The contractual requirement to give consent in a “commercially reasonable manner” has now been considered by the Court of Appeal. The decision in March 2014 found that a requirement to determine whether to give such consent in a ‘commercially reasonable manner’ meant only that consent could not be withheld irrationally.  

The facts were as follows: Unicredit sought early termination of a guarantee from Barclays, which was required to determine its consent in a ‘commercially reasonable manner’. Barclays demanded the payment of five years fees under the guarantee as the price of its consent, five years being the expected lifetime of the guarantee. Unicredit claimed that Barclays was not acting in a ‘commercially reasonable manner’. The High Court found that Barclays had acted in a commercially reasonable manner. A link to the summary of that decision which was published in the March 2013 Legalflyer.

The Court of Appeal held that Barclays was acting in a commercially reasonable manner when it demanded five years fees.

Giving the judgment of the court, Longmore LJ held that the appropriate standard was that of Wednesbury unreasonableness – namely, to be considered unreasonable it had to be so unreasonable that no reasonable person, acting reasonably, could have made it. He argued that an objective test would require weighing Barclays’s interests against that of its counterparty – but Barclays was not in a position to be able to do this. Barclays was entitled simply to give its own interests primacy. However, the test had to impose some sort of control. If Barclays demanded a price for consent which was “way above” its anticipated return from the contract, or if it refused to consent at any price, that would not be ‘commercially reasonable’. Longmore LJ also stressed that the question of construction applied only to the particular contract in its particular context.

Given that the debate was over the appropriate level of fees that Barclays would be allowed to charge for consent, it is understandable that the Court of Appeal did not want to substitute its own judgment as to the precise fee that was reasonable. Instead, they would only interfere if the proposed fee was ‘way above’ what was reasonable. In that light, a subjective test was appropriate.

It is perhaps unfortunate that the Court of Appeal did not take the opportunity to give clearer guidance as to the interpretation of ‘commercially reasonable manner’. Although the construction of a phrase depends on its context, the starting point for construction should be the ordinary meaning of the phrase. The context may then require an interpretation different from that ordinary meaning. Is Wednesbury unreasonableness the ordinary meaning of the phrase ‘commercially reasonable’? If not, what factors in the contract required giving that phrase a meaning different from its ordinary meaning? The Court of Appeal did not directly address either question.

One possible consequence – expressly envisaged by Longmore LJ in his judgment – is that parties insert interpretation clauses explaining what they mean by ‘commercially reasonable’ or other controversial phrases. This could lead to longer, more verbose contracts where words may not have their natural meaning: exactly the opposite of what the Court might wish to encourage. The alternative, if certainty is required, is to draft clauses which do not require the exercise of discretion by the party whose consent is being sought.

Barclays v Unicredit [2014] EWCA Civ 302