Consent wording in finance documents will either (1) prohibit actions (i.e. there is no right to ask for consent); (2) permit actions on the basis that consent is obtained with no restrictions on the ability of the consent provider to give or refuse consent; or (3) permit actions, with consent and require the consent provider to apply some reasonableness standard e.g. act in a commercially reasonable manner. The long awaited Court of Appeal judgment in the case of Barclays Bank plc v UniCredit Bank AG (formerly known as Bayerische Hypo-Und Vereinsbank AG) and Anor [2014] EWCA Civ 302 provides some useful judicial guidance on the third construction, a much-used qualifier phrase found in many finance documents, most notably the standard form 2002 ISDA Master Agreement.


The dispute arose in the context of a synthetic securitisation transaction1 entered into by subsidiaries of UniCredit SpA (“UniCredit”) and Barclays between the period of September and December 2008. The use of a synthetic securitisation structure allowed UniCredit to transfer the credit risk in certain of their assets to Barclays who would provide three guarantees (the “Guarantees”) and make quarterly payments to UniCredit in respect of relevant portfolio losses. In return for the Guarantees, UniCredit paid quarterly premiums to Barclays and a quarterly fixed fee (the “Fees”). Structuring the transaction in such a way allowed UniCredit to benefit from risk weighted asset regulatory capital relief (“RWA Relief”) under Basel II, thus reducing its Tier One regulatory capital requirements.

The essential structure of the Guarantees was that, in exchange for the premiums, Barclays would make quarterly payments to UniCredit in respect of the first losses suffered by reason of credit defaults on a portfolio of obligations designated as the “Reference Portfolio”.

The amount of the premiums payable by UniCredit was determined in such a way as, over the lifetime of the Guarantees, was intended to exceed the total of the losses which Barclays guaranteed to pay and Barclays would not, therefore, be exposed to the credit risk on the first tranche of the Reference Portfolio.

The lifetime of two of the Guarantees was 11 years and 19 years for the other Guarantee, but provisions were agreed entitling UniCredit (in events that were likely to happen) to bring them to an end after a period roughly equivalent to the weighted average life of the loans in the portfolio which was expected to be about five years. Barclays could therefore expect to earn five years worth of premium and fees under the Guarantees. The Guarantees also granted UniCredit a right of optional termination in four separate events, two of which (Regulatory Change2 and a 10% Clean-up Call Event) required Barclays’ prior consent:

“such consent to be determined by [Barclays] in a commercially reasonable manner.”

It was this clause which was at the centre of the dispute between the parties.


In June 2010, UniCredit sought Barclay’s consent to terminate the Guarantees early following the occurrence of a Regulatory Change as changes in the regulatory treatment of securitisation transactions meant that the Guarantees no longer provided UniCredit with the RWA Relief they were designed to achieve. Barclays accepted that a Regulatory Change had occurred but sought payment for giving its consent. Barclays reasoned that when it had entered into the Guarantees it had anticipated that they would run for five years and had booked as profit the discounted value of five years of fees under the contracts. Barclays demanded the shortfall in profit from UniCredit as the price of its consent.

UniCredit refused to pay the shortfall and proceedings commenced on whether it was commercially reasonable for Barclays to withhold its consent.


The judge at first instance held that:

Barclays’ refusal of consent was not to be regarded as a refusal to consent on any terms but as a statement that the price of its consent was that it should be paid the balance of its fees for a five year period discounted for present payment… [and] that Barclays had withheld its consent to early termination in a commercially reasonable manner.”

The parties had clearly contemplated that Barclays could refuse to consent to termination following a Regulatory Change by giving Barclays discretion, and in exercising that discretion Barclays was “not obliged to carry out a balancing exercise between its interests and UniCredit’s interests”. Accordingly Popplewell J found that Barclays’ refusal of consent was commercially reasonable, a decision he felt was reinforced by the fact that other termination provisions in the Guarantees guaranteed Barclays at least five years’ of Fees.


UniCredit challenged the High Court decision on the basis that Barclays had been allowed to give precedence to its own self interest and exclude the interests of UniCredit. The Court of Appeal dismissed the appeal and concluded that the price which Barclays demanded as the price of its consent cannot be said to have been determined by it in a commercially unreasonable manner.

The appeal raised the question of what is commercially reasonable in the context of determinations made by parties to financial instruments. There is some useful guidance to be extracted from the Court of Appeal decision:

UniCredit had 3 grounds of appeal, saying that the judge was wrong:

  1. to hold that Barclays was entitled to give precedence to its own commercial interests,
  2. to hold that Barclays was entitled to demand a sum equal to the entire fees it would have received if the Guarantees had continued for 5 years,
  3. in failing to give effect to an Entire Agreement Clause.

In relation to the first ground, Lord Justice Longmore held that in determining whether or not to consent to early termination, Barclays could give precedence to its own interest because “any commercial man…..would think it commercially reasonable to have primary regard to his own commercial interests”. He rejected UniCredit’s submission that this requirement meant Barclays should have had regard to the interests of UniCredit. He noted that whilst it was not easy to express a test for commercial reasonableness for this (let alone any other) contract, 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”.

On the second ground, it follows that the price demanded by Barclays for its consent cannot be said to have been determined in a “commercially unreasonable manner”. It is the manner of determination which must be commercially reasonable; it did not follow that the outcome has to be commercially reasonable, although, if it was not, that would no doubt cause one to look critically at the manner of the determination. Barclays was entitled to have regard to its own commercial interest and did not refuse consent outright, therefore acting in “a commercially reasonable manner”.

Finally, Longmore LJ identified that the entire agreement clause is concerned with identifying the terms of the contract and is not intended to “exclude admissible evidence... about the way in which parties exercise rights given to them by the terms of the contract”. It has no relevance to the way in which parties may exercise rights given to them by the contract.

Longmore LJ’s lead judgment makes it clear that there is no general objective construction of what “commercially reasonable manner” means. Counsel for UniCredit had tried to argue that, because the term was used in other agreements (for example, the definition of “Close-Out Amount” in the 2002 ISDA Master Agreement), the words should be construed in an objective sense but Longmore LJ said that he did “not think it useful to construe the words in this contract by reference to their use in other contexts, nor [did he] think it 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”. Consequently, the meaning of the phrase “commercially reasonable” will depend on the construction of the contract and the context will be important. A party will not be acting in a commercially reasonable manner if they ask for a price on early termination which is above the reasonable return they could have expected from the deal. Parties entering into and negotiating contracts should bear this in mind when interpreting contracts based around “reasonable” behaviour by parties.

Sandeep Kaur