Recent news and developments: In commercial contracts, the meaning of a clause which permits a party to transfer its rights subject to the consent of the other party

United Kingdom
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 its consent?

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 consent.