Consent not to be unreasonably withheld
Crowther v Arbuthnot
Commercial contracts routinely require a contracting party to obtain the consent of their counterparty to a particular act. Again, typically, such provisions expressly state that consent cannot be unreasonably withheld. This case looked at what this means.
Facts:
A Facility Agreement between a bank and its customer provided that a property could only be sold, subject to the bank’s consent (such consent not to be unreasonably withheld or delayed). Upon the sale the net proceeds were to be used to satisfy the loan (or part thereof). At the time the clause was agreed the property, which was held as security for a loan from the bank, was not worth as much as the loan. An offer was made by an independent third party to purchase the property at a fair market value, but the bank refused its consent to the sale. The bank wished to make it a condition of sale that the borrower provided alternative security for the shortfall between the value of the property and the value of the loan as well as agreeing a repayment plan for the remainder of the loan. The borrower contended that the bank was acting unreasonably - the purchase price was at a fair market value and the bank was seeking an additional commercial advantage.
Decision:
- The Court agreed with the borrower that the clause was to be construed according to the principles in a landlord and tenant case: Mount Eden v Straudley Investments (and the other earlier cases referred to in that case) rather than in accordance with the principles in Barclays Bank v Unicredit [link].
- The test in question was an objective one and not one of so called ‘Wednesbury unreasonableness’. The Wednesbury test is whether the decision is so unreasonable that no reasonable person acting reasonably could have made it and so is quite generous to the party being judged. It is essentially a test only of whether the decision taken was rational.
- This was also not a case of balancing one party’s commercial interests against another’s. In this respect see the earlier decision of Porton Capital v 3M from 2011 [link].
- The objective test on the other hand requires the court to consider the background and purpose of the provision i.e. the specific circumstances and whether the decision to refuse consent was a decision which might be reached by a reasonable man in the circumstances. The bank was not allowed to use the lever of the requirement for their consent to be obtained to somehow improve their commercial position.
- If it was clear that a better price would soon be obtainable then it might have been reasonable for the bank to delay consent, but that was not suggested in this case. The touchstone of reasonableness was that the sale should be at arm's length and at fair market value. The lender's desire for further security was understandable but was collateral to the purpose of the provision which was to make sure that the lender was not being prejudiced by the sale.
Points to Note:
- The key question here is whether the decision to withhold consent is a reasonable one in the circumstances and whether withholding consent is for a legitimate purpose
- The case of Property Alliance Group v RBS [2018] is also worthy of note because it commented on circumstances in which the exercise of a contractual right would be regarded as being for a legitimate purpose. In that case RBS had the right to require property valuations to be conducted ‘at any time’ with the borrower, i.e. PAG, being liable to bear the cost of any such valuation once in any 12 month period or where a default is continuing. Essentially, the exercise of a contractual right has to be for the purpose for which the right was granted. In that case the power to require valuations of properties to be conducted (and the cost of those valuations to be passed on) had to be exercised in pursuit of the legitimate commercial aims of RBS rather than, say, to vex PAG maliciously.