How many contracts have you drafted or signed that contain the phrase ‘…such consent not to be unreasonably withheld…’?
Well, from my own experience I can say that most contracts I work on have this wording in one or more of the contract clauses. But how many times have you stopped and thought about how important these seven words are? Well, a recent Commercial Court case focused on that very question.
The case, Apache North Sea Limited v INEOS FPS Limited [2020] EWHC 2081 (Comm), concerned the processing of hydrocarbons produced in the Forties Field of the North Sea by Apache, and the transportation of the same through the Forties Pipeline System owned and operated by INEOS.
The original contract dated 2003 was between Apache and BP (British Petroleum). This contract subsequently included an Attachment (F) that covered production estimates for the period from signing to end of 2020. In 2017, BP sold its interest in the Forties Pipeline System to INEOS and in 2019, Apache wrote to INEOS requesting an amendment to the contract to extend the Attachment (F) from January 2021 to end of 2040.
INEOS said that they would be willing to extend the Attachment (F) provided that the payment tariff was revised to increase the amounts that INEOS are paid.
Apache refused to revise the payment tariff saying that the clause concerning the extension of production estimates states: “…. subject to there being Uncommitted Capacity INEOS shall not unreasonably withhold its consent to such increase…” and that INEOS cannot withhold consent in exchange for the re-writing of fundamental terms of the contract. Apache also argued that price increases are already provided for in the contract through the application of indices and that it was contemplated that production would continue beyond the end of 2020.
INEOS on the other hand, argued that a change in tariff as a condition of giving consent to extend the Attachment (F) is a question of fact to be judged on the reasonableness test and that extending the period would involve substantial investment by INEOS which comes at a cost. INEOS also said that after the end of 2020, Apache has no further contractual rights so extending the term would be a significant increase in its rights.
The parties took the matter to Court to ask “….is INEOS acting unreasonably and/or non-contractually by withholding consent…”. The Court found, in Apaches’ favour, that whilst setting conditions to consent could be legitimate in certain circumstances, in this case, INEOS was not entitled to impose the condition, as it would have the effect of re-writing the parties’ bargain by depriving Apache of its contractual rights.
Amanda Williams | Head of Commercial Law