Reasonably withholding consent – can you attach conditions to a requested variation?

In the case of Apache North Sea Limited v INEOS FPS Limited [2020] EWHC 2081 (Comm), Apache was seeking to increase the volume of crude oil that it was entitled to transport via a network of pipelines and equipment, owned by INEOS.

The contract stated that INEO “shall not unreasonably withhold its consent” to the proposed increase in production and transportation of hydrocarbons, but INEOS stated that the proposed change would result in a substantial increase in Apache’s contractual rights and INEOS was only willing to consent if Apache agreed to revise the tariff payable (in favour of INEOS).

Apache was proposing to increase its output by 120 million barrels of crude oil, enabling it to use the network for an additional 20 years, up to 2040.Under the original terms and based on the original outputs, Apache’s right to use the network would have come to an end in 2020 although it was anticipated that production might continue beyond 2020.

INEOS argued that it was entitled to impose a higher tariff, before providing its consent to the change, as INEOS would be making substantial investment into the pipe network, some £500 million between 2019 and 2023. The original tariff was calculated to cover the cost of the network up to 2020 and did not price in investment and maintenance costs to extend the life and upgrade the network beyond 2020.

The Court ruled in favour of Apache and confirmed that INEOS could not impose a tariff increase, before giving its consent to amend the estimated outputs. The tariff payable by Apache was fixed by a clause within their contract, increasing by reference to a series of indices over time. By asserting that its consent was conditional upon a tariff increase, INEOS was forcing Apache to surrender a contractual right it had under their agreement and was an illegitimate attempt to substantially rewrite the bargain between them. As a result, withholding its consent in such circumstances was unreasonable and a breach of contract.

Where a contract states consent must not be “unreasonably withheld” or the parties are subject to a duty of good faith, the contract must be considered as a whole, to establish whether any preconditions are relevant and reasonable. Before providing consent, it is possible to impose terms which address a legitimate concern, where the stipulation is compensatory or mitigatory in nature. However, the requirements for providing consent should not normally seek to increase or enhance the rights of the party granting consent; the party seeking consent should not be held to ransom.

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