Imposing conditions to contractual consent – is it reasonable?

In the recent decision in Apache North Sea Ltd v INEOS FPS Ltd [2020] EWHC 2081 (Comm), the Commercial Court has provided guidance on the interpretation of consent provisions in a contract where such consent is not to be “unreasonably withheld”.

The dispute arose between INEOS FPS Limited (“INEOS”), owner and operator of the Forties Pipeline System (the “FPS”), and Apache North Sea Limited (“Apache”), who own interests in the Forties Field in the North Sea. Apache had entered into a transportation and processing agreement (the “TPA”) with the original operator of the FPS in 2003. The TPA regulated the terms on which hydrocarbons produced by Apache from its North Sea fields would be brought on-shore through the FPS. INEOS subsequently purchased the FPS and became a party to the TPA.

Attachment F to the TPA set out Apache’s estimated production profile up to the end of 2020. In June 2019, Apache sought INEOS’s consent to amend Attachment F to confirm its capacity requirements from 2021 up to 2040. The TPA entitled Apache to amend Attachment F and, subject to there being sufficient uncommitted capacity, and subject to INEOS’s consent, with such consent “not to be unreasonably withheld”.

INEOS stated that it was prepared to provide its consent if Apache agreed to revise the contractual tariff per barrel under the TPA for the extended period. This change would provide INEOS with a significant additional benefit. Apache argued that it was unreasonable for INEOS to place such a condition on its consent.

The Commercial Court’s decision

The Commercial Court agreed with Apache that INEOS was not entitled to demand an increase in tariff as a ­condition to providing its consent. The presiding judge, Mr Justice Foxton J, found that under the terms of the TPA, Apache was entitled and obliged to transport hydrocarbons through the FPS at the agreed tariff. Under the TPA this entitlement and obligation was envisaged to last beyond 2020. Accordingly, in seeking to change the tariff as a condition for its consent, INEOS was attempting to impose a “fundamental revision” to the parties’ bargain which was inconsistent with the terms of the contract and thus unreasonable.

In its judgment, the Court relied primarily on the decision in Sequent Nominees Ltd v Hautford Ltd [2020] AC 28 , which had considered consent ­provisions in property leases. In relying on this case, the Court confirmed that even if a consent provision requires a standard of “reasonableness”, while construing such provision, the Court should not do so in isolation, but should have in mind the overall terms of contract. The Court did however acknowledge that it remains important not to “trespass on issues which are properly part of the evaluative exercise” for the consenting party.

Can a party ‘reasonably’ impose a legitimate condition?

In reaching its decision, the Court ­identified situations where setting ­conditions to consent could be legitimate. The judge noted that the mere fact that the consenting party could gain an entitlement by imposing a ­condition would not in itself make that ­condition unreasonable or illegitimate, citing Lewison J in Sargeant v Macepark (Whittlebury) Limited [2004] EWHC 1333 (Ch). Conditions providing benefits to the consenting party may be legitimate and reasonable, to the extent the ­consenting party seeks to address a legitimate ­concern and provided that the conditions imposed provide a benefit that compensates or mitigates the ­consenting party against the consequences of providing such consent.

Comment

The issue of withholding consent arises regularly under long and short term shipping charter parties, long-term oil and gas contracts, construction contracts and in the context of corporate matters, e.g. joint ventures agreements. The judgment in Apache North Sea Ltd v INEOS FPS Ltd provides much needed ­guidance on consent provisions in the context of general commercial ­contracts, as ­guiding authorities on consent clauses in the past have generally been in the context of property disputes.

Given the current market conditions arising from the ongoing global pandemic, many industry players may likely be reviewing their existing long term agreements to assess whether consent rights could be a means to trigger a renegotiation of contractual terms. A key takeaway form this judgment is that to establish whether consent may be withheld, the parties’ bargain as a whole needs to be considered, and not the ­consent provision in isolation.

In providing or seeking consent, industry players should therefore closely consider the guidance from the Commercial Court’s judgment:

Generally, it will not be considered reasonable for a consenting party to seek to impose conditions which have the effect of enhancing or increasing their rights under the contract.

A party may, however, legitimately attach conditions to its consent which have the effect of enhancing their rights, to the extent these conditions seek to address a legitimate concern and ­provide a benefit that compensates or mitigates the consenting party against the consequences of providing such consent.

A party which either refuses to ­consent, or attaches conditions to its consent, must have regard to the ­parties’ bargain as a whole and the reason for withholding unconditional consent ­cannot be something “wholly extraneous and completely dissociated” from the contract.

The interpretation of these clauses depends on the specific facts and circumstances of the case. To avoid uncertainty, parties should therefore be careful when drafting such clauses, keeping in mind their contractual relationship. Instead of a discretionary reasonableness assessment, the parties should, if possible, consider including clear parameters or conditions for when consent can be withheld.

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