It is common for commercial contracts to include provisions that prohibit a party from doing certain things unless with the prior consent of the other party, in which consent may not be “unreasonably withheld”. These clauses usually relate to the assignment of contractual rights or a change of control of a party. The intention of these clauses is clear – a party would have conducted due diligence on the other party (i.e. with respect to its financial position, expertise, resources or track record) prior to entering into a contract. These clauses aim to protect a party from entering into a contract, only to be confronted with the situation where another party will step in.
In light of the COVID-19 pandemic and the current economic climate, many businesses are reviewing and reassessing their current contractual arrangements. It may be that parties will need to make alternative arrangements in order to fulfil their obligations under an existing contract. Quite often, such arrangements may require consent from the other party.
Historically, Australian judicial guidance on determining consent was developed in the context of leasing and real property transactions. However, more recently, the same principles have been extended to the wider commercial context. In particular, the Federal Court considered the issue of “consent” and the test of “reasonableness” under a failed commercialisation partnership in the epic battle between the University of Sydney (the University) and its former commercialisation partner (ObjectiVision). This case considered a wide range of issues in the context of intellectual property commercialisation arrangements, but also gave some valuable insights into what is expected of a party’s conduct in terms of “reasonableness” when navigating a commercial relationship.
In 1999, the University developed and filed a patent for a technology software that could detect partial and complete blind spots in connection with glaucoma. In the following year, the University entered into an exclusive licence agreement with a medical device company named ObjectiVision (the Licence) to develop the technology into a commercial product called AccuMap, which ran on a software called Operative Perimetry Evoked Response Analysis (OPERA).
Initially the commercial relationship between the University and ObjectiVision was positive. However, as a result of several technical issues, failure to meet performance standards and the breakdown of key relationships between the parties, the University terminated the exclusive nature of the Licence in August 2008.
The University started developing its own software, TERRA. In January 2010, the parties went into mediation and entered into a Heads of Agreement which reinstated the exclusive licence under the Licence for a limited time to allow ObjectiVision to complete its commercialisation obligations, failing which, the Licence would be terminated (the Heads of Agreement).
In 2011, the University terminated the Heads of Agreement and commenced dealing with Visionsearch Pty Ltd (Visionsearch).
In 2014, the University commenced proceedings in the Federal Court of Australia alleging that ObjectiVision had continued to infringe the University’s patented technology as it had not accepted the termination of the Licence. ObjectiVision in turn alleged that the Licence was not validly terminated and claimed that the University breached key terms of the Heads of Agreement. ObjectiVision also claimed that the University was in breach of its agreement when it started developing TERRA and working with Visionsearch. All copyright infringement allegations were dismissed.
Of particular interest, amongst a number of other issues considered by Justice Burley, was whether consent was “unreasonably withheld” by the University in regards to Objectivision’s third-party license agreement with Hamisa Holdings (Hamisa).
“Reasonableness” and withholding consent
The leading High Court authority on “reasonableness” and withholding consent is Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd  HCA 51 (Secured Income). The Court found that reasons for refusal must be a reason that was affecting the subject matter of the contract and not something extraneous and disassociated from the main issue of the contract.
In Fulham Partners LLC v National Australia Bank Ltd  NSW CA 296 (Fulham Partners), it was held that refusal to provide consent on the ground that there were doubts that the party could perform their obligations would, if the ground was made out, not be “arbitrary” or “unreasonable”. Further, the onus of proving whether consent has been unreasonably withheld was on the party seeking to demonstrate that the refusal was unreasonable.
Importantly, even though a party is not obliged to explain or justify why it is withholding consent, a court may see such lack of explanation as being an indicator of unreasonableness (Idoport Pty Ltd  NSWSC 524).
However, all authorities agreed that ultimately, whether a decision to withhold consent was “reasonable” depended on the facts of each case, and its particular circumstances, including the nature and object of the specific contract and the purpose of the clause prohibiting the “unreasonable” withholding.
Was the refusal of consent by the University unreasonable?
In the current case, ObjectiVision was unable to fulfil its obligations and was undergoing financial hardship. It attempted to salvage the commercialisation venture and raise further funds by allowing a third party, Hamisa, to acquire a majority of ObjectiVision’s shares.
Under the Heads of Agreement, clause 1.6(2) required ObjectiVision to obtain consent from the University who must “provide its consent in circumstances where the Third Party has the resources required to commercialise the AccuMap 2 product and will not withhold its consent unreasonably”.
A subscription deed was entered into by ObjectiVision and Hamisa in January 2001 but there was no written consent from the University. ObjectiVision claims that it sought consent from the University and that the University had unreasonably withheld consent for the Hamisa transaction.
In considering this issue, Burley J referred to the principles expounded in Secured Income and Fulham Partners. The Court considered a large amount of evidence and determined the following facts specific to this case:
- ObjectiVision had attempted to commercialise the AccuMap 2 since 2005 and yet the white prototype of the AccMpa2 was still not completed;
- the relationships between key personnel had broken down;
- the commercial objective of the Heads of Agreement was to determine whether the unsuccessful efforts to commercialise the technology could be achieved with the assistance of a third party investing. In light of this, the “resources” required means more than just “financial” resources and should also include clinical, medical, regulatory or industry resources;
- the funds from the Hamisa transaction were highly conditional and inadequate; and
- Hamisa did not have skills to contribute to the technical aspects of the commercialisation of the patents.
In light of the facts presented, the Court determined that the University had reasonable doubts as to whether Hamisa had the resources required to commercialise AccuMap2. The Court concluded that the University’s refusal of consent was not unreasonable.
How to obtain consent
The Court was also critical of how ObjectiVision attempted to obtain consent from the University.
Clause 1.6(1) of the Heads of Agreement stated that ObjectiVision must “undertake(s) to consult with the University regarding any approach to …Third Parties”. The Court commented that whilst it was not essential to consult the other party of all details of negotiations with third parties, merely sending a letter enclosing an early draft agreement for the proposed transaction without explicitly seeking consent was not “consulting”. Further, the Court noted that ObjectiVision did not provide the University with the final terms of the Hamisa transaction and under these circumstances, the University was not obliged to give its “after-the fact consent”.
The Court made it clear that parties seeking consent must provide the consenting party with all information regarding the proposed transaction. It would also be preferable to explicitly request consent for proposed transactions.
Burley J also noted that under clause 1.9 of the Heads of Agreement, it was clear that a condition of the University granting consent under clause 1.6 will be that ObjectiVision “first assigns” certain patents to the University. The patents were never assigned to the University. As clause 1.9 was a condition precedent, the Court held that the failure of ObjectiVision to comply with clause 1.9 meant that the University was not required to consider or grant the consent under clause 1.6. In other words, a party must ensure that they fulfil any condition precedents before seeking consent from the other party.
If a business wishes to alter current contractual agreements and if such variations require consent from the other party, it is important for the business to obtain proper advice regarding how the consent can be sought in accordance with the existing agreement. Even if the contract states that consent cannot be withheld “unreasonably”, whether the actions of the other party is considered “reasonable” will depend on the facts and terms of each case.
The authors thank Sophie Afaras, Paralegal, for the research conducted for this article.