Standard of reasonableness required for withholding consent
BARCLAYS v UNICREDIT [2012]
The Court applied an objective standard of reasonableness in deciding whether consent to the early termination of certain finance transactions had been reasonably withheld by one of the contracting parties.
Facts:
- The parties entered into three guarantees as part of a financial transaction under which B received quarterly fees in return for the guarantees. U had the option to terminate the guarantees in the event that a regulatory change affected the capital tax treatment of the guarantees. The right to terminate was subject to obtaining B’s consent; the decision whether to grant such consent was to be exercised by B in a ‘commercially reasonable manner’.
- B refused to give its consent as requested unless it was paid the balance of five years' fees (about €82 million). B claimed that there was a common understanding that it would be entitled to five years’ fees in the event of an early termination although no such understanding was written into the guarantees themselves (seemingly to avoid what was termed a ‘regulatory problem’). The guarantees could potentially have existed for 11, 19 and 19 years respectively. However, other termination rights existed in favour of U which came into effect at about the five year point.
- U argued that this condition by B was not a commercially reasonable ground for declining consent and discontinued payment under the guarantees.
- B then claimed that the guarantees had not been validly terminated as it had not consented to their early termination.
- It argued that it had behaved in a ‘commercially reasonable manner’ as the commercial reason for entering into the guarantees was to make profits from the transactions through its fees. Early termination would mean B would not receive the level of fees it had anticipated to its detriment and hence it was commercially reasonable for it to refuse to give its consent.
Decision:
- The Court held that B had withheld consent to early termination of the guarantees in a ‘commercially reasonable manner’ and that the guarantees had not been validly terminated.
- The principles developed in previous cases to determine whether consent has been unreasonably withheld, and which were applied to commercial contracts in Porton Capital v 3M [2011], also applied here.
- These principles are:
- there is an objective requirement of reasonableness;
- the burden is on the party seeking consent to show that the withholding of consent was unreasonable;
- the party withholding consent:
- has to show that a reasonable commercial man in its position might have reached the same decision;
- does not need to show its decision was justified;
- is entitled to consider its own commercial interests and does not have to carry out a balancing of interests exercise.
- Therefore the Court found that:
- B's decision whether to consent to early termination of the guarantees had to be commercially reasonable in an objective sense. It was not sufficient for B to show merely that the decision was made in good faith and was not arbitrary, capricious or irrational.
- The question was whether a reasonable commercial man in B's position might have reached such a decision.
- In determining what was commercially reasonable, B was entitled to take into account its own commercial interests. B was not obliged to carry out a balancing exercise between its interests and U's interests.
- B's commercial interests comprised its interest in earning profits from its fee income under the guarantees. B was entitled to refuse consent to protect that fee income for the remainder of a five year period on the basis that a reasonable commercial man might have reached the same decision, even though the Court found that there was no common understanding between the parties on this point.
- The Court clearly took the view that as other termination rights began to apply on or around the five year point that and other surrounding circumstances were sufficient justification for insisting upon the balance of five years’ fees being payable. However, that assumes that the risk of regulatory changes in the first five years effectively sat with U although there does not seem to us to be any strong basis for that in the drafting.
Points to Note:
- This decision confirmed that the same principles of an objective standard of reasonableness applied to the use of discretion in giving consent as in previous cases.
- To ensure that a balancing exercise does have to be undertaken when a decision regarding consent is to be made, use express wording to that effect within the contract. Alternatively, expressly state in the contract any specific factors which must be taken into account by the party from whom consent is sought.
- What this case illustrates is that there are certain circumstances in which the usual caveat of ‘such consent not to be unreasonably withheld’ makes little sense and offers little or no protection at all to the party required to obtain consent and different drafting is perhaps required.
- In March 2014 the Court of Appeal upheld the High Court's decision that B had been "commercially reasonable" when withholding its consent to early termination of guarantees and, specifically, that it was entitled to take primary account of its own interest in determining whether to consent to the termination.