Summary
A contractual consent provision requiring a party to act in a commercially reasonable manner imports an objective standard. The question is whether a reasonable commercial person in the decision-maker’s position might have reached the decision. The decision-maker may give priority to its own commercial interests and need not balance them against the other party’s interests, unless the requested protection is so disproportionate that no commercially reasonable person could have required it.
In this case, insisting on preservation of five years’ fee income was commercially reasonable. An entire agreement clause directed to contractual terms did not prevent reliance on negotiation evidence when assessing the exercise of the discretion. The guarantees therefore remained in force.
Factual background
Barclays Bank Plc entered into three synthetic securitisation guarantees with UniCredit entities. The guarantees permitted early termination after a regulatory change, but only with Barclays’ prior consent, to be determined in a commercially reasonable manner.
UniCredit sought termination after a regulatory change affected the capital relief obtained from the transactions. Barclays refused consent unless it received the discounted balance of five years’ fees. UniCredit argued that this refusal was unreasonable, that an entire agreement clause excluded reliance on the parties’ negotiations, and that the guarantees had alternatively ended following UniCredit’s repudiatory breach.
The central issues were the meaning of commercial reasonableness, the relevance of Barclays’ commercial interests and negotiation understanding, the effect of the entire agreement clause, and the consequences of the alleged repudiation.
Held
- Commercial reasonableness. Barclays’ refusal of consent under clause 12.1(b) was subject to an objective standard. The question was whether a reasonable commercial person in Barclays’ position might have reached the decision, rather than whether the decision was justified or merely non-irrational. The relevant approach was distinct from the rationality standard applicable to an unfettered contractual discretion.
- Barclays was entitled to prioritise its own commercial interests. Its legitimate interest was preserving the fee income from keeping the guarantees in force. It was not required to balance that interest against UniCredit’s interest in terminating agreements that no longer produced regulatory capital relief. The protection sought would be impermissible only if its nature or amount were so disproportionate to UniCredit’s continuing burden that no commercially reasonable person in Barclays’ position could have required it.
- Insistence on five years’ fees was commercially reasonable. It reflected Barclays’ reasonable contractual expectation, the treatment of five years’ fees under other termination provisions, the express provision for equivalent payments after certain termination events, and the absence of any coherent basis for treating profit as inherently unreasonable. Barclays could also reasonably have required some payment for hedge-unwind costs, although it was unnecessary to decide what lesser sum might have sufficed.
- The entire agreement and understanding clause concerned the identification of contractual terms. It did not exclude negotiation evidence relevant to whether a contractual discretion had been exercised commercially reasonably. Nor did it prevent reliance on an estoppel concerning the future exercise of that discretion. However, no shared understanding or estoppel was established on the facts.
- UniCredit’s repudiation did not automatically terminate the guarantees. The elective theory of repudiation applied. The exceptional limitation based on lack of legitimate interest was not engaged, and the evidence did not establish that continued performance or reconstruction of the payment ledger was impossible or wholly unreasonable.
- Barclays was entitled to declaratory relief. Its refusal of consent was commercially reasonable, and the guarantees had not been validly terminated or brought to an end.
The court’s approach to earlier authorities
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Appeal route
- This judgment [2012] EWHC 3655 (Comm) High Court (Commercial Court)
- Appealed to[2014] EWCA Civ 302Outcomeappeal dismissed unanimously
Key cases cited
21 authorities cited.
- Société Générale, London Branch v Geys [2012] UKSC 63
- Ashworth Frazer Limited v. Gloucester City Council [2001] UKHL 59
- Republic of India v India Steamship Co Ltd (The Indian Endurance and The Indian Grace) (No 2) [1998] AC 878
- White and Carter (Councils) Ltd v McGregor [1962] AC 413
- ING Bank NV v Ros Roca SA (Rev 1) [2011] EWCA Civ 353
- Axa Sun Life Services Plc v Campbell Martin Ltd & Ors [2011] EWCA Civ 133
- Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116
- Paragon Finance plc v Nash (Paragon Finance plc v Staunton) [2001] EWCA Civ 1466
- Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299
- LUDGATE INSURANCE COMPANY LTD v CITIBANK NA [1998] Lloyd's Rep IR 221
- British Gas Trading Limited v Eastern Electricity [1996] EWCA Civ 1239
- International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1985] EWCA Civ 11
- Isabella Shipowner SA v Shagang Shipping Co Ltd [2012] EWHC 1077 (Comm)
- Dubai Islamic Bank PJSC v PSI Energy Holding Company BSC & Ors [2011] EWHC 2718 (Comm)
- Porton Capital Technology Funds v 3M Holdings Ltd [2011] EWHC Civ 2895 (Comm)
- Sere Holdings Ltd v Volkswagen Group United Kingdom Ltd [2004] EWHC 1551
- INNTREPRENEUR PUB CO. (GL) v. EAST CROWN LTD. [2000] 2 Lloyd's Rep 611
- ABU DHABI NATIONAL TANKER CO. v. PRODUCT STAR SHIPPING LTD. (THE “PRODUCT STAR”) (No. 2) [1993] 1 Lloyd's Rep 397
- Bickel v Duke of Westminster [1977] QB 517
- Pimms Ltd v Tallow Chandlers Co [1964] 2 QB 547
- Tredegar v Harwood [1929] AC 72
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Cases citing this case
5 later cases · 2 positive · 3 caution
Most senior citing decisions:
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- Stein v Chodiev & Ors [2014] EWHC 1201 (Comm)
- Deutsche Bank (Suisse) SA v Khan & Ors [2013] EWHC 482 (Comm)
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