The Court of Appeal has recently considered what is meant by the term “commercially reasonable” in the context of discretion exercisable by a party to a guarantee.

The Facts

In order to mitigate its credit risk and reduce its regulatory capital requirements, Unicredit Bank AG (“Unicredit”) entered into three guarantees (the “Guarantees”) with Barclays Bank Plc (“Barclays”) in 2008.

The structure of these Guarantees provided that Barclays would make quarterly payments to Unicredit in respect of portfolio losses and, in return, Unicredit would pay quarterly premiums to Barclays together with a fixed fee. A mechanism was included in the Guarantees which granted Unicredit the right of optional termination in various events (the “Early Termination Mechanisms”). Two of these Early Termination Mechanisms required Barclays’ prior consent, “such consent to be determined by [Barclays] in a commercially reasonable manner”.

On 14 June 2010, Unicredit sought Barclays’ consent to early termination as a result of the triggering of one of the Early Termination Mechanisms. Barclays refused, stating that it would not consent unless it was paid the balance of its fees for five years. Unicredit declined, ceased paying the premiums under the Guarantees and treated the Guarantees as terminated. The dispute between the parties therefore turned on the question of whether Barclays had exercised its discretion in a “commercially reasonable” way.

The full decision of the Commercial Court in December 2012 was reported by Rosling King at the time ( In summary, the Commercial Court found that Barclays had withheld its consent to early termination in a commercially reasonable manner and that Unicredit’s treatment of the Guarantees as terminated was invalid. Notably, the Commercial Court found that Barclays was entitled to take primary account of its own interests in determining whether to consent to termination.

Barclays had alleged that it was a common understanding between the parties that the Guarantees would last five years and that premiums would be paid by Unicredit under the Guarantees for these five years. Though the Commercial Court accepted this argument, it did not agree with Barclays that this was established by estoppel by acquiescence or convention.

Unicredit appealed the decision of the Commercial Court, submitting that the judge was wrong:

to hold that Barclays was entitled to give precedence to its own commercial interests and thereby to exclude the interests of Unicredit in refusing to consent to early termination;
to hold that Barclays was entitled to demand a sum equal to the fees that it would have received had the Guarantees continued for five years; and
in failing to give effect to a clause in the Guarantees which provided that each of the Guarantees, (together with Credit Support Agreements), constituted the entire agreement and understanding of the parties and superseded all oral communication and prior writings (the “Entire Agreement Clauses”).

The Decision

The Court of Appeal noted that the critical factor in the case was that the party who had to act in a commercially reasonable manner in determining whether consent to terminate would be given was Barclays.

The Court of Appeal rejected Unicredit’s first basis for appeal on the grounds that “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”.

Unicredit’s second leg of its appeal was similarly rejected. The Court of Appeal was unequivocal in its reasoning, noting that Barclays was “entitled to have regard to its own commercial interest; it did not refuse consent outright; the price it sought was not out of line with the reasonable return it could have expected had the contract run its expected course”.

It was submitted by Unicredit that to use Barclays’ understanding that the Guarantees would last five years was inconsistent with the Entire Agreement Clauses. This was considered by the Court of Appeal to be “something of a non-point”, since the question was, rather, whether Barclays was commercially reasonable in agreeing to terminate the Guarantees on condition that the balance of its fees for a five year period would be paid.


The decision of the Court of Appeal confirms that an objective test will be applied when considering whether a party has exercised its contractual discretion in a “commercially reasonable” manner.  This decision is welcomed by lenders who will be entitled to have primary regard to their own interests in such circumstances.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.