In Autumn 2008, in the wake of the financial crisis, Unicredit Bank AG (“Unicredit”) entered into three guarantees (the “Guarantees”) with Barclays Bank Plc (“Barclays”). The Guarantees were the mechanisms by which Unicredit sought to mitigate the credit risk in respect of three loan portfolios which, in turn, would enable it to reduce the minimum capital reserve it was required to hold by the relevant regulator. In return, Unicredit would pay a quarterly premium to Barclays and a fixed fee.

A dispute arose between Barclays and Unicredit in relation to Unicredit’s right to terminate the Guarantees. The Guarantees contained five early termination mechanisms (ETMs) permitting early termination by Unicredit in the event that:

  • one of the ETMs was triggered; and
  • Unicredit obtained Barclays’ prior consent to terminate, such consent to be determined by Barclays in a commercially reasonable manner (the “Consent Mechanism”).

Unicredit wrote to Barclays on 14 June 2010 seeking Barclays’ consent to an early termination of the Guarantees as a result the triggering of one of the five ETMs. Barclays responded stating that it would not consent unless it was paid the balance of its fees for five years. Unicredit were not prepared to pay that, or any sum, and proceeded to treat the Guarantees as terminated on the basis that Barclays’ insistence on five years’ fees was not a commercially reasonable ground for declining consent.

Barclays commenced proceedings seeking a declaration that its refusal to consent to early termination of the Guarantees was made in a commercially reasonable manner and that the Guarantees had not been validly terminated.

The Issues

Issue 1: What is meant by ‘commercially reasonable’?

Barclays had to show that its determination of whether to consent to an early termination was reasonable in an objective sense. It would not be sufficient for Barclays to merely show that the decision was made in good faith and was not arbitrary or irrational. The question for the Court was not whether Barclays’ decision was justified, but whether the decision is one which might be reached by a reasonable man in the circumstances; and a decision maker would be entitled, as Barclays did, to take into account its own interests, in preference to those of the other party and normally to their exclusion.

Barclays’ commercial interest, in this context, comprised its interest in earning profits from its fee income under the Guarantees. The Court considered that Barclays would be entitled to refuse consent to protect that fee income unless its nature or amount was so disproportionate to Unicredit’s obligation to continue to pay it that no commercially reasonable man in Barclays’ position could have reached such a decision.

Issue 2: Was Barclays’ refusal to consent commercially reasonable because Unicredit offered no payment of any kind in return?

The Court concluded that it was not open to Barclays to seek to justify its refusal of consent on these grounds. The determination to refuse consent was in fact made on the basis that Barclays would insist upon being paid five years’ fees, either by the Guarantees continuing to run for that period or by being paid the equivalent as the price for consent as required under the Consent Mechanism. It was up to Unicredit to make a proposal of some lesser sum as the price for consent.

Issue 3: Was it commercially reasonable for Barclays to refuse consent unless it received 5 years’ fees?

The Court concluded that Barclays was acting in a commercially reasonable manner in refusing its consent unless it recovered five years’ fees for the following reasons:

  • It was Barclays’ reasonable and legitimate expectation at the time of entering into the Guarantees that it would be entitled to its fee income for a minimum of five years “come what may”.
  • Of the five ETAs, three expressly ensured that Barclays would receive at least five years’ fees under the Guarantees. Whilst the ETA that was triggered was not one of the three which expressly guaranteed Barclays five years’ fees (due to a regulatory issue) it was Barclays’ understanding that the Consent Mechanism could be used to achieve the same result, i.e. by refusing its consent unless the balance of five years’ fees was paid.
  • It was reasonable that Barclays understood the Consent Mechanism would operate in such a way so as to protect Barclays’ expectation that they would receive five years’ fees.
  • Barclays was entitled to give primacy to its own commercial interests over those of Unicredit.


The approach by the Court in this case is unsurprising in that it reaffirms the well-established position that the Court is reluctant to interfere with the exercise of a party’s contractual discretion.

The Court recognised that Barclays’ only commercial reason for entering into the Guarantees was to make a profit and without the ability to preserve profits, the Consent Mechanism would have little value. The approach adopted by the Court indicates a hesitancy to intervene in commercial agreements, provided that contractual discretion is exercised honestly and in good faith for the purposes for which it was conferred.

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