“Consent will not be unreasonably withheld” – promissory or proviso?


18 June 2020


Introduction

The appeal decision of the Full Court of the Supreme Court of South Australia in New Standard Energy PEL 570 Pty Ltd v Outback Energy Hunter Pty Ltd [2019] SASCFC 132 (per Kourakis CJ, Nicholson and Lovell JJ) provides interesting commentary on the meaning of the words “consent will not be unreasonably withheld” in the context of a change of control provision in a commercial contract.

The decision relates to a (counter) claim commenced by New Standard Energy PEL 570 Pty Ltd (NSE) and its parent company, Sundance Energy Australia Ltd (Sundance), against Outback Energy Hunter Pty Ltd (Outback) and its parent company, Santos QNT Pty Ltd (Santos QNT), for damages for breach of contract due to unreasonably withholding consent to a proposed change of control of NSE.  Sundance claimed damages on a loss of opportunity basis in the order of US$10 million plus AU$10 million.

 

Change of control clause

The change of control clause in question appeared as clause 7 of a contract referred to as the “Implementation Agreement”.  The Implementation Agreement related to Outback and NSE’s respective joint venture interests and obligations in respect of Petroleum Exploration Licence 570.  Santos QNT and Sundance were parties to the Implementation Agreement as guarantors of the obligations of their respective subsidiaries.

Clause 7.1 of the Implementation Agreement prohibited the assignment of interests or change in control of a party (requesting party) without the written consent of the counterparty (consenting party).  Clause 7.2 provided that consent “will not be unreasonably withheld” where the requesting party would continue to have the requisite financial and technical capabilities under the Implementation Agreement.

 

Promissory or proviso?

At the heart of NSE and Sundance’s claim (and subsequent appeal) was whether the reference in clause 7.2 to a party not unreasonably withholding consent was promissory in nature or merely a proviso.

The distinction is important because if promissory, the obligation would give rise to a right to sue the consenting party for damages in the event consent was unreasonably withheld.  In contrast, if the obligation was in the nature of a proviso and consent was unreasonably withheld, the requesting party would be relieved of the requirement to obtain consent and be entitled to proceed to effect a change of control without consent (without being in breach of contract).  However, there would be no right for the requesting party to sue the consenting party for damages for breach of contract.

At first instance, the trial judge (Blue J) held that the reference to the consenting party not unreasonably withholding consent in clause 7.2 was promissory in nature.  The trial judge considered the use of the words “will not unreasonably consent” strongly indicated the consenting party was promising not to unreasonably withhold consent.  Further, the structure of clause 7 (separated into two subclauses) was found to indicate: firstly, a prohibition on a change of control without consent; and secondly, a promise not to withhold consent in certain circumstances.  Finally, the trial judge held that the evident purpose of clause 7.2 was to impose upon the consenting party an obligation not to refuse consent in the defined circumstances.  Accordingly, the context of clause 7 as a whole indicated the parties were promising not to withhold consent in the defined circumstances.[i]

On appeal, Nicholson J (with whom Kourakis CJ and Lovell J agreed) considered the underlying commercial purpose of clause 7.  Nicholson J held that the purpose of clause 7 as a whole was to provide the consenting party with an opportunity to satisfy itself of the credentials of a proposed counterparty in the event a change in control was to be effected, whilst also protecting the requesting party from being at the mercy of the consenting party (where consent might be withheld for no good commercial or other reason).

Nicholson J referred to the body of case law raised by the Santos parties, which indicated that consent requirements in the context of change of control provisions are typically construed in the sense of being a proviso or qualification to the right to withhold consent, rather than a contractual promise to that effect – unless express words are used to indicate otherwise.[ii]  Further, Nicholson J pointed to the use of the passive voice in the drafting of clause 7.2 as indicating the parties did not intend the obligation not to unreasonably withhold consent to be promissory.

Based on the underlying commercial purpose of, the structure of and the language used in clause 7, Nicholson J held that clause 7.2 should be read as a proviso to or qualification of the operation of clause 7.1 only, and not a separate promise in its own right.[iii]

 

Other matters

The Full Court went on to consider whether, if clause 7.2 was promissory, there was an implied term of cooperation arising upon a party receiving a request for consent to a change in control.  It was held that the requirements for implying a term were not met – in particular, the requirement the term be necessary to give business efficacy to the contract – and so no term requiring cooperation was implied.[iv]

The Full Court also considered the question of, if clause 7.2 was promissory, to whom the obligation not to unreasonably withhold consent was owed.  Nicholson J (with whom Lovell J agreed) held the obligation was owed by and to the joint venture parties only, and not the parent company guarantors.  This would have impacted on Sundance’s ability to recover damages on a loss of opportunity basis suffered by Sundance but not NSE.  Kourakis CJ disagreed on this point and held the intention of the parties was to impose on the parent companies an obligation not to permit a change of control without the consent of the other parent company.  Accordingly, Kourakis CJ took the view the obligation not to unreasonably withhold consent was owed by each parent company, for the benefit of the other parent company.

In any event, at trial and on appeal, it was held that the Santos parties had not unreasonably withheld consent, and therefore had not breached clause 7.2.[v]

 

Conclusion

This case provides a useful illustration of the distinction between when a requirement under a contract is promissory (and therefore capable of giving rise to a claim for damages upon breach), or merely a proviso (in the nature of a qualification only).

Arguably, in the context of a party wishing to effect a change of control and seeking consent from a counterparty to the change of control, it is appropriate the party seeking consent should bear the risk of not obtaining consent, rather than the passive party (the consenting party) bearing the risk of a claim against it for damages on the basis it might have withheld consent unreasonably.

In practice, what can a requesting party do if the consenting party is unreasonably withholding consent?  Whilst perhaps not ideal, the requesting party will be relieved of the requirement to obtain consent and could proceed with the change in control without consent (without being in breach of contract).  However, there would be some risk in doing so, and the requesting party could be exposed to a later claim by the consenting party that the consenting party had a reasonable basis for withholding consent.  As an alternative (but potentially costly) option, the requesting party could consider seeking urgent declaratory relief from the courts in order to obtain certainty before proceeding with the change in control.

[i]  Outback Energy Hunter Pty Ltd v New Standard Energy PEL 570 Pty Ltd [2018] SASC 8, at [394] and [403].

[ii] See for example, Ideal Film Renting Co v Nielsen [1921] 1 Ch 575.

[iii] New Standard Energy PEL 570 Pty Ltd v Outback Energy Hunter Pty Ltd [2019] SASCFC 132, at [96].

[iv] Ibid at [141].

[v] See also New Standard Energy PEL 570 Pty Ltd v Outback Energy Hunter Pty Ltd [2020] HCASL 81.

 

This article provides general commentary only.  It does not purport to be legal advice.  We recommend that you seek professional advice having regard to your own particular circumstances.

 

Author:

Tasha Naige, Senior Associate in our Transactions Team

Contact
Email:  tnaige@dmawlawyers.com.au
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