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Court gives guidance on when withholding consent under commercial agreements is ‘unreasonable’

Businesses required to give consent that is ‘not to be unreasonably withheld’ under commercial agreements will welcome guidance from the Court of Appeal on how the courts will determine whether a refusal is reasonable.

In a recent case, a business could terminate an agreement early provided the other party (a bank) consented. The bank had to act in a ‘commercially reasonable’ way when deciding whether to consent. When the business wanted to terminate the agreement, the bank made its consent conditional upon being paid five years’ fees.

The Court of Appeal said it was not enough for the bank to say it had acted in good faith, and not arbitrarily or irrationally. The test of whether the condition was ‘commercially reasonable’ was objective – would a reasonably commercial person in the same position have imposed such a condition?

The court ruled that a reasonably commercial person was entitled to make a decision in its own interests only – it did not have to take the business’s interests into account and carry out a balancing exercise between them.

As the bank’s commercial interest in the agreement was continuing revenue for the term of the agreement and, given that five years’ fees was not disproportionate compared to its reasonable revenue expectations if the agreement had continued, requiring payment of that sum was a reasonable condition to impose for consenting to the early termination of the agreement.

Recommendations

Parties to commercial agreements requiring consent to any action by the other – such as early termination, such consent not to be unreasonably withheld – should note that the party giving consent can act in its own interests, without taking the other side’s interests into account, provided this is not disproportionately unfair to the other party.

Case ref: Barclays Bank plc v Unicredit Bank AG and another [2014] EWCA Civ 302

Alex Cook initially trained as a Barrister (non-practicing) before cross-qualifying as a specialist commercial and property litigation solicitor. Prior to becoming joint owner of Helix Law in 2013, he was Head of Litigation and one of the youngest partners in the region in a large firm based in Eastbourne. Comfortable and experienced litigating against large international City firms, he has successfully resolved complex commercial and property disputes for clients ranging from large international businesses and property investors to individual business people. Alex is an accredited commercial mediator  and he is increasingly asked to advise on contracts, risk, dispute avoidance and exit strategies. He also continues to develop and innovate our products, services and funding arrangements with the aim of making specialist litigation services more transparent and accessible.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]