Despite a lot of words being poured out on the subject, the basic principle that contracting parties do not automatically (ie without express contractual words) owe each other an obligation to act reasonably is still true in most cases. However, if you have a contract which expressly requires you to act reasonably, how this affects your freedom to act will depend upon the exact wording.
The Court of Appeal has been looking at the meaning of “commercially reasonable” in the context of determinations made by parties to financial instruments in Barclays v Unicredit CofA.
Unicredit had the optional right to terminate the guarantees it had entered into with Barclays on the happening of four different events, two of which required the consent of Barclays “such consent to be determined by [Barclays] in a commercially reasonable manner”. Unicredit sought Barclays’ consent to terminate early and Barclays’ response was that it should be paid the balance of its fees for a five year period discounted for present payment – otherwise it withheld its consent.
The Court held that “the meaning of the clause has to be determined as a matter of construction of this particular contract in its particular context”.
As a matter of construction of the clause, the critical factor was that it was from Barclays that consent had to be obtained and Barclays who had to determine whether consent was to be given, although in a commercially reasonable manner. So:
- the manner of the determination had to be commercially reasonable, not necessarily the outcome (although if it wasn’t it would cause the court to look critically at the manner of the determination)
- Barclays was entitled to take account of its own interests in preference to those of Unicredit (“any commercial man whose consent to a course of action is required but to whom the determination (whether to give that consent) is entrusted would think it commercially reasonable to have primary regard to his own commercial interests”)
- the requirement that consent be determined in a commercially reasonable manner had to be intended to be a control exercise of some kind and that Barclays would not have been acting in a commercially reasonable manner if they demanded a price which was way above what they could reasonably anticipate would have been a reasonable return from the contract into which they had entered.
Consequently, the key point is that 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 out of line/way above the reasonable return they could have expected from the deal.
Commercial parties entering into contracts should bear this in mind when negotiating and interpreting contracts based around ‘reasonable’ behaviour by both parties.