When can you “reasonably” withhold consent in a commercial context?

13 February, 2012

The recently decided case of Porton Capital Technology Funds & Others v 3M UK Holdings Ltd & Another [2011] EWHC 2895 (Comm)1 is important as it delivered judgment on three separate points.

 

Facts

3M UK purchased the entire shareholding of Acolyte Biomedica Limited (Acolyte) under a share purchase agreement (SPA) with Acolyte’s shareholders (the sellers). Acolyte’s only commercial product was a test process and related technology for detecting MRSA, referred to as BacLite. The purchase price was £10.4 million in cash and a further payment based on net sales in 2009.

 

Breach of contract and repudiation

To protect the interests of the seller, the SPA set out a number of obligations relating to the conduct of the business imposed upon 3M UK including actively marketing BacLite in the United States, EU, Canada and Australia, diligently seeking regulatory approval for BacLite in those jurisdictions to the extent such approval was required and not ceasing to carry on the Acolyte business or the development or marketing of the BacLite product without the written consent of the sellers, which consent was not to be unreasonably withheld or delayed.

The Court found that 3M UK had breached its obligation by abandoning the clinical studies and failing to take any further steps after March 2008 to seek approval for BacLite in the US. The Court did not accept 3M UK’s argument that it would have been futile to continue to seek approval for the product as approval would never have been obtained in light of the performance issues that had been identified by the clinical studies.

The obligation for 3M UK to actively market BacLite required more than simply taking some active marketing steps, and meant that 3M UK’s marketing efforts needed to be characterised by action. This interpretation of the meaning of “actively” was in line with a general definition given in the Oxford dictionary which was relied upon by the sellers. The Court found that 3M UK’s efforts to market the BacLite product in the EU ceased to be characterised by action from the end of June 2008, thereby giving rise to a breach of its obligations under the SPA. It was found that by that time, although some marketing activities were continuing they were largely confined to continuing dealings with already interested potential customers, and 3M UK was no longer making a substantive effort to market the product to new customers.

3M UK’s cessation of the business on 8 December 2008 was a repudiation of the SPA and it remained in repudiation at all material times thereafter. That repudiation was accepted by the Particulars of Claim in the court proceedings.

 

Withheld consent


As the product was not successful, in 2008 3M UK wrote to the sellers seeking consent to cease the business and offered them compensation of $1.07 million under the earn-out scheme.  The sellers refused to give their consent unless they received the maximum compensation available under the scheme (£41 million). 3M UK ceased the business before 2009 so there were no sales in that year to be considered under the earn-out. 3M UK claimed the sellers had unreasonably withheld their consent and 3M UK had therefore been entitled to terminate the business. The product’s own failings and market meant that sales could only ever have been at the low value of $1.07 million according to 3M UK.

The Court held that the following four principles should be applied in deciding whether the sellers acted reasonably in withholding their consent:

(i)  the burden was upon 3M UK to show that the sellers’ refusal to consent to the cessation of the Acolyte business was unreasonable;

(ii)  it was not for the sellers to show that their refusal of consent was right or justified, simply that it was reasonable in the circumstances;

(iii)  in determining what is reasonable, the sellers were entitled to have regard to their own interests in earning as large an earn-out payment as possible; and

iv)  the sellers were not required to balance their own interests with those of 3M UK, or to have any regard to the costs that 3M UK might be incurring in connection with the ongoing business of Acolyte.

In applying the principles set out above and finding that the sellers were reasonable in refusing their consent, the Court agreed that it was reasonable to suspect that some of the failure of the product was due to breaches of the SPA by 3M UK. It was also reasonable to expect that the sales in 2009 would be more than $1.07 million. In fact there were a number of 3M UK estimates at the time which exceeded the figure offered, and the $1.07 million estimate was meant to be conservative.

 

Quantum

As a result of 3M UK breaching the terms of the SPA and discontinuing the product, there could be no certainty as to what the earnings of the product would otherwise have been in 2009 in order to determine the damages due to the sellers. Relying on the old decision in Armory v Delamirie (1722), the sellers argued that because the very actions of 3M UK in breaching the contract had made the quantification of damages more difficult, the Court should resolve any uncertainties in favour of the sellers.

As the case did not concern a refusal to produce goods to the Court or any suppression of evidence, it held that the principle in the Armory case that the sellers sought to apply was not appropriate. The presumption in the claimants’ favour would only arise in a case of doubt and the Court did not have sufficient doubt about the quantification of damages to require the application of the principle. Breach of contract does not of itself entitle a claimant to have uncertainties regarding the level of damages resolved in its favour.

 

Conclusion

Having found in favour of the sellers in relation to the breach of contract claim, the Court held that damages should be calculated on a loss of profits basis, by reference to the net sales that would have been achieved in 2009 if 3M UK had not breached its obligations under the SPA. On the factual and expert evidence presented, the Court determined that the aggregate net sales of BacLite in 2009 would have been $2,152,000 but for the 3M UK breach, and awarded damages in the sum of $1,299,808 being the sellers’ 60.4% share of the aggregate net sales.

The case is rare example of an instance where the Court has ruled on the reasonableness of giving consent in a commercial context. There is always likely to be some uncertainty about the precise level of damages suffered by a claimant, particularly where the damages claim is based upon projected sales. The decision in the Armory case was principally motivated by the conduct of the defendant in that case, and ought not to become a principle of general application.

 

1Link to judgment: Porton Capital Technology Funds & Others v 3M UK Holdings Ltd & Another [2011] EWHC 2895 (Comm)

 

 

 

Reviewed in 2015