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Legal opinion: Discretion to approve sub-licensing must be exercised in good faith

Posted on 05 February 2008

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by Tim Worden, Taylor Wessing

In the case of Lymington Marina Ltd v Macnamara and others,1 the Court of Appeal examined the scope of a clause in a licence allowing a licensor to refuse to approve a proposed sub-licensee. The licence in question granted the licensee a right to berth a yacht in the licensor’s marina.

The Court of Appeal held that the grounds on which the licensor could withhold its approval were limited to those which relate to the proposed sub-licensee himself and which arise out of his proposed use of the marina. A term should be implied in the licence that the licensor must exercise its power to withhold approval in good faith and should not withhold it arbitrarily, capriciously or in bad faith.

In construing the licence to assess the scope of the licensor’s power to refuse to approve a proposed sub-licensee, the Court of Appeal looked at the express wording of the licence. In contrast to the power to withhold consent to sub-license, which expressly required the third party sub-licensee to be approved by the licensor, the licence stated that the licensor could withhold consent to assign the licence in its ‘absolute discretion’.

Case Summary

A company called Lymington Marina Limited (‘L’) had granted a 98-year licence to berth a yacht in its marina. The licence was, at the time the dispute arose, in the name of Bingham Macnamara (‘B’). B wished to grant sub-licences to use the berth to his two brothers on a rotational basis. L brought an action for a declaration as to the scope of its powers under the licence to refuse a request to sub-license.

The licence contained two provisions of relevance relating to assignment and sub-licensing:

  • ‘The Licensee may: 3(k)(i) assign this Licence as a whole (but not any of the rights hereby granted separately) to an assignee approved by the Company which approval may be granted or withheld at the Company’s absolute discretion. [emphasis added]
  • ‘3(k)(ii) authorise a third party to exercise all the rights hereby granted as a whole but not any of the rights hereby granted separately for a period of not less than one month and not more than twelve months PROVIDED ALWAYS that such third party shall first be approved by the Company.’ [emphasis added]

First Instance Decision

At first instance, the judge held that B’s right to grant sub-licences of his mooring rights under the licence was subject to three restrictions: (1) the sub-licence should be of all B’s rights for the period of the sub-licence, (2) the term of any sub-licence should be between one and twelve months, and (3) the sub-licensee should be approved by L.

In relation to clause 3(k)(ii), the judge held that L could not decline to approve a sub-licensee except on grounds concerned with the identity of the sub-licensee in relation to his proposed use of the marina. L was not entitled, under the terms of the licence, to decline to approve a sub-licensee simply to protect its own commercial interests. The power of approval had to be exercised in good faith on relevant grounds.

The judge accepted both parties’ submissions that there was no duty on L to give reasons for a rejection of a proposed sub-licensee, although he noted that the court could infer from a failure to give reasons that no such reasons existed.

Court of Appeal Decision

L appealed the decision of the High Court. One of the issues which arose on appeal concerned the scope of L’s power to decline to approve a third party sub-licensee under clause 3(k)(ii) of the licence.

The Court of Appeal considered that there were two material questions to be answered on this issue:

(1) Is L’s power to refuse to approve a sub-licensee restricted to grounds related to the particular sub-licensee? (2) Is the power to refuse to sub-license subject to any restrictions, such as that it must be exercised in good faith, and for grounds related to the grant of the sub-licence?

In essence, the first question considers the scope of L’s power, and the second question examines the manner in which the power can be exercised.

Scope of the power to refuse to approve a proposed sub-licensee

On the first question, the Court of Appeal looked at the meaning of clause 3(k)(ii) in the context of the licence as a whole. In particular, Arden LJ, who gave the leading judgment in the case, held that the express wording of clauses 3(k)(i) and (ii) made it impossible to find that there was no distinction between L’s power to refuse under the two provisions.

Clause 3(k)(i) clearly gave L a power to withhold its approval in its absolute discretion.

Furthermore, clause 3(k)(ii) expressly states that it is the proposed third party sub-licensee for whom L’s approval is required – it says nothing, for example, about the terms of the sub-licence. Although the Court of Appeal approved of the first instance judge’s finding that L could not approve a sub-licensee on the basis that the grant of such a sub-licence would be contrary to L’s commercial interest, it held that this should be subject to a caveat: L could refuse to approve a sub-licensee where L’s commercial interests coincide with the reasons for refusal of a sub-licensee on grounds related to that particular sub-licensee.

For example, if a particular sub-licensee was known to have avoided paying mooring fees previously, this could suggest that they would avoid paying such fees under the sub-licence, and this would be an acceptable reason for L to refuse to approve that particular sub-licensee. Such a refusal would be based not only on grounds relating to the particular sub-licensee, but also on the basis that allowing the grant of such a sub-licence would be contrary to L’s commercial interests.

Manner in which the power can be exercised In relation to the second question, the Court of Appeal asked whether a term should be implied into clause 3(k)(ii) so that, even if L exercised the power not to approve a proposed sub-licensee for reasons related to the identity of the proposed sub-licensee, the exercise of the power could be set aside if the grounds of refusal of approval were, for example, in bad faith or wholly unreasonable. Arden LJ applied the ‘business efficacy’ test in assessing whether such a term should be implied. The test states that a term is only to be implied if it is so obvious that reasonable parties would not have thought it necessary to include it or if the implication of the term is necessary to give the contract business efficacy.

The Court of Appeal held that there was an implied term in the licence that L must exercise its power to withhold approval in good faith and should not withhold it arbitrarily, capriciously or in bad faith. Any refusal of approval by L does not need to be objectively justifiable – such a term would be onerous on L and so would not have been implied by the business efficacy test. The Court of Appeal concluded that all L needed to do was to consider any application for approval made to it – there was no obligation on L to seek out other facts in relation to the approval request.

Commentary

This case emphasises how important it is for parties to a licence to agree the basis on which approval under a licence, be it for sub-licensing, assignment or anything else, may be withheld by a licensor.

If a licensor wishes to have the power to refuse to allow sub-licensing, the licence should state expressly that the licensor has ‘absolute discretion’ to withhold its approval. Where sub-licensing is to be subject to the licensor’s ‘approval’, the licence should set out clearly what aspect of the proposed sub-licensing requires the licensor’s approval (for example, the identity of the proposed sub-licensee or the terms of the sublicence).

In the absence of an express term agreeing the manner in which the licensor can exercise its power to grant or refuse such approval, a court will imply a term into the licence that the licensor must exercise the power in good faith and must not withhold approval arbitrarily.

Originally published in BioScience Law Review, publsihed by Lawtext Publishing Ltd,

Visit the Lawtext website.

 

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