Many contracts include clauses which provide that one party may decide whether to consent to a course of action requested by the counterparty. It is common to see some limitation on the exercise of the discretion of the party whose consent is being sought, such as "consent, not to be unreasonably withheld". In this particular case, the High Court has, following principles first developed in landlord and tenant case law, applied an objective test to determine whether the party whose consent is being sought has acted in a commercially reasonable manner in coming to its decision. The upshot is that the party whose consent is being sought, while having to act objectively in a commercially reasonable manner, is entitled to give its own commercial interests precedence over those of the other party and it is not obliged to try and balance the competing interests of the parties.
In this case, the claimant (Barclays) and the two defendants (together UniCredit) entered into three synthetic securitisations of loan portfolios which were embodied in three guarantees (the Guarantees). These transactions were designed to allow UniCredit to obtain capital relief following the financial crisis in 2008. The Guarantees each contained a clause which provided that if a defined change in regulation occurred, UniCredit could request that Barclays consent to an early termination of the Guarantees. Barclays, in turn, was obliged to determine in a "commercially reasonable manner" whether to give consent.
As a result of a regulatory change, however, the transactions did not provide UniCredit with the benefits it had hoped for and in June 2010, UniCredit sought Barclays' consent to the early termination of the three Guarantees. Barclays' expectation at the outset of the transaction had been that five years worth of fees would be received and so it refused to give consent unless it was paid the balance of five years worth of fees (€82 million). UniCredit, however, argued that what was commercially reasonable had to be assessed in light of the severity of the impact of the regulatory change on UniCredit.
The Judge found that Barclays was justified in its position, on the basis that Barclays' only commercial reason for entering into the transaction was to make a profit as a result of the fees that would be paid. The discretion to refuse early termination allowed Barclays to protect its profits. In coming to this conclusion, the Judge considered landlord and tenant case law which applied an objective standard of reasonableness to clauses which provide that consent is not to be unreasonably withheld. The principles set out in these cases were then applied in a commercial context in Porton Capital Technology Funds & OtherS v 3M Holdings EWHC Civ 2895, and it was these principles that the Judge used when considering how to assess whether Barclays had acted in a commercially reasonable manner. He found the following:
- Barclays had to show that in refusing consent to early termination, it objectively acted commercially reasonably. It was not enough for Barclays to show that the decision was made in "...good faith and was not arbitrary, capricious or irrational..".
- In assessing whether Barclays had made the determination not to consent in an objective manner, Barclays did not need to show that the decision was justified but whether a "reasonable commercial man in Barclays' position might have reached such a decision".
- Barclays was entitled to take into account its own commercial interests when determining what was commercially reasonable. These interests took precedence over UniCredit's interests and Barclays was not obliged to try and balance the parties' interests.
- In this transaction, Barclays' commercial interests were the profits generated by the Guarantee fees. Barclays was entitled to protect its commercial interests by refusing consent, unless it could be determined that the nature or amount of the fees was so disproportionate to UniCredit's obligation to pay that no commercially reasonable man in Barclays' position could have reached the same decision. Unless this onerous test was met, Barclays could ignore the effect that continuing the transaction would have on UniCredit. In this case, the Judge determined that, on the facts, this test was not satisfied and that a party in Barclays' position would be acting reasonably by insisting on some element of profit when determining whether to give its consent.
This case shows that while an obligation to act in a commercially reasonable manner in determining whether to grant consent is meant to impose an objective test by which the decision is judged, the reality is that the party whose consent is being sought is very unlikely to be deemed to have acted unreasonably if it seeks to protect its own commercial interests and ignore those of the party seeking consent. To avoid the uncertainties that inclusion of such a term in a contract may cause, parties should consider the use of a term which sets out that consent will be given if certain conditions are met. For instance, it is common in aircraft leases for a clause to be included which requires the lessor to consent to the sublease of the aircraft to specified companies, thus obviating the exercise of discretion.
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