The concept of a contractual arrangement in which one party is able to act unreasonably or whimsically to the detriment of another is one which, from a legal perspective at least, doesn’t sit comfortably.
The shipping case of Abu Dhabi National Tanker Co v Product Star Shipping established that a provision entitling a ship owner to decide whether any port to which a vessel was ordered was dangerous didn’t entitle the owner to act arbitrarily, capriciously or unreasonably. Notwithstanding the absence of any requirement to act reasonably, the discretion had to be exercised honestly and in good faith having regard to the provisions of the contract which conferred it. In effect the court implied an obligation on the owner to act reasonably.
A further application of the courts’ approach to provisions which don’t expressly state that a party must act reasonably is to be found in the recent case of 89 Holland Park v Hicks. This case concerned applications which must be made to approve plans before development could take place. The covenant in question simply stated that work could not be commenced until plans of the development had been approved by a third party.
Interestingly a second covenant affecting the same land and in favour of the same third party was imposed three years earlier and provided for the third party to act reasonably in determining whether to approve plans.
The court, having heard extensive arguments as to why the covenant should be construed strictly held that a qualification of reasonableness should be implied. If the party with the benefit of the covenant was given a complete and unfettered right exercisable on a whim to veto any development it would have wholly undermined the purpose of the original agreement and covenant.
The covenant in question obviously concerned the approval of plans as opposed to development per se. It does however provide a useful reminder of how difficult it is to impose an entirely unqualified covenant requiring consent. If such an unqualified consent is intended (and it is difficult to see why parties would knowingly sign up to one) consideration will need to be given to expressly stating in the documents that is intended to be the case. In the absence of such express (and stark) wording it seems that the courts will continue to impose a framework of reasonableness wherever the consent of one party is required in order to allow, permit or approve the acts of another.
If you require any further information in relation to the points raised in this blog please contact Mark Withers.