Consent not to be "unreasonably withheld"
The Court of Appeal has had cause to consider in
the context of a commercial contract the meaning of a clause which
permits a party to transfer its rights subject to the consent of
the other party, not to be unreasonably withheld.
In British Gas Trading Limited v. Eastern
Electricity plc, BGT sought to transfer a contract to Centrica plc
as part of the overall British Gas demerger strategy. The Court of
Appeal drew a distinction between clauses which conferred a right
to "consent" and those which conferred a right only to "approve". A
"consent" clause will confer a greater discretion on a party than a
mere "approval" clause.
In this case the contract fell into the "approval"
category. The parties when entering into the contract must have
contemplated that the transfer clause would lead to a change in the
identity of a counterparty and that the new party would be likely
to be under different control. Eastern had the right to "approve"
the identity of the transferee but, in the absence of any objection
based on the identity or creditworthiness of the transferee, there
was no basis on these facts upon which consent could reasonably be
withheld. BGT's wider purpose (to circumvent Eastern's right to
terminate the contract as a result of the change in control of BGT)
was not a relevant consideration.
This case lends itself to comparable clauses in
financing documents. For example, a clause in a syndicated loan may
allow banks to transfer all or part of their commitment subject to
the borrower's consent, such consent not to be unreasonably
withheld. Such a clause would seem to fall into the "approval"
category. How would this fetter the borrower's ability to withhold
A borrower might argue that it only wishes to have
banks in the syndicate with which it has built up a relationship.
Or that the transfers by banks of part only of their commitment can
cause the number of banks in the syndicate to expand to
unmanageable numbers. Would these grounds justify the withholding
of consent? It would appear not. When borrower and banks agreed the
transfer clause they presumably envisaged that it would operate to
allow banks to leave and new banks to join the syndicate, and by
catering for transfers of part only, that it could cause the
syndicate to expand. In the absence of any objections to the
creditworthiness of the new bank, the borrower may be hard pressed
to find any alternative reasonable grounds to withhold its