Everyone For Him- Or Herself?: The English Court Considers The Extent Of A Party's Duty To 'Act Reasonably' In The Context Of A Financing Transaction

The English High Court has applied an objective standard of reasonableness in determining whether a party to a series of finance transactions had reasonably withheld its consent to the early termination of such transactions. Historically, where a contract has given one party a discretion the exercise of which would affect both parties, unless the contract imposed a requirement of reasonableness in the exercise of that discretion, the English courts have opted to impose few restrictions on the party's decision-making powers under a contract, requiring only that a decision must be made, "honestly and in good faith," and that discretion not be exercised, "arbitrarily, capriciously or unreasonably".1 Given this minimal protection, contracting parties often seek to curtail the decision-making powers of their counterparty by imposing a requirement that the discretion holder "act reasonably" in exercising any such power. Despite its popularity in all manner of contracts, and finance documents in particular, there had existed a degree of ambiguity as to what an obligation to "act reasonably" actually entails. The extent of this obligation was the subject of the recently decided Barclays Bank plc v Unicredit Bank AG and others [2012] EWHC 3655 (Comm). The Facts The defendants were wholly owned German and Austrian subsidiaries of the Unicredit banking group (the "Defendants"). In connection with the synthetic securitisation of pools of loans held by them, the Defendants entered into three guarantee agreements with Barclays Bank plc ("Barclays") in April 2009 (the "Guarantees"). Barclays' principal return for assuming the risk of the loan portfolios' default was fees amounting to an aggregate of24.8 million per annum. The Guarantees set out a number of circumstances in which the Defendants could bring them to a premature end. One such circumstance was where regulatory changes caused a Defendant to be subject to less favourable capital treatment with respect to a Guarantee, provided that the Defendant obtained Barclays' prior consent to the termination, "such consent to be determined by Barclays acting in a commercially reasonable manner." Just 14 months after entering into the Guarantees, the Defendants requested that Barclays consent to their termination on the basis that regulatory changes meant the Defendants were no longer receiving capital relief by holding them. Refusing the request outright in its first written communication, Barclays indicated...