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Court of Appeals Interprets "Commercially Reasonable" in Complex Finance Transaction

Barclays Bank plc v UniCredit Bank AG & anr [2014] EWCA Civ 302, 20 March 2014

The English Court of Appeal has interpreted "commercially reasonable", in the context of an obligation to determine consent to an early termination provision in a guarantee in a "commercially reasonable manner".


UniCredit entered into three synthetic securitisations of loan portfolios with Barclays, embodied in three deeds of guarantee. The term of the longest of the guarantees was 19 years. At the time of execution, Barclays entered five years' fees as profit in its books. There were optional early termination clauses in each guarantee in the event of a regulatory change resulting in less favourable capital treatment of the guarantee, provided that UniCredit obtained prior consent from Barclays "such consent to be determined by [Barclays] in a commercially reasonable manner". UniCredit sought early termination under this provision and Barclays refused to give its consent unless it was paid the five years' fees.

UniCredit claimed Barclays had unreasonably refused consent and discontinued payment under the guarantees. Barclays maintained that the guarantees had not been terminated and remained in force. At first instance, Mr Justice Popplewell held that the contractual requirement for a discretion to be exercised in a "commercially reasonable" manner was to be assessed against an objective standard of reasonableness, and not against the more limited standard set out by Rix LJ in Socimer International Bank Ltd v Standard Bank London Ltd [2008] Bus LR 1306. However, even on the higher objective standard, a commercial party may still favour its own interest to the exclusion of its counterparty's and be acting commercially reasonably. On the facts Barclays was entitled to the five years' fees. UniCredit appealed.

The appeal The principal matters on appeal were whether Barclays was entitled to:

(1) give precedence to its own commercial interest; and

(2) demand the five years' fees.

"Commercial reasonableness" generally

Longmore LJ, who gave the leading judgment, noted that there had been much debate as to whether the clause in question was to be regarded:

(1) as conferring a contractual discretion on Barclays so that the principles of contractual discretion cases applied as exemplified in the Socimer case so that a discretion must be exercised honestly and in good faith for the purposes for which it was conferred and not in a way that is capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse;

(2) as equivalent to conferring a discretion to which the principles of Wednesbury reasonableness apply, namely that the exercise of the discretion is not "so unreasonable that no reasonable authority could ever have come to it";

(3) as analogous to landlord and tenant cases where, while a landlord need usually consider only his own relevant interests, there may be cases where there is such disproportion between the benefit to the landlord and the detriment to the tenant if the landlord withholds his consent to an assignment, that it is unreasonable for the landlord to refuse consent; or

(4) as subject to an objective determination of what was "commercially reasonable"

Longmore LJ concluded that he did not see much to be gained from this type of analysis but, nonetheless, felt that the provision fell within category (2) (ie Wednesbury reasonableness). He also noted that the Socimer case indicates that there is, in any event, little difference between categories (1) and (2).

Longmore LJ went on to attempt an overall test while acknowledging how hard this was: "It is not easy to express a test for commercial reasonableness for the purpose of this (let alone any other) contract but I would tentatively express it by saying that the party who has to make the relevant determination 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."

On the facts

The Court of Appeal held that:

(1) Barclays could take account of its own interest in preference to the interest of UniCredit;

(2) the price demanded for consent was not commercially unreasonable; and, accordingly

(3) the guarantees had not been validly terminated or come to an end.


The Court of Appeal has upheld the decision of the High Court in finding that Barclays had not unreasonably refused to give its consent where required to act in a "commercially reasonable manner" by demanding five years' fees in return for consenting to early termination of some guarantees. In doing so, it has set the threshold for acting commercially reasonably at a low level: in essence, not acting irrationally. The Court was at pains to stress that this was a finding on these particular facts; nonetheless, it is hard to imagine debating what is commercially reasonable without reference to this case. One potential anomaly of the decision is captured by what the judge at first instance noted, "The presumption is that by using express words, the parties were seeking to achieve some greater restriction than would have applied if no words had been used". And yet, the effect of the Court of Appeal decision would appear to elide the meaning of "commercially unreasonable" with the limits on exercising a discretion in Socimer and Wednesbury which apply in any event (even if the contract is silent).

In submissions, the parties referred to the definition of "Close-Out Amount" in the ISDA 2002 Master Agreement which provides that "Close-Out Amount" is to be "…determined by the Determining Party (or its agent), which will act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result". The Court refused to be drawn into this debate, stating that it was not by any means inevitable that the construction put on the words in this case will necessarily apply in those other contexts, which may anyway use slightly different words.

If parties want the term "commercially reasonable" to elicit a particular behaviour from a drafting perspective they are best spelling this out. In the ISDA 2002 Master Agreement, for example, the definition of "Close-Out Amount" goes on to give examples of what "commercially reasonable procedures" may include as well as, separately, spelling out certain things the Determining Party will consider unless certain circumstances do not apply. In many circumstances, the use of the term "commercially reasonable" is also a useful check against parties' behaviour during the life of a contract, pre-litigation. In other words, a party will usually, and would be well advised to, think twice about doing something where it must be "commercially reasonable".

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