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Case law: Court gives guidance on when withholding consent under commercial agreements is ‘unreasonable’

Businesses required to give consent ‘not to be unreasonably withheld’ under commercial agreements will welcome judicial guidance on how the courts will determine whether a refusal is reasonable.

Legal Alert

This update was published in Legal Alert - June 2014

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

In a recent case, a business could terminate an agreement early provided the other party (a bank) consented. The bank had to act in a ‘commercially reasonable’ way when deciding whether to consent. When the business sought to terminate the agreement, the bank made its consent conditional upon being paid five years’ fees.

The Court of Appeal ruled that it was not enough for the bank to say it had acted in good faith, and not arbitrarily or irrationally. The test of whether the condition was ‘commercially reasonable’ was objective – would a reasonably commercial person in the same position have imposed such a condition? A reasonably commercial person was entitled to make a decision in its own interests only – it did not have to take the business’s interests into account and carry out a balancing exercise between them.

As the bank’s commercial interest in the agreement was continuing revenue for the term of the agreement, and given that five years’ fees was not disproportionate compared to its reasonable revenue expectations if the agreement had continued, requiring payment of that sum was a reasonable condition to impose for consenting to the early termination of the agreement.

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