Grounds for withholding consent
Apache North Sea v Ineos (High Court) [2020]
Contracts routinely make certain matters ‘subject to the prior consent of [the other contracting party], such consent not to be unreasonably withheld’ The question in this case was whether consent had been withheld on reasonable grounds
Facts:
The dispute arose out of an agreement for the transportation and processing of hydrocarbons (the “TPA”) between Apache North Sea (“Apache”) and Ineos. The TPA was entered into for the transportation to shore of Apache’s oil from the North Sea through the Forties Pipeline System (the “FPS”) operated by Ineos.
In June 2019, Apache wrote to Ineos seeking its agreement to amend Attachment F to the TPA to provide for estimates of production for the period from January 2021 to December 2040. Clause 5.05(a) of the TPA provided that if Apache “requires to…amend Attachment F” then subject to there being Uncommitted Capacity, Ineos “shall not unreasonably withhold its consent to such increase.”
It was agreed that there was Uncommitted Capacity. However, Ineos refused its consent to the request unless Apache agreed to a revision of the tariff payable under the TPA.
Apache argued that it is an established principle when consent is required before a particular step can be taken, such consent not to be unreasonably withheld, that consent cannot be withheld in order to secure a re-writing of fundamental terms of the parties’ contract. Apache maintained that the TPA provided for the calculation of tariffs by taking an agreed base point and escalating it by reference to a series of indices over time. Ineos, by seeking changes to the agreed tariffs as the price of consent, were said to be breaching that principle.
Ineos argued that Apache had no contractual right to transport its hydrocarbons through the TPA after the end of 2020, even less to do so at the contractual tariff. It maintained that the only contractual limitation on Ineos' right to refuse or condition its consent is that the reasons for refusing or conditioning consent must be relevant to Ineos' contractual relationship with Apache and to the change for which Ineos' consent is sought. Ineos pointed to very substantial investments which it intends to make in the FPS and argued that the condition which Ineos seeks to impose is clearly referable to Ineos' contractual relationship with Apache and to Apache's request to amend Attachment F.
Decision:
The court ruled in favour of Apache and agreed that Ineos was not permitted to impose a condition to require a revision of the tariff payable under the TPA before giving its consent to amend Attachment F to the TPA.
The court re-emphasised an important point that consent provisions cannot be used to re-write the parties’ bargain so as to deprive the counterparty to the contract of rights it has under it.
A condition may be permissible where it provides a mechanism for addressing a legitimate concern on the part of the consent-provider in respect to the consequences of providing consent. In the current case, Ineos’ attempt to increase the tariff payable under the TPA was an illegitimate attempt to rewrite the bargain, where the benefit obtained was not compensatory or mitigatory in nature and was therefore impermissible.
So far as the scope and duration of the TPA were concerned, the court concluded that the agreement was one which had no pre-defined term but rather one which could potentially subsist for so long as Apache were producing oil in the North Sea and that, except for two very specific exceptions, whilst it subsisted, Apache was obliged to use the FPS on an exclusive basis for transporting oil back to shore.
Points to Note:
- The court was careful to state that it must be careful not to substitute its own judgment for that of the contractual decision-maker and turn what is essentially an evaluation of fact into an issue of law for the court.
- Unfortunately, the court did not offer any examples of where it might have been legitimate for Ineos to reasonably withhold consent. Each decision on reasonableness will depend upon its own facts.
- The court was less than clear on the question of which contracting party has the burden of proving reasonableness. At one point the court quoted an earlier case which said ‘the burden is on the party withholding consent to show that the decision was ‘reasonable’ in the sense that it was a conclusion that might be reached by a reasonable man in the circumstances (the party does not have to show that the decision was the right one). However, in another section the court said ‘The onus of proving that consent has been unreasonably withheld is on the [party seeking consent’]’.