Change of control clauses – 'consent will not be unreasonably withheld' – Promissory or proviso?
In this case, the Full Court of the Supreme Court of South Australia considered the scope and nature of a change of control clause providing that a party's prior written consent 'will not be unreasonably withheld'.
The court held that the phrase was not promissory but, rather, in the nature of a proviso and that there was no implied term requiring the party whose consent was sought to cooperate in the process of obtaining consent.
This case provides a detailed examination of a common change of control clause formulation and the legal principles for interpreting the nature of a consent requirement. It also reinforces the limited circumstances in which a term will be implied into a contract.
The case concerned a petroleum exploration joint venture between NSE and Outback. At the time the dispute arose, NSE was a wholly owned subsidiary of Sundance, and Outback was a wholly owned subsidiary of Santos Queensland. Sundance and Santos Queensland were guarantors of their respective subsidiaries' obligations under an implementation agreement to which they were also parties.
Sundance, as part of a larger transaction, was negotiating the sale of its shares in NSE to a company in the Quintanilla Group.
Clause 7.1(b) of the implementation agreement provided that 'a Party must not, without the prior written consent of the other party…permit a Change in Control of that Party to occur.' Clause 7.2 further stated that 'the consent of a Party required under clause 7.1 will not be unreasonably withheld' where the party changing control would continue to have the financial and technical capabilities to perform the obligations for which it was responsible.
Sundance approached Santos Queensland in October 2015, requesting consent to the transfer as a matter of urgency. Following correspondence between the parties, Santos did not consent. Sundance continued to negotiate the terms of the broader transaction with Quintanilla. It was agreed that if Santos had not consented within 36 months of closing, Sundance would have the option to buy the asset back or transfer it to Quintanilla with an indemnity for any liability arising from assignment without consent. By mid-December 2015, for reasons unrelated to the lack of consent, the negotiations came to an end.
Outback commenced proceedings in relation to another dispute between the parties regarding the implementation agreement. NSE and Sundance, by way of a cross-action against Outback and a third party action against Santos Queensland, sought injunctive relief and damages for breach for the failure to give consent to the proposed change of control.
While a number of issues were canvassed, the main questions on appeal were:
- whether the phrase 'will not be unreasonably withheld' was promissory or only in the nature of a proviso;
- if the phrase was promissory, whether the obligation was owed to Sundance (the guarantor parent company) or just to NSE (the joint venturer); and
- whether there was an implied term of cooperation regarding the process of obtaining and giving consent.
The trial judge had held that the phrase was promissory, that the promise was owed to Sundance as well as NSE, and that there was an implied term of cooperation; but that Santos Queensland and Outback were not in breach, and the alleged loss had not been established.
The appeal was dismissed, and the trial judge's finding that Santos and Outback were not in breach upheld. However, the court expressed a very different view on each of the key issues, unanimously holding that clause 7 was not promissory and there was no implied term of cooperation. Two of the three judges also held that had there been a promissory obligation not to unreasonably withhold consent, that obligation would have been owed to NSE but not to Sundance.
Promissory or proviso?
On the nature of the phrase 'will not be unreasonably withheld', the court:
- noted that such provisions are typically construed in the sense of being a qualification of the right to withhold consent, such that where consent is withheld, the proponent party is relieved of the requirement to obtain it, and will not itself be in breach of the contract if it proceeds with the assignment or change of control without it;
- nevertheless pointed to examples in the authorities of clauses where the language used clearly and expressly creates a contractual promise not to unreasonably withhold consent that is distinct from, and not merely a proviso to, the contractual promise to obtain consent;
- stated that the use of 'will not' is not, of itself, indicative of a promise and there is no reason to elevate it beyond other phrases common in this context, such as 'shall not' or 'is not to be'. Further, the passive 'not be unreasonably withheld' tends against a promissory interpretation; and
- held that, even without the benefit of earlier authority, the commercial purpose of, the structure of and the language used in the clause strongly militated against a promissory construction.
In addition, Justice Kourakis framed the promissory construction as one that would unreasonably expose the parties to 'commercial and legal uncertainty and a substantial award of damages to the other's business if they do not prioritise the giving of consent or if their withholding of consent falls on the wrong side of the line drawn by cl 7.2.'
Even if the clause had involved a promissory obligation, Justice Nicholson (Justice Lovell agreeing) held that the obligation would not have been owed to Sundance. Much of the difficulty here arose from the inconsistent use of upper case 'Party' and lower case 'party'. Each of the joint venturers and their guarantor parent companies were parties to the implementation agreement and there was no defined term 'Party'.
After attempting to reconcile the different usages in clauses 7.1 and 7.2, the court remarked that '[i]n circumstances where a consistently logical pattern of use cannot be discerned, one ought not discount the possibility of drafting/proof reading carelessness.' However, the solution was to be found in the settled principles of contractual interpretation. As the judgment highlighted, 'the Court's task is not to choose the most desirable commercial construction, at least where the text is clear and offers up a single or specific workable commercial construction'. That construction in these circumstances was that, if clause 7.2 was promissory, Santos and Outback would have owed the obligation to NSE but not to its guarantor parent company, Sundance.
Implied term of cooperation?
On the existence of the alleged implied term of cooperation, the court held that it did not satisfy the requirements for the implication of a term; in particular, the requirement that it be necessary to give business efficacy to the contract. The court found that:
- while it is clearly established that there is a term implied by law in all commercial contracts that each party will cooperate with each other by doing all such things as are necessary to enable the other party to have the benefit of the contract, that implied term only requires acts necessary to the performance by a party of fundamental obligations;
- since the proviso in clause 7.2 was not promissory, it couldn't be a fundamental obligation such that an implied term requiring acts necessary to the performance of that obligation existed; and
- even if clause 7.2 were promissory, an implied term requiring cooperation in the process of obtaining consent was not so obvious that it went without saying, nor was it necessary to give business efficacy to the contract. The contract was effective and capable of operating with business efficacy independently of, and without the need for, such an implied term.