The English Court of Appeal has confirmed a High Court decision that a bank need not to take into account the interests of a contractual counterparty when exercising its discretion on a "commercially reasonable" basis. The use of such a term did require the bank to act in an objectively reasonable manner, but it was fully entitled to put its own interests ahead of those of the counterparty.
In Barclays v Unicredit1, Barclays' refusal to give consent to an early termination of loan securitisation unless it received five years' fees was upheld to be "commercially reasonable".
While an objective standard of reasonableness has long been accepted in landlord and tenant cases, the High Court decision last year (reported here) was the first time it had been applied in a finance setting.
The critical factor was that the manner of determination had to be commercially reasonable for the party determining whether consent should be given. It was impossible to see how a requirement for the guarantor to have regard to the counterparty's interests could work in practice.
The requirement that consent be determined in a commercially reasonable manner was intended as a control exercise of some kind. The Court observed that an absolute refusal to give consent at any price may not have been commercially reasonable nor would it have been commercially reasonable to demand a price that was entirely unreasonable for the requested consent. Wednesbury principles could be applied to the use of such terminology. On the facts of this case, five years' fees was held to be reasonable.
The case reminds us of the importance of choosing accurate contractual language to express the parties' intentions. It is particularly relevant to those involved in finance transactions, where this decision may indicate a shift in attitude as to what is "reasonable".