Barclays Bank PLC v Unicredit Bank AG & ANR [2014] EWCA Civ 302 –

When a contract requires a party to act in a ‘commercially reasonable’ way, it’s the way that the party makes the decision that is key, rather than the outcome of the decision. The deciding party may take account of its own interests in preference to the interests  of the other party.

Although the court here was looking at a contract for a financial instrument, and didn’t aim to set out a general test for commercial reasonableness, the decision may be of wider interest.

Unicredit entered into two guarantees with Barclays, with terms of 11 and 19 years.

Unicredit had the option to terminate the guarantees after a certain period, which was expected to be around five years. In other circumstances, Unicredit needed Barclays’ consent to terminate: ‘such consent [was] to be determined by [Barclays] in a commercially reasonable manner’. Unicredit wanted to exit the arrangement and sought Barclays’ consent to terminate.

Barclays refused, but not outright: it would agree to the termination if Unicredit paid the balance of its fees for the five-year period. Unicredit rejected this offer and alleged that Barclays had acted in a commercially unreasonable manner by refusing to consent.

The Court of Appeal found that Barclays’ actions had been commercially reasonable and held that:

  • a decision-maker must act in a commercially reasonable manner, but that does not mean that the outcome must be commercially reasonable for all parties; and
  • any ‘commercial man’ entrusted to make a decision would think it commercially reasonable to have primary regard for his own interests. In practice, it can’t work in any other way: although it’s easy for the decision-maker to consider his own interests, it would be very difficult for him to assess the interests of others. Using the phrase ‘commercially reasonable’ is clearly intended to impose some control on the decision-maker, but the phrase can’t by itself require the decision-maker to assess the interests of both parties.

Although the judgment doesn’t provide a general test for ‘commercial reasonableness’, it is helpful in giving guidance on when a party will not be acting in a commercially reasonable manner. On these facts, it would be commercially unreasonable if the decision-maker suggested a price for early termination that was out of line with the reasonable return it could expect if the contract ran its expected course.

Be careful when including the phrase ‘commercially reasonable’ and consider how it will apply. This will of course depend on the construction of the contract and the context.