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Legal update March 2013

Banking and Finance Lender consent - Barclays v Unicredit

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Barclays v Unicredit highlights the importance of "consent not to be unreasonably withheld" wording in loan agreements.

Since the onset of the credit crunch, there has been a great deal of comment and discussion around the ability of a lender to withhold consents under loan agreements.

Just before Christmas, the case of Barclays Bank PLC v Unicredit Bank AG provided some useful guidance on the ability of a lender to withhold consent. It is the first reported judicial decision to look at this issue in the context of a finance transaction, albeit in this case financial guarantees of a loan portfolio rather than a loan agreement.

Typical wording Broadly, loan agreement consent wording will fall into three types:

1. Total Prohibition

This type of clause provides that the action referred to cannot be undertaken. In these circumstances, a borrower does not even have the right to ask for consent.

2. Permission with consent

Here, the borrower is given permission to do or not do something, but only if lender consent is obtained. In this type of wording, there are no stated restrictions on the ability of the lender to give or refuse consent.

3. Permission with consent, not to be unreasonably withheld

Similar to type 2 but the wording provides that lender consent cannot be unreasonably withheld.

The case of Barclays v Unicredit Here, Barclays' decision whether or not to consent was to be made "in a commercially reasonably manner". The Court decided that this was an example of type 3 wording (see above).

In deciding whether or not to give consent, Barclays had to behave in a way which is commercially reasonable in

an objective sense. It was not sufficient for Barclays to show merely that the decision was made in good faith and was not arbitrary, capricious or irrational (which is the minimum standard to be applied in cases of type 2 wording).

In reaching its decision, Barclays were able to act in their own commercial interests. They were not required to undertake a balancing exercise as to the respective interests of Unicredit and themselves. Their decision to withhold consent did not have be justified, but one which a reasonable financier in Barclays' position might have taken.

However, refusal to consent would not be allowed if the costs to Unicredit were so disproportionate that no reasonable financier in Barclays' position could have reached such a decision.

The Court refused to find that a lender would have a duty to act reasonably even if these words were not used in the relevant clause.

Conclusion This is a welcome clarification of the law as it applies to finance transactions and follows similar decisions in landlord and tenant and commercial cases.

It illustrates the importance to RPs of including "not to be unreasonably withheld" wording where this can be negotiated in key loan agreement provisions.

It also serves as a reminder that the wording of any particular clause needs always to be interpreted in the context of the agreement as a whole and the other surrounding facts. Whilst the underlying legal principles may now be clearer, there is always room for debate as to how they might be interpreted in any particular case.

March 2013 Trowers & Hamlins For more information please contact Neil Waller Partner t +44 (0)161 838 2032 e nwaller@trowers.com