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Monday 14 January 2013

Have you split the difference?

In the recent case of Barclays Bank plc – v – Unicredit Bank AG and Unicredit Bank Austria AG [2012] EWHC 3655 (Comm), the High Court looked at a clause commonly encountered in finance contracts, which allowed one of the contractual counterparties to give or refuse consent in relation to a particular issue on a, “commercially reasonable” basis. The Court stated that an objective test was to be applied in determining whether or not it was reasonable to withhold consent. i.e., in this case, what would a reasonable commercial man have done in the circumstances when called upon to exercise a particular consent right. On this basis, the Court considered that it was perfectly acceptable for the decision maker to take account of his own commercial interests in preference to those of his contractual counterparty.

The result is not particularly surprising from a legal standpoint. The High Court was only confirming in the context of a finance transaction what lawyers have long believed to be the case in respect of many other types of commercial contracts. But the law is perhaps at odds with what lay people believe consent rights in contracts really mean and what they will really deliver.

The impasse in many a commercial contract negotiation between two diametrically opposite viewpoints in often broken  by the parties agreeing in the spirit of compromise that instead of concrete X or unmoveable Y, that they can both live with flexible Z Рthat one party will be tasked with giving consent when the time comes, such consent not to be unreasonably withheld or delayed.

For such hard fought compromise to mean anything other than the person making the decision has to be not just fair, but fair to both parties, would come as an unwelcome and unintended surprise to many laymen. The lesson to be learnt therefore is that if a more equitable balance is desired between parties to a contract in relation to a contractual consent right, more effort must be devoted during contract negotiations to establishing the parameters of how the consent should be exercised.

Bruce Jones

MH Corporate

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