[The vocabulary in bold can be found in a short Glossary section at the end of the text]
When negotiating and drafting a commercial contract, it is vital to be clear about the rights and obligations of the parties to it. Both parties need to be as clear as possible about what the contract expects. Contractual disputes are sometimes very costly to resolve.
A commercial contract may contain a clause which needs one party to consent, to do something before it can be done. Such a clause often contains a further requirement on that party; namely, that they do not withhold consent unreasonably. The usual wording in such clauses is something like, ‘such consent not to be unreasonably withheld.’
It is easy to see that these kinds of clauses may create problems. Any clause which depends on something not being done ‘unreasonably’ is vague. One party may think they are doing something reasonably, while the other party may (strongly) disagree.
The recent (July 2020) English High Court (Commercial Division) case of Apache North Sea Limited v Ineos FPS Limited EWHC 2081 (Comm) gives guidance on the extent to which a party can attach conditions to the granting of consent without breaching the requirement not to withhold consent unreasonably.
The dispute between the parties involved a Transportation and Processing Agreement (“TPA”) in relation to hydrocarbons. Under the TPA, the hydrocarbons from Apache’s ‘field’ were to be transported through a pipeline system controlled by INEOS. Apache paid a tariff to INEOS for this.
Apache wished to increase its production profile. Essentially, under the contract, it needed INEOS’s consent to do this. The relevant TPA clause dealing condition.
The English High Court (Foxton J) gave judgment in favour of Apache. In doing so, it gave guidance on the extent to which one party can attach conditions before giving consent under this kind of contract clause. Foxton J held that it may sometimes be legitimate for a party to attach conditions to the giving of consent; for example, to genuinely protect a benefit derived from the contract. However, it would not usually be reasonable to do so if the condition would result in the party giving consent obtaining a benefit which was not “compensatory or mitigatory in nature”, which was the case here.
Decisions like this usually provide some practical help to lawyers. In this case, once again we see a situation where a contract has not provided for a situation and the parties have been forced to go through a costly – and potentially damaging – court process to resolve it. It also highlights, once again, the problems that can arise when vague language like ‘not to be withheld without reasonable consent’ is used in commercial contracts.
The full judgment in the case can be found here: https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Comm/2020/2081.html&query=(apache)+AND+(ineos)
to resolve – to resolve something, in this context, means to find a solution to, or settle, a problem.
to consent – to consent essentially means ‘to agree’. Consent can be given or withheld.
to withhold – to withhold means to refuse to give something to somebody.
vague – If something is ‘vague’, it means it is unclear or uncertain.
to breach – In a legal sense, ‘to breach’ means to break, or fail to do or observe something, that you are required to do. You will breach a contract, for example, if you fail to do what, under the contract, you are obliged to do.
tariff – A tariff is a sum of money which is paid to someone else for doing something. It is often used in relation to taxes payable (for example, when importing goods into a country).
to derive – To derive means to obtain or get something from somewhere else. If you ‘derive a benefit’ from something, it essentially means that you get a benefit or advantage from it.
compensatory – ‘Compensatory’ is an adjective. It usually means some kind of money payment awarded or given to someone because of something somebody else has done wrong, such as caused them an injury or loss. The noun form, ‘compensation’, is something, usually money, awarded to someone because they have suffered some loss or injury.
mitigatory – This is something that reduces or lessens the pain of something. The noun form, ‘mitigation’, means the action of reducing the severity or seriousness of something. The opposite of ‘to mitigate’ is ‘to exacerbate’ (meaning, to make something worse).
Disclaimer: This post is a teaching and studying resource only. It is not intended to be a source of legal information or advice.
© Cambridge Legal Academy 2020