INEOS "shall not unreasonably withhold its consent to such increase".

The High Court was asked to determine whether INEOS was acting reasonably or "non-contractually" by withholding its consent to the amendment unless Apache agreed to pay the increased tariff.

What did the Court decide?

The Court decided that on the proper construction of the TPA as a whole, it was unreasonable and inconsistent with Apache's contractual rights for INEOS to make its consent conditional on Apache agreeing to pay an increased tariff. The imposition of that condition would have been inconsistent with the terms of the TPA as it required a fundamental change to Apache's obligations under the contract.

In making this decision, the Court acknowledged a number of principles that are of general application to the interpretation of consent provisions, including that:

• a consent provision should not be construed in isolation but in the context of the other terms of the contract, to determine what the consent-giver was expressly permitted to do;
• it will not normally be reasonable for the consent-giver to impose a condition which is designed to increase or enhance the rights they enjoy under the contract; and
• conditional consent may be justified where the condition is intended to mitigate against or compensate for a legitimate concern which could arise as a consequence of the consent being given.

Comment

The case is particularly noteworthy as it considers the scope of legitimate reasons to withhold consent in a general commercial context. Most other reported decisions in this area relate to landlord and tenant disputes.

It confirms that when considering "reasonableness" requirements in contractual consent provisions, the Court will be reluctant to permit the parties to fundamentally rewrite their agreement. The circumstances in which conditional consent is likely to be deemed legitimate are also limited - generally to where that condition mitigates a risk or compensates for the consequences of granting consent.

Where possible, contract drafters may wish to avoid terms such as "reasonableness" or "good faith" when drafting contractual decision-making provisions as they will always be open to interpretation. Instead, and to ensure greater contractual certainty, it may be preferable to expressly state in the contract that consent will be deemed to be given provided specified conditions have been met or actions taken. This may avoid difficult decisions as to whether a party has acted reasonably or not.