FML Timeline: Barclays Bank PLC (Claimant/Respondent) -v- Unicredit Bank AG & Anor (Defendant/Appellants)

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In 2008, Unicredit entered into three “synthetic securitisations” with Barclays, under which they transferred the credit risk of portfolio assets embodied in three guarantees. The lifetimes of the guarantees were 11 years and 19 years. Optional early termination provisions were agreed entitling Unicredit to terminate the guarantees in the event of regulatory change, on the condition that they obtained prior consent from Barclays "such consent to be determined by [Barclays] in a commercially reasonable manner". In 2010 Unicredit sought early termination under this provision. Barclays refused consent until it was paid the equivalent of five years’ fees as profit, which was the profit figure it had forecast.

Unicredit claimed Barclays had unreasonably refused to provide consent. Treating the refusal as a waiver of the consent requirement, Unicredit discontinued payment under the guarantees. Barclays maintained that the guarantees remained in force. Proceedings ensued, focusing on whether Barclays’ request for payment was commercially reasonable.

The High Court held that it was commercially reasonable to withhold consent on the grounds that a commercial party may still favour its own interest to the exclusion of its counterparty’s and be viewed as acting reasonably. Unicredit appealed.

Decision

The principal matters before the Court of Appeal were whether Barclays was entitled to:

• give priority to its own commercial interest and exclude the interests of Unicredit, and
• demand five years’ worth of fees.

The Court of Appeal upheld the High Court’s decision that Barclays had acted in a “commercially reasonable manner”. Longmore LJ argued that it was unrealistic to expect Barclays to seek a mutually satisfactory outcome since “any commercial man whose consent to a course of action is required but to whom the determination is entrusted would think it commercially reasonable to have primary regard to his own commercial interests”. Further, the judge reasoned that a party would be unable to assess a counterparty’s interests accurately. A neutral third party’s involvement would be required, incurring unnecessary financial and time costs. Longmore LJ stressed that this was a finding on these particular facts.

The termination clause was to be regarded as equivalent to conferring a discretion to which the principles of Wednesbury reasonableness apply – to be considered unreasonable it had to be "so unreasonable that no reasonable authority could ever have come to it". Longmore LJ argued that an objective test for commercial reasonableness was hard to express but noted that a party “will not be acting in a commercially reasonable manner if he demands a price which is way above what he can reasonably anticipate would have been a reasonable return from the contract into which he has entered and which it is sought to terminate at an early date." This only prevented Barclays from demanding a sum far in excess of the contract’s reasonably anticipated return.

Although Unicredit submitted that an entire agreement clause in the guarantees prevented Barclays from relying on its wider understanding of the contracts as to their likely duration, it was considered a “non-point” since the issue at hand was whether Barclays had acted in a commercially unreasonable manner. The entire agreement clause was not intended to “exclude admissible evidence... about the way in which parties exercise rights given to them by the terms of the contract”. The judge noted in the conclusion that the decision allowing Barclays to recover five years’ worth of fees might have been reached in a commercially unreasonable manner, however this issue was deemed not relevant to the Court of Appeal’s decision.

Noteworthy/ Novel points

A requirement to determine whether to give consent in a "commercially reasonable manner" meant only that consent could not be withheld irrationally.

Clauses requiring a party to exercise a conferred discretion reasonably are common in financial agreements and therefore this decision may have far reaching implications. It was suggested that only the particular context of the words was relevant to determine their meaning, highlighting the necessity for further clarification in contracts. However, a potential consequence of this judgment may be that parties seek to include interpretation clauses clarifying contentious phrases. The result could see a rise in complicated contracts which try to legislate for all eventualities.