Issued on behalf of Rosling King LLP

The Appeal Court has ruled in favour of Barclays Bank v Unicredit over a guarantee claim. The ruling is a victory for banks and sets a precedent for future cases.

Rosling King Partner Juliet Schalker explains:

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”) as a mechanism by which Unicredit sought to mitigate the credit risk in respect to three loan portfolios.

The Guarantees were meant to reduce the minimum capital reserve it was required to hold by the relevant regulator and Unicredit would pay a quarterly premium to Barclays and a fixed fee.

However, 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 either one of the ETMs was triggered, or if Unicredit obtained Barclays’ prior consent to terminate, consent which would be determined by Barclays in a commercially reasonable manner.

However, when Unicredit wrote to Barclays on 14 June 2010 seeking Barclays’ consent to an early termination of the Guarantees, triggering of one of the five ETMs, Barclays responded that it would not consent unless they paid the balance of its fees for five years.

Unicredit declared they were not prepared to pay 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 thus 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 Court of first instance agreed that Barclays was indeed acting in a commercially reasonable manner in refusing its consent unless it recovered five years’ fees.

Unicredit appealed this decision on a number of grounds, one being that the Judge was wrong to hold that Barclays was entitled to safeguard its own commercial interests, thereby excluding the interests of Unicredit in refusing to consent to early termination.

However, the Appeal Court found in favour of Barclays and stated:  “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.”

Furthermore: “Bankers, as commercial men, have a keen instinct for where their own interests lie”. Although the Appeal Court stated that it was not easy to express a test for commercial reasonableness, it would say that a party who has to make the relevant determination will not be acting in a commercially reasonable manner if he demands a price which is way above what he can reasonably anticipate.

The Appeal Court held that the price which Barclays demanded as the price of its consent cannot be considered as commercially unreasonable. Barclays was entitled to have regard to its own commercial interest, as it did not refuse consent outright and the price it sought was not out of line with the reasonable return it could have expected, had the contract run its expected course.

The Court of Appeal therefore concluded that Barclays made its determination in a commercially reasonable manner and the appeal was dismissed.

This ruling is yet another victory for banks. At both first instance and on appeal, the Court recognised that Barclays’ only commercial reason for entering into the Guarantees was to make a profit and that Barclays’ actions were indeed commercially reasonable.