Withholding consent – what is reasonable?

In brief

The High Court’s recent decision in Barclays Bank Plc v UniCredit Bank AG examined the right of a party to withhold consent under a contract where it was “commercially reasonable” to do so. The Court found that the use of qualifiers such as “commercially reasonable” and “reasonable” in a commercial context places an objective standard of reasonableness on the party whose consent is sought. However, in deciding whether to give consent, a party is entitled to have regard to its own interests, usually to the exclusion of the other party’s interests.

Implications

When negotiating and drafting commercial contracts, parties should be aware that the use of qualifiers like “reasonable” and “commercially reasonable” may not entail a balancing of the parties’ different interests. There is probably no meaningful distinction between “reasonable” and “commercially reasonable” when used in this context. A party should not assume that its own interests will necessarily be taken into account.

If the circumstances permit, it might be feasible for the contract to specify the factors that must be considered by the relevant party when deciding whether or not to grant consent.

Background

Barclays and UniCredit entered into three synthetic securitisations of loan portfolios in the wake of the financial crisis in 2008. UniCredit sought to terminate these arrangements early, which required Barclays’ consent, such consent “to be determined by [Barclays] in a commercially reasonable manner.” Barclays refused consent unless it was paid the equivalent of five years’ fees under the relevant contracts, which Barclays argued had been its commercial understanding of the minimum financial benefit it would receive.

Decision

The judge noted the well-established principle that the circumstances in which a court will interfere with the exercise of contractual discretion are extremely limited.

Examining the authorities, he rejected the application of the so-called Wednesbury standard of reasonableness, which would have meant that Barclays had a free rein as long as it did not behave in an arbitrary, capricious or irrational way. The judge’s view was that this was not what businessmen mean by “reasonable”. Instead, he applied the concept of objective reasonableness developed in the landlord and tenant context. Barclays’ decision to withhold consent was therefore to be assessed in terms of what a reasonable commercial person, guided by his own commercial interests, would have decided. According to the judge, Barclays had a “reasonable and legitimate expectation” in relation to the fees it would receive under the contracts, even where this involved Barclays making some element of profit.

Interestingly, the judgment suggests that, if Unicredit had made a counter-offer in relation to the fees due to Barclays under the contracts, the question of Barclays’ refusal to consent would have been more complicated. However, in the circumstances it was commercially reasonable for Barclays to withhold its consent in order to protect its own commercial interests.