The uncertainty of ‘reasonableness’
‘Reasonableness’ is one of the most commonly-used words in English law yet the concept is hard to define and usually depends on the facts of the case.
But in the event of a dispute, over-reliance on the use of ‘reasonableness’ in an agreement can leave you open to a judge’s interpretation of what is, or isn’t, ‘reasonable’, as happened in this recent case.
Porton Capital Technology Funds sold a company (Acolyte) to 3M under an agreement containing an earn-out mechanism – a device whereby all, or part of, the purchase price is determined by the future performance of the company. The amount payable under the earn-out was 100 per cent of net sales for 2009 up to £41m.
3M agreed to promote Acolyte’s main pharmaceutical product and not cease the business without Proton’s written consent which, crucially, was not to be ‘unreasonably withheld’. In the event, the product performed badly, 3M ceased promoting it, and offered Proton US$1m for their consent to discontinue the business. Porton refused and claimed the maximum earn-out sum of £41m. Was their refusal reasonable?
The High Court ruled that Porton had acted reasonably in refusing consent to cease the business. Key factors in their decision were: the earn-out payments constituted the main sum owed by 3M; previous estimates were considerably higher and Porton reasonably believed that net sales would exceed US$1m; Porton did not have to take 3M’s explanations at face value; and since Porton were not involved in running Acolyte, they had limited knowledge of how it was being run.
As this example shows, commercial agreements should be drafted with precision, addressing all eventualities rather than relying on uncertain concepts such as ‘reasonableness’ to determine important issues. Having a clear-cut understanding in place at the start of a commercial relationship can prevent a shed-load of ambiguity, hassle and legal cost further down the line.
As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.