Meaning of Commercially Reasonable as a requirement of Commercial and Property Legal Documents

The term “commercially reasonable” was recently litigated in the context of determinations made by parties to financial instruments. Even here much will turn on the sub context of the particular document and the circumstances. The term is sometimes used in property documents and this case may provide some assistance as to its meaning though again the context will be important.

In Barclays Bank Plc v Unicredit Bank Ag & Anor [2014] Unicredit were paying Barclays premiums for guarantees given by Barclays. These enabled Unicredit to lay off certain credit risks and reduce their capital requirements.

The lifetime of two of the guarantees was 11 years and 19 years for the other guarantee, but provisions were agreed entitling Unicredit (in events that were likely to occur) to bring them to an end after a period which was expected to be about 5 years. Barclays could therefore expect to earn five years’ premiums and fees under the guarantees.

Clause 12.1 of the guarantees granted this right of optional termination in four separate events, two of which required Barclays’ prior consent “such consent to be determined by [Barclays] in a commercially reasonable manner.”

The person who had to act in a commercially reasonable manner was “the Guarantor” namely Barclays itself.

It was the manner of the determination which must be commercially reasonable; it did not follow that the outcome had to be commercially reasonable although, if it is not, that would no doubt cause the court to look critically at the manner of the determination.

In determining whether or not to consent to early termination, could Barclays take account of its own interest in preference to the interest of Unicredit?

It could, because any commercial man whose consent was required to a course of action would think it commercially reasonable to have primary regard to his own commercial interests.

Of course the requirement that consent be determined in a commercially reasonable manner must be intended to be some kind of a control.

So, if, Barclays had said that they would not consent at any price or if it had said that they wanted 11 years’ (or 19 years’) fees as being the full term of the guarantees, that might well not have been “commercially reasonable”.

But that was not the position here.

It was not easy to specify a test for commercial reasonableness for the purpose of this or other contracts generally but it could be tentatively said that it would not be acting in a commercially reasonable manner to demand a price which was way above what they could reasonably have anticipated would have been a reasonable return from the contract being prematurely terminated.

The price which Barclays demanded for its consent here could not be said to have been determined by it in a commercially unreasonable manner.

It 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.

This blog has been posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.