Barclays Bank Plc v Unicredit Bank AG & Anor, [2012] EWHC 3655 (Comm) (21 December 2012) (2024)

10. There are different methods used by regulators to assess the amount of tier one capital reserve thatmust be held against the securitised tranches which are retained by the originator of such asecuritisation. One common approach is for the risk weight to be determined by external creditratings. Another approach, which at the relevant time was little used and could only be adopted by asmall number of approved banks, is known as the Supervisory Formula Approach ("SFA"). Basel IIallows for two main methodologies for calculating RWA: the "standardised" approach and theInternal-Rating Based ("IRB") approach. In 2008, HVB in Germany and Bank Austria in Austriawere already using the IRB method, whereas UniCredit Banca SpA and the other Italian bankswhich were part of the UniCredit group were still using the standardised method. The regulatoryrelief afforded in relation to a securitisation applying the SFA was only available to so-calledAdvanced IRB banks (which both HVB and BA were), and then only on portfolios which metcertain criteria.

11. To determine a risk weight on each tranche, the SFA applies a formula which takes account of fiveinputs, which are: (1) the number of loans in the underlying pool taking into account theirindividual sizes, (2) the regulatory capital which the bank would have had to maintain against thepool without synthetic securitisation, (3) the pool's exposure weighted average loss given defaultnumber (i.e. the expected loss against a particular asset which would be suffered if there was to be adefault), (4) where the securitised tranche sits in the structure (junior, mezzanine, senior) and (5) thesize of the tranche. The output of the formula is an RWA percentage for the tranche for which it hasbeen computed. The formula enables the bank flexibly to divide the pool into different tranches,computing the regulatory capital requirement each tranche must bear. To manage the capital chargeagainst the whole pool the bank can transfer the risk in certain tranches to a counterparty, andthereby gain regulatory capital relief on the pool, if effective risk transfer is achieved according tothe regulatory rules.

12. These rules for synthetic balance sheet deals were particularly well developed by BaFin for Germanbanks due to the frequent usage of synthetic securitisation in Germany. Bank Austria was the largestAustrian bank, and as far as Dr Spaeth knew, it was the only bank in Austria conducting syntheticsecuritisations of the type contained in the Guarantees. In this respect, the FMA, and the auditorswho approved the regulatory treatment, were content to follow BaFin's lead on the regulatoryinterpretation of Basel II, whose implementation in Austria was in substantially the same terms asin Germany.

13. All this was well known to Dr Spaeth, and her colleagues in the team at HVB who were involved inconcluding the Guarantees. Those at Barclays involved in negotiating the Guarantees would havebeen aware of these general principles of regulatory capital relief, but were not familiar with thedetail of the SFA formula, nor the particular attitudes and approach of the Austrian and Germanregulators to effective risk transfer. Nor were they aware of the UniCredit group's overall regulatorycapital position.

14. The immediate context for the HVB-1 Guarantee was that UniCredit as a consolidated groupwished to improve its tier one capital ratio, and was under considerable pressure from the Bank ofItaly to do so before the quarter date of 30 September 2008. The initiative to execute the HVB-1Guarantee came from the Italian Head Office at UniCredit in Milan.

15. Negotiations for the HVB-1 Guarantee started on 16 September 2008 and were concluded within afortnight. At the same time Dr Spaeth was conducting negotiations for synthetic securitisations oftwo other pools of assets, which were successfully concluded with other counterparties by 30September 2008. These negotiations took place during considerable turmoil in the financialmarkets. A few of the headline events which were shaking the markets in September 2008 were thecollapse of Fanny Mae and Freddy Mac; the rescue of Merrill Lynch by Bank of America; the bailout of AIG by the Federal Reserve providing a $85 billion credit facility; the rescue of HBOS by agovernment encouraged merger with Lloyds Bank; Washington Mutual filing for Chapter 11bankruptcy; and the collapse of Wachovia and its proposed sale to Citigroup. On 29 September2008, HVB's real estate lending arm, Hypo Real Estate, needed a 35 billion euro bail out from theGerman Government and a consortium of banks. Many banks other than UniCredit were facingsimilar regulatory capital pressures. The cash securitisation market was effectively closed.Interbank lending was severely restricted.

16. The position in the markets was not significantly better in December 2008 when the BA and HVB-2Guarantees were concluded. Their negotiation proceeded on the basis that the principles agreed forthe HVB-1 Guarantee should continue to apply. Apart from the amounts involved, they wereconcluded on similar terms, with one material difference which I will identify below.

17. The Guarantees were amended and restated on 2 April 2009. Nothing turns on the amendments andI shall refer to the Guarantees in their restated form unless the context otherwise requires.

The Guarantees

18. The essential structure of the Guarantees was that in exchange for quarterly payments of premiumand a fixed fee, Barclays would make quarterly payments to UniCredit in respect of the first lossessuffered by reason of credit defaults on a portfolio of obligations which had been designated byUniCredit for each of the transactions as its "Reference Portfolio". The losses were referred to in theGuarantees as Credit Protection Payments. The notional values of the Reference Portfolios, wheninitially designated, were €9,965,235,219.18 for HVB-1; €6,663,757,405.85 for the BA Guarantee;and €3,982,760,904.00 for HVB-2. The first loss tranche covered by the Credit ProtectionPayments for the HVB-1 Guarantee was a little over 7%; Barclays' liability for the first loss tranchewas limited to €700 million. The first loss tranche was of a different width for the latertransactions; the equivalent limits for the BA and HVB-2 Guarantees were €600 million and €420million respectively.

19. The amount of the premiums was determined in such a way as to ensure that, over the lifetime ofthe Guarantees, the total premium would exceed the total Credit Protection Payments, so thatBarclays was not exposed to the credit risk on the first loss tranche of the Reference Portfolio. TheGuarantees potentially lasted for the period of the longest loan in the Reference Portfolio, whichwas 11, 19 and 19 years respectively. Over this period the premiums would be bound to exceed theCredit Protection Payments. Barclays did not, on the other hand, stand to gain from the performanceof the first loss tranche of the Reference Portfolio, because any surplus premium was to be returnedto HVB or Bank Austria. In the HVB-1 Guarantee the surplus was to be returned at the terminationof the Guarantees; in the BA and HVB-2 Guarantees there was a mechanism for return of surplusannually during the currency of the Guarantees, with adjustment to ensure the same neutral effect.

20. In addition to premium, Barclays was entitled to a fee which was not subject to any adjustment. Forthe HVB-1 Guarantee, the fee was €3 million per quarter (€12 million per annum). For the BA andHVB-2 Guarantees it was €2 million and €1.2 million and respectively (€8 million and €4.8million per annum).

21. The quarterly payment dates for premium, fees and Credit Protection Payments were 30 March, 30June, 30 September and 30 December each year. The amounts due each way would be calculated,with the balance falling to be paid at the end of each quarter on a netted off basis. The calculationwas to be based on an Accumulation Ledger, to be prepared by UniCredit, which recorded thepremium and Credit Protection Payments. In essence the Accumulation Ledger represented the netbalance of payments made and to be made by each party to the other, subject only to exclusion ofBarclays' quarterly fee which was payable in addition to whatever balance was shown on theLedger. The Ledger was described as being positive if premiums exceeded Credit ProtectionPayments, so that UniCredit would pay Barclays the balance plus the fees. It was described asnegative if the Credit Protection Payments exceeded the premiums, in which case Barclays wouldpay UniCredit the balance subject to deduction of its fees. Each Guarantee was accompanied by aCredit Support Agreement ("CSA") under which, if the Accumulation Ledger was negative,UniCredit was required to post security for the deficit, such that Barclays was not taking a creditrisk on UniCredit in relation to the Accumulation Ledger being negative at any stage of the runningof the Guarantee.

22. One of the reasons for structuring the deals in a way which did not expose Barclays to any realcredit risk on the first loss tranche of the portfolio, which was the risk notionally being protected bythe Guarantees, was that Barclays would not have been prepared to take such risk, at any price, inthe current turbulent market conditions; and because in any event the urgency of the deals and theshort negotiating timescale gave it no opportunity to carry out due diligence on the ReferencePortfolios so as to be able to assess the underlying credit risks of the borrowers. Nevertheless thestructure of the transaction was apparently such as to persuade the regulators that there had been an "effective transfer of risk" on this tranche so as to qualify for the full RWA relief in respect of it.

23. It was not the case, however, that Barclays assumed no risk at all on the Guarantees, in return for itsannual fees totalling almost €25 million. Barclays was at risk in two respects:

(2) Barclays was also potentially exposed to a timing risk depending on when the firsttranche losses occurred. The premiums over the life of the Guarantees were designed toexceed the total exposure on the first tranche by a margin which would safely cover theinterest cost to Barclays of having a negative Accumulation Ledger from time to time.However it was possible, although unlikely, that interest rates would increase duringthe lifetime of the Guarantee to a sufficient level to exceed this margin and exposeBarclays to a potential interest rate loss. In the case of the HVB-1 Guarantee, whichonly provided for distribution of surplus at the end, this risk would only eventuate ifthere were a combination of heavy losses early in the lifetime of the Guarantee and anunexpectedly large increase in interest rates. In the other two Guarantees, in whichBarclays would not retain the same interest benefit of the Ledger being positive(because surplus was distributed annually during the lifetime of the Guarantee) the riskprofile was more complex. This risk was recognised during negotiations and referred toat times as "the extension risk".

24. Although the life of the Guarantees was potentially 11, 19 and 19 years respectively, because of thelongest single loan in each pool, both parties expected that UniCredit would wish to terminate eachGuarantee when the portfolio had substantially reduced in size by the passage of time, and agreedthat it should be allowed to do so. Accordingly, each Guarantee provided that UniCredit would beentitled to elect early termination after a period roughly equivalent to the weighted average life ofthe loans in the portfolio. This was referred to as "the WAL date" and the option to terminate as a"time call". In the HVB-1 Guarantee the WAL date was 30 September 2013, reflecting a weightedaverage life of the portfolio rounded up to five years. In the BA and HVB-2 Guarantees it was againfive years from the first quarter payment date. The Guarantees provided that upon such a time call,which could be made on the WAL date or any quarter date thereafter, UniCredit had the option toterminate, but only if the Accumulation Ledger were positive (by which I mean, to be moreaccurate, if the Accumulation Ledger, minus any Credit Protection Payments which wouldsubsequently fall due as a result of already declared credit defaults, were positive). If the Ledgerwere negative, in the sense described, UniCredit would have to wait for it to turn positive beforebeing able to exercise its time call. Accordingly, subject to the effect of other early terminationoptions, Barclays would be guaranteed to earn at least five years' fees under the Guarantee.

Optional Early Termination

25. The time call was one of four circ*mstances designated in the HVB-1 and HVB-2 Guarantees (onceamended and restated) as circ*mstances in which HVB could elect to terminate the Guaranteesbefore their natural expiry. Each was designated an Optional Early Termination date and providedfor in clause 12 of the Guarantee. The four circ*mstances were the occurrence of:

(1) the "Weighted Average Life Termination Date" (Clause 12.1(d));

(2) a "Regulatory Change" (Clause 12.1(b));

(3) the "Substitution Event Date" (Clause 12.1(a)); and

(4) a "10% Clean-up Call Event" (Clause 12.1(c)).

26. The BA Guarantee provided additionally for a fifth circ*mstance as an Optional Early Terminationdate if "the Rating Event Substitution Date occurs".

27. I have explained the Weighted Average Life Termination Date. It was the time call available fiveyears after the date of the Guarantee, and entitled UniCredit to terminate the Guarantee then, or onany subsequent quarter date, provided that the Accumulation Ledger were positive.

28. Clause 12.1(b) of the Guarantees related to the designation of an Optional Early Termination Dateby UniCredit upon the occurrence of a Regulatory Change, and is the clause which is central to thecurrent dispute. It provided:

"If:……(b) a Regulatory Change occurs in respect of [UniCredit], provided that[UniCredit] has obtained the prior consent from [Barclays], such consent to bedetermined by [Barclays] in a commercially reasonable manner…… [UniCredit] may,by not less than 5 Business Days notice to [Barclays], designate……… the nextfollowing Payment Date as an Optional Early Termination Date."

29.

30.

31. Regulatory Change was defined in Clause 1.1 to occur when:

"in the determination of [UniCredit]…………[UniCredit] will be subject to lessfavourable regulatory capital treatment with respect to this Guarantee, [the portfolioobligations]………and/or the amount of regulatory capital freed up in respect of [theportfolio obligations]…."

32. The other three grounds of Optional Early Termination are also relevant:

(1) The Substitution Event Date was the quarter day four years after the date of theGuarantee. At that point UniCredit was entitled to bring the Guarantee to an end if itwished to enter into a substitute transaction in order to resecuritise the remainingportfolio. It could only do so if the Accumulation Ledger were positive; and suchtermination required UniCredit to pay a "Substitution Premium", which amounted toone year's Barclays' fees for the Guarantee.

(2) A "10% Clean-up Call Event" occurred if the Reference Portfolio had fallen to 10%or less of its original notional value. As with termination following a RegulatoryChange, UniCredit was entitled to terminate the Guarantees early on this ground onlywith the consent of Barclays, such consent to be determined in a commerciallyreasonable manner.

(3) The Rating Event Substitution Date was only to be found in the BA Guarantee. IfBarclays' credit rating were downgraded, UniCredit could terminate early, againprovided that the Accumulation Ledger were positive. If it wished to do so it wasobliged to pay the "Rating Event Substitution Premium", which was defined in suchterms as to ensure that Barclays would receive from Bank Austria the balance of fiveyears' fees.

33. Thus of the five grounds upon which UniCredit were able to designate an Optional EarlyTermination Date in any of the Guarantees, three expressly ensured that Barclays would receive atleast five years' fees under the Guarantees:

(1) the Weighted Average Life Termination Date could occur only after five years;

(2) the Substitution Event Date occurred after four years but required payment of oneyear's fees as a condition of termination;

(3) a Rating Event Substitution Date could occur at any time, but the premium to bepaid on termination was the balance of five years' fees.

34. The provisions for termination following a Regulatory Change and a 10% Clean-up Call Event didnot contain any express reference to a time period or the payment of fees, but were both subject tothe need for Barclays to consent to termination of the Guarantees.

35. It was common ground that Barclays would have been entitled to refuse consent if and for so longas the Accumulation Ledger were negative. As explained more fully below, it was Barclays' understanding, as a consequence of discussions during negotiations, that there would have been a regulatory problem with including an express provision for payment of the balance of five years' fees in these two situations; but that the consent mechanism could be used by Barclays to achieve the same result, by refusing its consent unless the balance of five years' fees were paid. By this mechanism, so Barclays understood, it would be able to ensure that whatever happened, it would receive a minimum of five years' fees.

36. On that basis Barclays booked as profit, at the date of each Guarantee, the discounted present valueof five years' fees, on the understanding that this amount of fee income was guaranteed to bereceived come what may (subject to the credit risk of default by UniCredit).

37. There was one other relevant ground for early termination. Under clause 11.4(c) of the Guarantees,UniCredit was entitled to give notice terminating the Guarantees upon the occurrence of anIllegality, a Tax Event or a Tax Event Upon Merger in respect of UniCredit (subject to firstattempting to restructure the transaction to avoid the event giving rise to the right to terminate).Each of these grounds of termination depended on subsequent events making performance illegal orsubjecting the payment regimen to unexpected tax treatment. Where early termination occurredpursuant to clause 11.4(c) of the Guarantees, there was a requirement under clause 11.7(a)(i)(D) thatUniCredit pay to Barclays the "Unwind Costs". The Unwind Costs were defined as

"the amount determined by [Barclays] to be its costs in connection with the earlytermination of the Guarantee, as determined by [Barclays] in good faith and acommercially reasonable manner by reference to its books and records and including,without limitation, any costs associated with loss of profit or unwinding any hedgesassociated with this Guarantee".

38. As with a termination on the ground of a Regulatory Change, the right of Barclays to requirepayment on termination of its "loss of profit" determined in a "commercially reasonable manner"was understood by Barclays as being a mechanism whereby, as with the other grounds for earlytermination, Barclays could ensure that it would receive five years' fees for the Guarantees.

39. The Guarantees, as executed, contained an entire agreement and understanding clause ("the EAUClause") in the following terms:

"20.1 This Guarantee, together with the Credit Support Agreement, constitutes theentire agreement and understanding of the parties with respect to its subject matter andsupersedes all oral communication and prior writings with respect thereto."

Request for Early Termination

40. On 14 June 2010 UniCredit wrote a letter in respect of each Guarantee seeking Barclays' consent toan early termination on 30 June 2010 as a result of a Regulatory Change. This did not come whollyout of the blue. There had been discussion between the parties earlier in the year as to whetherUniCredit would be able to terminate by reason of a Regulatory Change, and Barclays hadsuggested terms on which it would allow UniCredit to do so. I did not have the full extent of thosediscussions in the evidence before me.

41. By letters dated 23 June 2010 Barclays responded that it was not prepared to give its consentbecause

"Although early termination of the Agreement was contemplated in the Agreement, it isclear that the parties intended the Agreement to continue for a substantial period oftime. Unicredit cannot reasonably expect Barclays to consent to termination so early inthe term of the Agreement, in circ*mstances where this would deprive Barclays of asignificant proportion of the overall revenue that it had bargained for and thus result inmaterial economic detriment to Barclays."

42. Although the letter did not say so, Barclays had internally determined that it would only consent ifpaid the balance of five years' fees. An internal document, which was prepared to show the positionat 30 June 2010, identified that the discounted present value of these fees was calculated as being€82,606,465. Mr Norfolk-Thompson gave evidence on behalf of Barclays explaining and verifyingthe document, and the calculation was not challenged.

43. The document also showed that it would cost Barclays some €5.65 million to unwind the interestrate swaps which it had entered into to hedge against the extension risk; and about €1.65 million tounwind credit hedges taken out in respect of the credit risk of UniCredit's non payment of the fees(which were not protected by the CSAs). These were mark to market figures; Mr Norfolk-Thompson explained that it would have cost Barclays about €150,000 more to close out the hedgetransactions, to reflect the bid/offer spread. The figures showed, therefore, that it would costBarclays about €7.45 million to close out existing hedge transactions if the Guarantees wereterminated on 30 June 2010. The costs which would be saved by Barclays by the early termination,as then estimated, comprised a maximum of some €6.5 million. That figure is made up of some€2.5 million, which was the present value of the future credit risk hedged by credit hedges (or toput it another way, the present value of the fees was some €2.5 million less than the €82,606,465because there was a €2.5 million risk they would not be paid); and a figure of €4 million whichhad been reserved for the future costs of hedging, which would no longer be necessary. HoweverMr Norfolk-Thompson's evidence, which I accept, was that this €4 million would almost certainlyhave been released from reserve if the Guarantees continued, because the credit and interest raterisks were already fully hedged in a way which made it unlikely that any further hedging wouldhave been required. The extension risk on HVB-1 only arose in the event of heavy losses in theearly years of the Guarantee and by June 2010 it was apparent that these had not occurred. The €4million reserve did not, therefore, represent a saving which would result from early termination ofthe Guarantees. I find, therefore, that the savings to Barclays as a result of termination of theGuarantees at 30 June 2010 would have been a little over €2.5 million. In addition, of course, itwould save the management time and expense in managing and monitoring the Guarantees overtheir lifetime.

44. The evidence was not well developed as to exactly which sum Barclays internally determined itwould insist upon, in return for its consent. Mr Ali, Mr Mariani and Mr Wrobel each said in theirwitness statements that Barclays determined that it would insist on the balance of five years' fees;but said nothing about discounting to present value, or taking account of hedge unwind costs, orsavings. This evidence was not explored or challenged in cross examination. I find that the sumupon which Barclays internally determined it would insist, in return for providing consent, was€82,606,465 i.e. the balance of its fees for five years, discounted to then present value, withouttaking account of hedge unwind costs, which it would absorb, or savings from early termination,from which it would benefit. This was its approach in January 2010 when there were discussionsbetween the parties about what Barclays would require for unwinding the Guarantees at that stage.Barclays' demand at that time, reflected in an internal email of 20 January 2010 and communicatedto UniCredit on 27 January 2010, was for the balance of its fees for five years, discounted to thenpresent value, without taking account of hedge unwind costs, which it would absorb, or savingsfrom early termination, from which it would benefit.

45. On the limited material available to me, I conclude that this is what Barclays' letter was intended toconvey, and how it was understood by UniCredit, in the light of Barclay's previous stance inJanuary 2010. Barclays was saying, and was understood by UniCredit to be saying, that it wouldnot consent unless it were paid the balance of its fees for five years.

46. UniCredit responded to Barclays' letters of 23 June 2010 by letters of the same date which said thatit was not reasonable for Barclays to refuse consent in the light of the fact that the regulatorychange resulted in UniCredit no longer receiving capital relief by reason of the Guarantees.UniCredit stated that Barclays' unreasonable refusal of consent was being treated as a waiver of theconsent requirement, and purported to designate 30 June as the Optional Early Termination date inaccordance with the Guarantees. The letter went on to identify the financial consequences arisingunder various provisions of the Guarantees.

47. Barclays responded by letters dated 25 June 2010, repeating that

"Clause 12.1(b) clearly contemplates the possibility that consent may not be given to aproposed early termination. As outlined in our 23 June letter, the decision in thepresent case has been made by Barclays in a commercially reasonable manner, takinginto account particularly the fact that an early termination at such an early stage in thescheduled life of the Agreement would deprive Barclays of a significant proportion ofthe overall revenue that it had bargained for and thus result in material economicdetriment to Barclays."

48. On 29 and 30 June 2010 Bank Austria wrote seeking payment from Barclays of what it alleged wasthe net payment due as a result of early termination. On 30 June 2010 HVB wrote to Barclaysaddressing Barclays' reasons for refusing consent in its letter of 25 June 2010. UniCredit stated thatwhat was commercially reasonable must be assessed in the light of the severity of the impact of theRegulatory Change on UniCredit. It pointed out that the Guarantee did not oblige UniCredit tomake any additional payments to Barclays upon early termination on the grounds of a RegulatoryChange; and went on "in the light of this, it is not commercially reasonable for Barclays to withholdits consent". The letter concluded by offering to pay the amounts required to make theAccumulation Ledger neutral, without offering any payment as a price for Barclays' consent to earlytermination. Mr Railton QC characterised this letter, in my view fairly, as a statement by HVB thatit was not prepared to offer any sum as the price for Barclays' consent.

49. Thereafter the dispute between the parties crystallised. There was an issue as to whether anyRegulatory Change, as defined, had occurred, but by the time of the trial Barclays conceded thatone had (although on a different basis from that put forward by UniCredit in its June 2010 lettersand the earlier stages of the dispute). After June 2010 UniCredit did not calculate the quarterlypayment due by the parties under the Guarantees, and there were no further payments made underthe Guarantees.

The submissions

50. Barclays contended as follows:

(1) The discretion conferred on Barclays by clause 12.1(b) of the Guarantees, todetermine whether to grant its consent in a commercially reasonable manner, wassubject to a requirement of rationality equivalent to the implied obligation ofreasonableness attached to any discretion conferred on one party to a contract, as moreparticularly articulated by Rix LJ in Socimer International Bank Ltd (in liquidation) vStandard Bank London Ltd [2008] Bus LR 1306 at [61]-[66];

(2) There was a common understanding reached between the parties during thenegotiations for the HVB-1 Guarantee, which remained the common understanding forthe BA and HVB-2 Guarantees, that:

(a) Barclays would be paid its fee for a minimum of five years regardless of anyRegulatory Change; and

(b) Barclays would be entitled to decline its consent to early termination in the event ofa Regulatory Change if Barclays did not receive its fees for five years; and

(c) a determination by Barclays to refuse consent to early termination for a Regulatorychange without being paid five years' fees would be a determination in a commerciallyreasonable manner.

(3) Alternatively, such an understanding on Barclays' part was communicated toUniCredit and acquiesced in by UniCredit in the negotiations.

(4) Reliance on such an understanding is not precluded by the EAU Clause.

(5) Such understanding is determinative of whether Barclays was entitled to withholdits consent because:

(a) it was commercially reasonable for Barclays to exercise its discretion in accordancewith the understanding as to how it would do so; and/or

(b) the understanding gives rise to an estoppel by convention or acquiescence.

(6) Alternatively, absent any such understanding on which Barclays is entitled to rely,the determination to refuse consent was reasonable in that:

(a) it was commercially reasonable to refuse consent unless paid the balance of fiveyears' fees, discounted to present value; and/or

(b) it was commercially reasonable to refuse consent in circ*mstances where UniCreditdid not offer to pay any sum in return, not even Barclays' hedge unwind costs.

(7) Accordingly Barclays is entitled to a declaration to that effect, and that theGuarantees have not been validly terminated.

(8) Alternatively, if Barclays did not determine its refusal of consent in a commerciallyreasonable manner, it nevertheless refused consent, the Guarantees remain in force andUniCredit's remedy lies in damages.

51. UniCredit contended as follows:

(1) The discretion conferred on Barclays by clause 12.1(b) of the Guarantees importedan objective standard of reasonableness.

(2) The EAU Clause precluded Barclays from relying on, and the Court frominvestigating, any shared understanding or acquiesced in understanding; it similarlyprecluded investigation of, or reliance on, Barclays' understanding of UniCredit'sunderstanding.

(3) There was in fact no shared or acquiesced in understanding of the nature alleged byBarclays, and no estoppel.

(4) In the absence of Barclays' ability to establish or rely upon the alleged shared oracquiesced in understanding, Barclays' determination was not commerciallyreasonable. Barclays was insisting on five years' fees, which was unreasonable.Although UniCredit did not offer any payment in return for consent, it was for Barclaysto identify and ask for the price for their consent if a commercially reasonabledetermination justified one.

(5) If the determination to refuse consent was not commercially reasonable, the effectwas to waive consent, with the result that the early termination option was validlyexercised.

(6) Alternatively, if Barclays refusal of consent was determined in a commerciallyreasonable manner, Barclays is confined to a remedy in damages because Barclays wasbound to accept UniCredit's repudiatory breach under the principle in White & Carter(Councils) Ltd v McGregor [1962] AC 413.

52. UniCredit had unsuccessfully applied to have the scope of the EAU Clause determined as apreliminary issue. I therefore heard evidence of the negotiations, and of the alleged understandingsof the parties, without prejudice to UniCredit's arguments as to their admissibility or relevance. Thecommercial negotiations for HVB-1 were conducted partly by email, but primarily by phone, forthe most part between Mr Wrobel on behalf of Barclays and Dr Spaeth on behalf of UniCredit. Inone relevant telephone call Mr Wrobel spoke to another member of Dr Spaeth's team who wasassisting her on the deal, Ms Streck. Mr Wrobel and Dr Spaeth were the main point of contact forthe negotiations. More senior management was involved in the decision making on each side, andthere were some communications during the negotiations through other channels, but none onwhich either side placed significant reliance. Both sides were being advised by lawyers, who wereinvolved in negotiating and finalising the wording of the Guarantees in order to give effect to thecommercial terms agreed.

53. The conversations between Mr Wrobel and Dr Spaeth (and Ms Streck) were recorded by Barclaysin the normal course of business, unless, exceptionally, they were made by or to Mr Wrobel on hismobile phone when he was out of the office. They were conducted mainly in the German language.Translations of transcriptions of the recordings were before the Court. There were numerousconversations as the deal progressed, some very lengthy. They were analysed by the parties inconsiderable detail. Mr Wrobel and Dr Spaeth gave evidence of what their understanding was ateach stage of the negotiations when something of potential significance was said.

54. UniCredit accepted that it was Mr Wrobel's and Barclays' understanding, as a result of thediscussions during negotiations, that there would have been a regulatory problem with including anexpress provision for payment of the balance of five years' fees in the event of a Regulatory ChangeEvent, but that the consent wording was inserted to achieve the same result, so that Barclays couldrefuse its consent unless the balance of five years' fees were paid. By this mechanism, so Barclaysunderstood, it would be able to ensure that whatever happened, it would receive a minimum of fiveyears' fees. That Mr Wrobel and others at Barclays had such an understanding was put beyonddoubt by Barclays' internal documentation, including Mr Wrobel's internal reporting of hisconversations with Dr Spaeth, and the booking of five years' fees as profit at the outset.

55. Mr Wrobel's evidence was that he believed from what Dr Spaeth and Ms Streck said, and wrote,that they and UniCredit shared his understanding. Dr Spaeth's evidence was that it was not anunderstanding she shared, nor had she conveyed to Mr Wrobel that she shared it. Both were honestwitnesses and neither Mr Wolfson QC nor Mr Railton QC contended otherwise. UniCreditnevertheless accepted that Barclays genuinely believed that its understanding was a sharedunderstanding i.e. that this was also what UniCredit understood when the Guarantees were enteredinto. Moreover it was accepted by UniCredit that this belief by Barclays, that UniCredit shared theunderstanding, was a reasonable one in the light of the terms of the communications between MrWrobel and Dr Spaeth and Ms Streck during the negotiations, albeit that UniCredit contended thatthis honest and reasonable belief was in fact mistaken, and that in any event the EAU Clauseprecluded Barclays from seeking to rely on its understanding of UniCredit's understanding.

56. If there was a shared understanding as alleged by Barclays, and if reliance upon it were notprecluded by the EAU Clause, UniCredit did not actively challenge the proposition that thedetermination to refuse consent was made by Barclays in a commercially reasonable manner. Thiswas realistic. In those circ*mstances there would be no need to have resort to the doctrines ofestoppel by convention or acquiescence. Even adopting an objective standard of reasonableness, itwould have been commercially reasonable for Barclays to exercise its discretion in the way bothparties understood from their negotiations that it would, and would be entitled to.

57. In these circ*mstances it is convenient to address the issues which arise in the following order:

(1) What is meant by "commercially reasonable" in Clause 12.1(b)? Does it import aSocimer standard of rationality or an objective standard of reasonableness, and whatcriteria are to be applied?

(2) Ignoring any shared or acquiesced in understanding, was Barclays' refusal ofconsent commercially reasonable:

(a) because UniCredit offered no payment of any kind in return; and/or

(b) because it was commercially reasonable for Barclays to refuse consent unless oruntil it had received five years' fees?

(3) Does the EAU Clause preclude Barclays from relying on a shared or acquiesced inunderstanding, or estoppel, of the kind which it alleges?

(4) If not, was there in fact such a shared or acquiesced in understanding, and/or isthere an estoppel by convention or acquiescence?

(5) What are the consequences of the conclusions reached in (1) to (4) above?

Issue 1: What is meant by "commercially unreasonable" in Clause 12.1(b)?

58. In Socimer Bank Ltd v Standard Bank Ltd [2008] Bus LR 1304 Rix LJ reviewed the authoritiesgoverning the restrictions implicit in a discretion granted by one contracting party to the other:

" 60 When a contract allocates only to one party a power to make decisions under thecontract which may have an effect on both parties, at least two questions arise. One is,what if any are the limitations on the decision-maker's freedom of decision? …………

61 The answer to the first question is illustrated by cases such as the following. In AbuDhabi National Tanker Co v Product Star Shipping Ltd (The Product Star) (No 2)[1993] I Lloyd's Rep 397 the charterparty contained a clause which gave charterersthe right to alter the destination of the cargo in circ*mstances where the contractualport of loading or discharge was blockaded owing to war and "the loading ordischarging of cargo at any such port be considered by the Master or the owner in hisor their discretion dangerous". The trial judge, upheld by the Court of Appeal, heldthat the owners' purported decision under this clause was wholly unwarranted, andthat in fact they did not consider it dangerous to proceed to the contractual loadingport. Leggatt LJ, with whom Balcombe and Mann LJJ agreed, said about the content ofthe owners' power, at p 404:

"For purposes of judicial review the court is concerned to judge whether adecision-making body has exceeded its powers, and in this context whethera particular decision is so perverse that no reasonable body, properlydirecting itself as to the applicable law, could have reached such adecision. But the exercise of judicial control of administrative action is ananalogy which must be applied with caution to the assessment of whether acontractual discretion has been properly exercised. The essential questionalways is whether the relevant power has been abused. Where A and Bcontract with one another to confer a discretion on A, that does not renderB subject to A's uninhibited whim. In my judgment, the authorities showthat not only must the discretion be exercised honestly and in good faith,but, having regard to the provisions of the contract by which it must beconferred, it must not be exercised arbitrarily, capriciously, orunreasonably. That entails a proper consideration of the matter aftermaking any necessary inquiries. To these principles, little is added by theconcept of fairness: it does no more than describe the result achieved bytheir application."

62 Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd's Rep IR 221 concerned anagreement by which the London Market Letter of Credit Scheme was operated byCitibank. In certain circ*mstances the agreement gave to the bank the rights "to retainin the account(s) such additional margin as it considers appropriate in all thecirc*mstances" and to "allocate the drawing(s) . . . in such manner as the bankconsiders appropriate in its sole discretion": p 221. Waller J and this court held thatCitibank had exercised its decision-making rights in accordance with the purposes forwhich they were granted. Brooke LJ, with whom Mummery and Russell LJJ agreed,said, at paras 35-36:

35. It is very well established that the circ*mstances in which a court willinterfere with the exercise by a party to a contract of a contractualdiscretion given to it by another party are extremely limited. We werereferred to Weinberger v Inglis [1919] AC 6o6; Dundee GeneralHospitals Board of Management v Walker [1952] 1 All ER 896; Docker vHyams [1969] 1 Lloyd's Rep 487 and Abu Dhabi National Tanker Co vProduct Star Shipping Co Ltd (The Product Star) (No 2) [1993] 1 Lloyd'sRep 397. These cases show that provided that the discretion is exercisedhonestly and in good faith for the purposes for which it was conferred, andprovided also that it was a true exercise of discretion in the sense that itwas not capricious or arbitrary or so outrageous in its defiance of reasonthat it can properly be categorised as perverse, the courts will notintervene.

"36. Mr Rowland sought to derive comfort from some of the language usedby Leggatt LJ, with whom the other members of this court agreed, in TheProduct Star (No 2) at p 404 in support of a contention that the courts aremore ready to apply a standard of objective reasonableness whenassessing whether a discretionary decision can stand. That Leggatt LJ hadnot the slightest intention of watering down the well-established test ismanifest from the passages of his judgment (at pp 405 RHC, 406 RHC and407 RHC) in which he applied the law to the facts, where it is clear that heis using the epithet 'unreasonable' to characterise a view which noreasonable decision-maker could reasonably have formed on the materialbefore him."

63 Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER(Comm) 299 concerned the claims co-operation clause in a facultative reinsurancepolicy. The clause required the prior approval of the reinsurers for any settlement orcompromise of an underlying loss. The issue was raised whether it was to be impliedthat reinsurers could not withhold such approval unless they had reasonable groundsfor doing so. This court, in a judgment given by Mance LJ (in which Latham LJ and SirChristopher Staughton shared), held that no such implication was to be made. ManceLJ said, at paras 64, 67 and 73:

"64. I gain some assistance by analogy from these cases. In all of them, itseems to me that what was proscribed was unreasonableness in the senseof conduct or a decision to which no reasonable person having therelevant discretion could have subscribed . ."

"67 . . . I would therefore accept as a general qualification, that anywithholding of approval by reinsurers should take place in good faith afterconsideration of and on the basis of the facts giving rise to the particularclaim and not with reference to considerations wholly extraneous to thesubject matter of the particular reinsurance."

"73. If there is any further implication, it is along the lines that thereinsurer will not withhold approval arbitrarily, or (to use what I see as nomore than an expanded expression of the same concept) will not do so incirc*mstances so extreme that no reasonable company in its position couldpossibly withhold approval. This will not ordinarily add materially to therequirement that the reinsurer should form a genuine view as to theappropriateness of settlement or compromise without taking into accountconsiderations extraneous to the subject matter of the reinsurance."

64 Paragon Finance plc v Nash [2002] I WLR 685 concerned a variable interestclause in a mortgage agreement. The issue was whether the discretion given to themortgagee to vary the interest rate was subject to an implied term that it was bound toexercise the discretion "fairly as between both parties to the contract, and notarbitrarily, capriciously or unreasonably". Dyson LJ, with whom Thorpe LJ and AstillJ agreed, accepted a limited implication in which "unreasonably" was understood in asense analogous to the Wednesbury sense. That was the sense in which Leggatt LJ hadused the expression in The Product Star (No 2): see paras 37-38. Dyson LJ concluded,at para 41:

"41. So here too,"—referring to Gan Insurance Co Ltd v Tai PingInsurance Co Ltd (No 2)—"we find a somewhat reluctant extension of theimplied term to include unreasonableness that is analogous toWednesbury. I entirely accept that the scope of an implied term willdepend on the circ*mstances of the particular contract. But I find theanalogy of the Gan Insurance case and the cases considered in thejudgment of Mance LJ helpful. It is one thing to imply a term that a lenderwill not exercise his discretion in a way that no reasonable lender, actingreasonably, would do. It is unlikely that a lender who was acting in thatway would not also be acting either dishonestly, for an improper purpose,capriciously or arbitrarily. It is quite another matter to imply a term thatthe lender would not impose unreasonable rates."

……………………………………………………

66 It is plain from these authorities that a decision-maker's discretion will be limited,as a matter of necessary implication, by concepts of honesty, good faith, andgenuineness, and the need for the absence of arbitrariness, capriciousness, perversityand irrationality. The concern is that the discretion should not be abused.Reasonableness and unreasonableness are also concepts deployed in this context, butonly in a sense analogous to Wednesbury unreasonableness, not in the sense in whichthat expression is used when speaking of the duty to take reasonable care, or whenotherwise deploying entirely objective criteria: as for o instance when there might bean implication of a term requiring the fixing of a reasonable price, or a reasonabletime. In the latter class of case, the concept of reasonableness is intended to be entirelymutual and thus guided by objective criteria. Gloster J was therefore, in my judgment,right to put to Mr Millett in the passage cited at para 57 above the question whether adistinction should be made between the duty to take reasonable care and the duty not tobe unreasonable in a Wednesbury sense; and Mr Millett was in my judgment wrong tosubmit that it made no difference which test was deployed. Laws LJ in the course ofargument put the matter accurately, if I may respectfully agree, when he said thatpursuant to the Wednesbury rationality test, the decision remains that of the decisionmaker,whereas on entirely objective criteria of reasonableness the decision-makerbecomes the court itself. A similar distinction was highlighted by Potter LJ inHorkulak [2005] ICR 402 para 51. For the sake of convenience and clarity I willtherefore use the expression "rationality" instead of Wednesbury-type reasonableness,and confine "reasonableness" to the situation where the arbiter on entirely objectivecriteria is the court itself."

59. By contrast, an objective standard of reasonableness is to be applied in cases where a lease providesthat a tenant may sublet or assign with the consent of the landlord, such consent not to beunreasonably withheld. It is for the Court to determine whether the withholding of consent isreasonable in such cases: see Woodfall's Law of Landlord and Tenant paragraph 11.127.

60. In International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 Ch 513, at519-521, Balcombe LJ summarised the following principles as established by the authoritiesrelating to such clauses:

"(1) The purpose of a covenant against assignment without the consent of the landlord,such consent not to be unreasonably withheld, is to protect the lessor from having hispremises used or occupied in an undesirable way, or by an undesirable tenant orassignee ……

(2) As a corollary to the first proposition, a landlord is not entitled to refuse his consentto an assignment on grounds which have nothing whatever to do with the relationshipof landlord and tenant in regard to the subject matter of the lease ............

………………………

(4) It is not necessary for the landlord to prove that the conclusions which led him torefuse consent were justified, if they were conclusions which might be reached by areasonable man in the circ*mstances ...

………………………

(6) There is a divergence of authority on the question, in considering whether thelandlord's refusal of consent is reasonable, whether it is permissible to have regard tothe consequences to the tenant if consent to the proposed assignment is withheld………… in my judgment a proper reconciliation of those two streams of authority canbe achieved by saying that while a landlord need usually only consider his ownrelevant interests, there may be cases where there is such a disproportion between thebenefit to the landlord and the detriment to the tenant if the landlord withholds hisconsent to an assignment that it is unreasonable for the landlord to refuse consent.

(7) Subject to the propositions set out above, it is in each case a question of fact,depending upon all the circ*mstances, whether the landlord's consent to an assignmentis being unreasonably withheld …"

61. In Ashworth Frazer Ltd v Gloucester City Council [2001] UKHL 59, [2001] 1 WLR 2180 , LordBingham said :

[4] ……… the question whether the landlord's conduct was reasonable orunreasonable will be one of fact to be decided by the tribunal of fact. There are manyreported cases……..These cases are of illustrative value. But in each the decisionrested on the facts of the particular case, and care must be taken not to elevate adecision taken on the facts of a particular case into a principle of law. The correctapproach was very clearly laid down by Lord Denning MR in Bickel v Duke ofWestminster [1977] QB 517 at 524.

[5] ……..the landlord's obligation is to show that his conduct was reasonable, not thatit was right or justifiable. As Danckwerts LJ held in Pimms Ltd v Tallow Chandlers Coin the City of London [1964] 2 QB 547 at 564: "... it is not necessary for the landlordsto prove that the conclusions which led them to refuse consent were justified, if theywere conclusions which might be reached by a reasonable man in the circ*mstances...'" …….I would respectfully endorse the observation of Viscount Dunedin in ViscountTredegar v Harwood [1929] AC 72 at 78, that one 'should read reasonableness in thegeneral sense'. There are few expressions more routinely used by British lawyers than'reasonable', and the expression should be given a broad, commonsense meaning inthis context as in others."

62. It is apparent therefore that in the landlord and tenant context, where there is an objectiverequirement of reasonableness, the question is not whether the decision is justified, but whether thedecision is one which might be reached by a reasonable man in the circ*mstances. The decisionmaker is entitled to take into account his own commercial interests. These will take precedence overthe commercial interests of the other party. Indeed Balcombe LJ's proposition (6) is to the effect thata landlord "need usually only consider his own relevant interests", that is to say he can normallyconsider his own commercial interests to the exclusion of the interests of the tenant; the tenant'sinterests only come into play where to ignore them would be so disproportionate as to beunreasonable.

63. These principles were applied in a commercial setting in Porton Capital Technology Funds &others v 3M Holdings Ltd [2011] EWHC Civ 2895 (Comm). In that case the Claimant vendors hadsold their shareholding in Acolyte to 3M on terms which included an entitlement to an earn outpayment based on Acolyte's net sales for 2009. The Share Purchase Agreement included a provisionthat Acolyte should not cease to carry on business without the written consent of the vendors, suchconsent not to be unreasonably withheld. Consent was requested and refused, following which 3Mterminated Acolyte's business in December 2008. One issue was whether the consent wasunreasonably withheld. Hamblen J referred to International Drilling Fluids and Ashworth Frazerand said:

"222. In support of the applicability of such cases to commercial agreements, theClaimants relied upon the case of British Gas Trading Limited v Eastern Electricity,The Times, 29 November 1996, which concerned a long-term gas supply contractwhich required the customer's consent to any assignment of the supplier's rights andobligations under the contract, such consent not to be unreasonably withheld. Thequestion for the Court was whether it was reasonable for the customer to withhold itsconsent, in circ*mstances where the supplier was undergoing a reorganisation(following a report by the Monopolies and Mergers Commission Report) and theresulting change in control would entitle the customer to terminate the contract in anyevent, unless the contract was first assigned. At first instance, Colman J made extensivereference to the landlord and tenant authorities and concluded that, in thecirc*mstances of that case, consent to the assignment was being unreasonablywithheld. That decision was upheld on appeal: [1996] EWCA Civ 1239.

223. The Claimants submitted that of particular importance in this case are thefollowing principles, to be derived from the above authorities:

i) First, the burden is upon 3M to show that the Claimants' refusal to consent to thecessation of the Acolyte business was unreasonable.

ii) Second, it is not for the Claimants to show that their refusal of consent was right orjustified, simply that it was reasonable in the circ*mstances.

iii) Third, in determining what is reasonable, the Claimants were entitled to haveregard to their own interests in earning as large an Earn Out Payment as possible.

iv) Fourth, the Claimants were not required to balance their own interests with those of3M, or to have any regard to the costs that 3M might be incurring in connection withthe ongoing business of Acolyte.

………………………………

228. 3M disputed the applicability of principles derived from landlord and tenant casesto a commercial agreement such as the SPA. However I accept, as Colman J did in theBritish Gas Trading Limited v Eastern Electricity case, that they provide someassistance and that the approach set out in paragraph 223 is appropriate in this case."

64. Mr Railton QC argued that the contractual requirement in Clause 12.1(b) that the determination bemade in a commercially reasonable manner did no more than to make express that which wouldhave been implicit if the discretion had been unfettered and the clause had simply provided that theoption could only be exercised with Barclays' consent. The word "commercially" added nothing tothe concept of reasonableness, and the use of the word "reasonable" was to import expressly the testof rationality which would have been implicit. He argued that to construe the clause as posing anobjective test would be impractical because the Court would not be able to determine whatobjective criteria to apply.

65. Attractively as these arguments were presented, I am unable to accept them. The parties chose notto give Barclays an uncirc*mscribed discretion whether or not to consent, but chose to confine it tobehaviour which was commercially reasonable. The presumption is that by using express words, theparties were seeking to achieve some greater restriction than would have applied if no words hadbeen used. Although public lawyers are familiar with the concept of reasonableness in itsWednesbury sense of not irrational, that is not the sense in which the word would commonly beused or understood by businessmen in a commercial agreement. That conclusion is reinforced bythe use of the adverb "commercially", which is apposite for a concept of objective reasonablenessbut rather less so for a concept of rationality.

66. It is true that it is difficult to define objective criteria applicable in all cases in which thedetermination of consent under clause 12.1(b) falls to be considered, other than at a high level ofgenerality. But the same is true of a provision that consent is not to be unreasonably withheld inlandlord and tenant cases, as is apparent from Lord Bingham's observations in Ashworth FrazerLtd v Gloucester City Council and those of Lord Denning MR in Bickel v Duke of Westminsterwhich Lord Bingham endorsed. The difficulty is mitigated by the two aspects of the objective testwhich I have highlighted, namely that the question is not whether the decision is justified butwhether the decision is one which might be reached by a reasonable man in the circ*mstances; andthe decision maker is entitled to take into account his own commercial interests, in preference tothose of the other party, and normally to their exclusion.

67. The primacy of Barclays' commercial interests in the exercise contemplated by Clause 12.1(b),which arises by analogy with the landlord and tenant cases and the Porton decision, is reinforced bythe following features of the Guarantees:

(1) The discretion is a broad one without any express limitation as to purpose (asdistinct from the requirement that the manner of the exercise of the discretion be"commercially reasonable"). Such breadth is consistent with Barclays being permittedto exercise its discretion to protect its own commercial interests.

(2) UniCredit's case characterises the Guarantees as giving it a right to terminate theGuarantees, which constituted the primary interest and which would be negated by therefusal of consent. That characterisation misconstrues the relevant contractual term,which did not give UniCredit a right to terminate the Guarantees and provides no basisfor asserting the primacy of UniCredit's interest in termination following a RegulatoryChange. On the contrary, the ability to terminate was expressly subject to therequirement for Barclays to give its consent. That requirement for Barclays' consentgave priority to the ability of Barclays to exercise its discretion to protect its owncommercial interests over the ability of UniCredit to terminate the Guarantees.Accordingly, Barclays could not negate a right to early termination by its refusal ofconsent – there was no such right. The structure of the clause gives primacy toBarclays' right to refuse consent over UniCredit's right to early termination.

(3) The discretion given to Barclays by clause 12.1(b) would fall to be exercised onlyin the context of UniCredit wanting to terminate the Guarantees following a RegulatoryChange which reduces or eliminates UniCredit's ability to obtain Regulatory CapitalRelief from the Guarantees. In such a context, UniCredit's interest is bound to be thatthe Guarantees terminate; otherwise UniCredit would not be seeking Barclays' consentto do so. In that context, the objective purpose of conferring on Barclays a discretion torefuse consent must have been to permit Barclays to assert its own contrary interest inkeeping the Guarantees in effect and continuing to receive payments under them in. Ofnecessity, the conferring of a discretion to refuse consent gives primacy to Barclays'interests over those of UniCredit.

(4) The definition of Regulatory Change is a wide one. It allows for the option to betriggered if the effect is less favourable regulatory capital treatment. This may removeonly some part, perhaps a small part, of the benefit to UniCredit of the Guarantees. Thedefinition grants to UniCredit the right to determine whether the change has this effect.The impact of any regulatory change on the regulatory capital position of Bank Austria,HVB, and the UniCredit group will be a matter peculiarly within the knowledge ofUniCredit. UniCredit, not Barclays, will be in a position to discuss it with the localregulators. All this would make it unrealistic to construe the clause in a way in whichBarclays was obliged to weigh up the detriment to UniCredit if consent were refused.

68. Barclays' only commercial reason for entering into the Guarantees was to make profits from thetransactions through its fees. It had no other commercial interest in them. Without the ability toprotect and preserve profits by means of the exercise of its discretion, the discretion would havelittle purpose for Barclays. What is meant by Barclays' commercial interests in the context of thediscretion conferred by clause 12.1(b) is Barclays' interest in keeping the Guarantees on foot so thatit can earn the profits represented by its fees.

69. Accordingly in my judgment the correct approach to the application of the clause is as follows:

(1) Barclays' determination of whether to consent to early termination for a RegulatoryChange under Clause 12.1(b) of the Guarantees must be commercially reasonable in anobjective sense. It is not sufficient for Barclays to show merely that the decision wasmade in good faith and was not arbitrary, capricious or irrational.

(2) The question is not whether the decision is justified, but whether a reasonablecommercial man in Barclays' position might have reached such a decision.

(3) In determining what is commercially reasonable, Barclays is entitled to take intoaccount its own commercial interests. These take precedence over UniCredit'scommercial interests in bringing to an end agreements which may no longer confer anyfinancial advantage on UniCredit because it has lost the capital relief which theagreements were intended to confer. Barclays is not obliged to carry out a balancingexercise between its interests and UniCredit's interests.

(4) Barclays' commercial interests, in this context, comprise its interest in earningprofits from its fee income under the Guarantees. Barclays would be entitled to refuseconsent to protect that fee income unless its nature or amount was so disproportionateto UniCredit's obligation to continue to pay it that no commercially reasonable man inBarclays position could have reached such a decision. Unless the protection of feeincome is of this character or reaches this level, Barclays is entitled to ignore the effectof the continuation of the Guarantees on UniCredit.

Issue 2(a): Ignoring any shared or acquiesced in understanding, was Barclays' refusal of consentcommercially reasonable because UniCredit offered no payment of any kind in return?

70. In my judgment it is not open to Barclays to seek to justify its refusal of consent on these grounds.The determination to refuse consent was in fact made on the basis that Barclays would insist uponbeing paid five years' fees, either by the agreement continuing to run for that period or by beingpaid the equivalent as the price for its consent. Barclays did not suggest the latter in its letterrefusing consent, or ask any price for its consent; the letter merely refused consent. But as I havefound earlier in this judgment, the letter refusing consent was intended to convey, and would haveconveyed to UniCredit, that the refusal of consent was based on an insistence on five years' fees. Ifthat was not commercially reasonable (which I address below), it was not incumbent uponUniCredit to make a proposal as to payment of some lesser sum as the price for consent.

71. Nevertheless, there is little doubt that Barclays would have been acting reasonably in refusingconsent without receiving some payment or credit from UniCredit. UniCredit conceded that itwould have been reasonable for Barclays to recover its out of pocket costs of unwinding the hedgesalready in place, at least if they exceeded costs saved by early termination, as I have found they did.It may be that if five years' fees could not be justified as commercially reasonable, a smaller amountcould. Dr Spaeth said in evidence that in the event of the seeking of consent before five years hadexpired, she would have expected there to be a commercial negotiation. I do not need to decide, atthis stage, whether Barclays would have been acting reasonably in demanding a lesser amount thanfive years' fees.

Issue 2(b): Ignoring any shared or acquiesced in understanding, was it commercially reasonablefor Barclays to refuse consent unless or until it had received five years' fees?

72. Applying the criteria which I have identified, I have little hesitation in concluding that Barclays wasacting in a commercially reasonable manner in refusing its consent unless and until it recovered fiveyears' fees, for a number of reasons.

73. First, that was Barclays' reasonable and legitimate expectation at the time the Guarantees wereentered into. Whatever the state of mind of Dr Spaeth or others at UniCredit at that time, the state ofmind of Mr Wrobel and Barclays' management was that the commercial deal was that Barclayswould be entitled to its fee income for a minimum of five years, come what may. It was a good dealfor Barclays (as was readily conceded during the trial) but it was the basis on which Barclays wasprepared to contract in the turbulent market conditions and given UniCredit's pressing need forcapital relief. The understanding which Barclays had, at the time of the Guarantees, of the way inwhich the consent mechanism would operate was that it could be used to protect their expectationthat they would receive five years' fees. Mr Wolfson QC conceded that that was a reasonableunderstanding. Moreover it was an understanding which had a practical effect in Barclays bookingfive years' fees as profit in the 2008 year. If Barclays were unable to secure payment of these fees byrefusal of consent, it would have to enter a loss in its accounts in 2010. Whilst in one sense this isan accounting loss rather than an economic loss, it nevertheless represents a real detriment toBarclays in circ*mstances where it would confound their reasonable expectations at the time ofcontracting.

74. This is so irrespective of any understanding which Barclays had as to UniCredit's understanding,which Mr Wolfson QC contended was irrelevant or inadmissible by virtue of the EAU clause. Forthe reasons set out below I reject the argument that the EAU clause has that effect. It is relevant inthis context that, as Mr Wolfson QC conceded, Barclays understanding was not merely an internalone, but one which they honestly and reasonably believed was shared by UniCredit. UniCredit'scase therefore involves the proposition that no reasonable person in Barclays' position could haveexercised the discretion to refuse consent in a way in which Barclays honestly and reasonablybelieved, at the time the Guarantees were entered into, that both parties expected it to be exercised.That would be a surprising conclusion.

75. Mr Wolfson QC argued that whether Barclays reasonably, but mistakenly, believed that there was acommon understanding is irrelevant to commercial reasonableness. As he put it, a mistaken beliefthat you can charge an unreasonable sum does not make an unreasonable sum reasonable. Idisagree. The primacy of Barclays' interests, which is accorded by the discretion conferred on it byClause 12.1(b), entitles Barclays to take account of its own reasonable expectations at the time ofcontracting. That is all the more so if it reasonably believes, at the time of contracting, that thoseexpectations are shared, even if such belief is in fact mistaken. The question is not whether thedecision was justified, but whether a reasonable person in Barclays' position could have reached it.

76. Secondly, in the BA Guarantee, UniCredit expressly agreed to pay Barclays a minimum of fiveyears' fees if there were an optional early termination by UniCredit as a result of a Rating Event, i.e.if Barclays' credit rating were downgraded. The relevance of such an event is that it might have thesame effect as a Regulatory Change, in that the capital relief afforded to UniCredit was calculatedin a way which included taking account of Barclays' credit rating. A Rating Event would be outsidethe control of UniCredit and would or might deprive UniCredit of the entire benefit of theGuarantees. Yet in those circ*mstances, UniCredit agreed that Barclays should receive a minimumof five years' fees. Ex hypothesi UniCredit regarded that as commercially reasonable. I do not see amaterial distinction between a Rating Event and a Regulatory Change for these purposes. Both areoutside UniCredit's control and both will trigger the exercise of the early termination option becausethey diminish or remove the benefit UniCredit receives under the Guarantees. Dr Spaeth was crossexamined as what the relevant distinction was which made one commercially reasonable but not theother. I did not find her answer coherent or convincing. She explained the difference as being that a regulatory change was dictated by the regulator, whereas if Barclays were downgraded, the amountof capital relief thereby extinguished or impaired would depend upon HVB's (sic) internal view ofBarclays' rating, not Barclays' external rating. But that does not detract from the fact that the triggerwould be something which was outside Bank Austria's control, and if Bank Austria took the viewthat it removed or significantly impaired the capital relief, it would be entitled to terminate theGuarantees. Nevertheless in those circ*mstances Bank Austria agreed it would still have to payBarclays five years' fees.

77. Thirdly, Barclays' expectation of a minimum of five years' fees was protected under the terms of theother early termination options which expressly dealt with the point. Of the five grounds uponwhich UniCredit were able to designate an Optional Early Termination Date in any of theGuarantees, two were dealt with by the consent mechanism but the other three expressly ensuredthat Barclays would receive at least five years' fees under the Guarantees. The Weighted AverageLife Termination Date could occur only after five years; the Substitution Event Date occurred afterfour years but required payment of one year's fees as a condition of termination; and the RatingEvent Substitution Date in the BA Guarantee required a premium to be paid on terminationequivalent to the balance of five years' fees. The capital relief available to UniCredit from theGuarantees would diminish as loans expired before the WAL date, but that would not precludeBarclays earning five years' fees. UniCredit might want to resecuritise the portfolio at any stageearly in its history because it would result in more favourable capital relief, but it could not do sowithout paying Barclays five years' fees. These events can be distinguished from a RegulatoryChange in that they are not subsequent events outside UniCredit's control. Nevertheless they reflectBarclays' reasonable commercial interest in a minimum fee income of five years' worth.

78. This attracts some, albeit limited, further support from the terms of Clause 12.3(c)(ii) of each of theGuarantees. This provides that the amounts recoverable on early termination under Clause 12 (i.e.the outstanding balance of five years' fees where that is expressly provided for in the way I haveidentified) constitute a "reasonable pre-estimate of loss". Whilst no doubt intended to precludereliance by UniCredit on the penalty doctrine, this provision nevertheless treats the balance of fiveyears' fees as a reasonable estimate of Barclays' loss from early termination where that arises from aSubstitution Event or Rating Event. There is no reason to adopt a more restrictive view of what isreasonable when considering whether Barclays exercised the discretion given to it in connectionwith the Regulatory Call in a commercially reasonable manner.

79. In those cases in which there is express contractual provision for a pre-determined payment on earlytermination, the Guarantees themselves provide for a greater payment to Barclays than that whichUniCredit contend would be reasonable in the case of an early termination on the ground ofRegulatory Change. There is nothing in the contractual terms which indicates that Barclays shouldbe exposed to the risk of losing some of its fees in the event of an early termination on the groundof Regulatory Change when it is not exposed to that risk in the event of an early termination onother grounds. Nor is the difference in the nature of the events which trigger the early terminationoption in each case sufficient for one to be able to say that no reasonable person in Barclays'position would insist on being in the same financial position in each case.

80. Fourthly, I am reinforced in my conclusion by the difficulties which Mr Wolfson QC had inidentifying what it was about the insistence upon five years' fees which made it unreasonable. Thiswas not due to any lack of forensic skill, but rather the impossibility of the task. His primaryposition was that any element of profit was unreasonable: Barclays could insist on any costs whichwould be incurred in unwinding hedges, but no more. This was not consistent with UniCredit'spleaded case that "the purpose of the discretion was to enable Barclays to protect itself againstlosses which would crystallise if the Guarantee terminated early... or other detriment to Barclays".Other detriment must envisage something other than losses. UniCredit's argument was that once aregulatory change had removed from UniCredit any benefit under the Guarantees, Barclays couldnot reasonably keep them alive in order to earn any more fees by way of profit. Such a restrictiveinterpretation of what would be commercially reasonable would be to give UniCredit's interests interminating the Guarantees primacy over Barclays' interests, and so subvert the clause. It wouldremove any consideration of Barclays' interests and give primacy to those of UniCredit. If theLedger were positive, Barclays' only interest in the continuation of the Guarantees was the earningof its fees, as Mr Wolfson QC was at times concerned to emphasise; there would be no point ingiving Barclays a discretion as to whether the Guarantees should continue (which was notexpressed to be limited to circ*mstances in which the Ledger was negative) if Barclays could notexercise it for the purposes of earning future fees. Moreover, if Mr Wolfson QC were right in thisargument, Barclays would be bound to consent to an early termination at any time, even if theregulatory change only had a marginal effect on diminishing UniCredit's capital relief and theoption were exercised simply because market conditions had changed in a way which made itcheaper for UniCredit to resecuritise the portfolio with another counterparty. Again that would be togive UniCredit's interests primacy over those of Barclays.

81. It follows that it could not be said that no one in Barclays' position would be acting reasonably ininsisting on at least some element of profit. This is a conclusion shared by Dr Spaeth, who said thatin the event of a regulatory change call she expected there to be a commercial negotiation over whatfuture fees Barclays could charge.

82. Mr Wolfson QC's alternative position was that on any view it would not be reasonable for Barclaysto insist on the balance of five years' revenue, rather than five years' worth of profits. It was not thatthe five year period was too long, or the size of the sums disproportionate to the burden imposedupon UniCredit by the continuation of the Guarantees. Rather, he contended that by insisting on fiveyears' fees, Barclays was thereby seeking to secure more than it could have recovered by way ofdamages, because it was seeking revenue, not profit, for the period up to a point when UniCreditwould have been entitled to exercise the time call at the WAL date. There are three answers to thispoint. The first is that Barclays in fact simply refused consent, rather than demanding a sum ofmoney. The refusal of consent and continuation of the Guarantees would allow Barclays to earn itsfee revenues but would not avoid the incurring of any costs. It would provide Barclays with itsprofit, not more. Secondly, as I have found on the evidence, Barclays' decision was to insist on thethen present value of its fees, which would not have exceeded its profit, given the hedge unwindcosts and cost savings resulting from early termination. Thirdly, the sums to be paid in the event ofa Substitution Event Date, or a Rating Event Substitution Date, are the balance of five years' fees,undiscounted to present value and without taking account of saved costs: the Guarantees provide inthese circ*mstances for the payment of revenue, not merely profit.

83. Mr Wolfson QC argued that if the regulatory change clause entitled Barclays to keep the Guaranteesalive unless and until it received five years' fees, the clause would confer no benefit on UniCreditand would be stripped of any commercial purpose: they could exercise the WAL call at five yearsanyway, but could not do any better if there were an earlier regulatory change. This is not so. Theclause would be of value to UniCredit if Barclays did not insist upon payment of five years' fees,which is only one response in a range of determinations which might have been made in acommercially reasonable manner. Moreover, an early termination on payment of five years' fees,discounted to their present value, might be of benefit to UniCredit in reorganising and resecuritisingtheir loan book. Such a benefit is contemplated by the provisions for early terminationby reason of a Substitution Event Date and a Rating Event Substitution Date, each of which allowedtermination before the expiry of five years, and envisaged that UniCredit might wish to opt for it,but required a payment to Barclays of the balance of five years' fees.

84. For all these reasons I conclude that Barclays determined its refusal of consent in a commerciallyreasonable manner.

Issue 3: Does the EAU Clause preclude Barclays from relying on a shared or acquiesced inunderstanding, or estoppel, of the kind which it alleges?

85. This issue does not arise, as a result of the conclusions I have already reached, and in light of myconclusions on Issue 4 below. I can express my views upon it briefly.

86. The clause provides: "This Guarantee, together with the Credit Support Agreement, constitutes theentire agreement and understanding of the parties with respect to its subject matter and supersedesall oral communication and prior writings with respect thereto." It is concerned with identificationof the contractual terms. It is intended to preclude investigation of, or reliance on, anycommunication in the course of negotiation of the Guarantee, as something which is to be treated ashaving contractual effect, unless it finds expression in the written document. It is for that purposealone that any understandings are to be excluded or superseded. It would not preclude reliance onsuch communications to found an allegation of misrepresentation (cf Axa Sun Life Services Plc vCampbell Martin Ltd [2012] Bus LR 203). Nor does it, in my view, restrict the scope of thematerial which may be relied upon to inform the question whether a determination of refusal ofconsent is commercially reasonable. It is not concerned with limiting a discretion which iscontractually conferred. The clause does not purport to introduce any limitation as to matters whichcould be considered in the exercise of a contractual discretion. Nor is this the place where onewould expect to find such limitation or restriction: its obvious place would be in clause 12.1. Ifthere is to be any restriction or limitation on matters which would otherwise be relevant to acontractual discretion, such a limitation would need to be clear and express and unequivocallydirected to the exercise of the discretion. Clause 20.1 is not in such terms.

87. This conclusion accords with the purpose and function of entire agreement clauses as expressed byLightman J in Inntrepreneur Pub Co v East Crown [2000] 2 Lloyds Rep 611 at [33], and approvedby the Court of Appeal in Axa Sun Life at [63]:

" The purpose of an entire agreement clause is to preclude a party to a writtenagreement from threshing through the undergrowth and finding in the course ofnegotiations, some (chance) remark or statement (often long-forgotten or difficult torecall or explain) upon which to found a claim, such as the present, to the existence ofa collateral warranty. The entire agreement clause obviates the occasion for any suchsearch, and the peril to the contracting parties posed by the need in its absence toconduct such a search. For such a clause constitutes a binding agreement between theparties that the full contractual terms are to be found in the document containing theclause and not elsewhere, and that, accordingly, any promises or assurances made inthe course of the negotiations (which in the absence of such a clause, might have effectas a collateral warranty) shall have no contractual force, save in so far as they arereflected and given effect in the document."

88. Whether an entire agreement clause precludes reliance on an estoppel by convention is a questionon which there is little authority. Each case will depend upon the particular terms of the entireagreement clause and the nature of the estoppel contended for, which may be a common assumptionas to an existing state of fact or law, which was the paradigm situation in which the doctrine wasfirst developed, or a common assumption as to what is expected to happen in the future in relationto a transaction, to which the doctrine also now extends (ING Bank v Ros Roca SA [2012] 1 WLR472 at [64(i)]).

89. In Sere Holdings Limited v Volkswagen Group United Kingdom Ltd [2004] EWHC 1551 MrChristopher Nugee QC, sitting as a deputy High Court Judge, held that an entire agreement clausein wide terms precluded reliance on an estoppel by convention. That was a case in which thealleged common assumption was as to the future conduct of the defendant and therefore its effectwas akin to a contractual promise. Mr Nugee QC said at [25] that "if the entire agreement clause iseffective... to rob an express promise made in precontractual negotiations of any legal effect, itseems to me that it must equally be effective to prevent a promise from having any legal effect wherethat promise is said to arise out of an assumption shared by the parties when entering into thecontract". On the other hand in Dubai Islamic Bank v PSI Energy Holding Company [2011]EWHC 2718 (Comm) Hamblen J, in considering a summary judgment application, accepted at[83]-[84] that it was arguable that an estoppel by convention could take effect notwithstanding anentire agreement clause. The common assumption in that case did not involve the assertion of anadditional contractual promise, but rather was relied on to prevent a party enforcing an existingcontractual promise in a way contrary to the parties' shared understanding. Hamblen J pointed outthat an entire agreement clause did not preclude a claim for rectification, a principle which, likeestoppel by convention, is based on considerations of unconscionability.

90. The particular estoppel by convention or acquiescence alleged by Barclays in this case, whichinvolves an assumption as to future conduct which is not akin to an additional contractual promise,would not be precluded by the terms of Clause 20.1 of these Guarantees. The assumption reliedupon is as to how one party will exercise a contractual discretion conferred upon it. Clause 20.1 isnot addressed to the mode of exercise of that discretion.

Issue 4: Was there a shared or acquiesced in understanding and/or is there an estoppel byconvention or acquiescence?

91. Mr Railton QC submitted that upon a detailed analysis of the translations of the transcriptions of thephone conversations, and of the contemporaneous emails, it was clear that UniCredit, and inparticular Dr Spaeth, shared Barclays' understanding that in the event of a Regulatory Change,Barclays would be entitled to refuse consent unless or until it was paid five years' fees. This analysisdid not depend upon any single clear expression of that understanding in unequivocal terms in adocument, but rather upon the language used in a large number of telephone calls, in the context ofthe place of each call in the evolution of the negotiation.

92. There are three reasons why I am unable to accept that submission, which can be expressed withoutrecording at length the numerous passages in the communications which were relied upon insupport of it.

93. The first is that the transcripts of the telephone conversations do not provide a full or reliablepicture of the negotiations. They do not fall to be interpreted in the same way as written exchanges.In some places the conversation is referred to as inaudible; it is impossible to know how much ismissing, or what the content or significance of the missing words might be. Moreover, there wereadditional conversations when Mr Wrobel was using his mobile phone, which were not recordedand are therefore not available for scrutiny. The material before the Court is therefore incomplete,and the witnesses could not reasonably have been expected to recall the detailed content ofunrecorded conversations from unaided memory.

94. The conversations were conducted mainly in the German language. There were some disputes abouttranslations, but that was perhaps the least of the relevant difficulties in interpreting them. When thetranscription records someone as saying "yes", it is not clear whether he or she is agreeing with aproposition put forward by the other, or merely indicating that he or she understands it, orunderstands that it is what the other party wants. Something which appears on the transcript as astatement may have been a question by reason of inflection of voice, and vice-versa. It may havebeen a summary of what the other person seemed to be saying to check it was understood.Transcription does not capture a speaker's nuances of tone which may significantly affect how thewords are to be interpreted. It does not capture surprise, or sarcasm or irony (Dr Spaeth said of oneof the statements upon which Barclays relied that it was ironic). It does not capture whether anapparent statement was tentative or emphatic. The interlocutors were often talking over each other.Expressions upon which Barclays placed heavy emphasis, such as "guaranteed", or "locked in"might have different meanings to different people, and were heavily dependent on their context forinterpretation. Some were used to express different concepts at different times. A good example wasthe expression "make whole" which was used (in English) during some of the conversations. Itmight refer to Barclays being made whole by payment to make the Ledger neutral in circ*mstanceswhere the Ledger were negative, without any connotation for future fees; or it might refer toBarclays being made whole by the payment of a minimum amount of future fees, especially if thecontext of the discussion posited a positive Ledger on termination. Unless it were clear that bothinterlocutors were talking of a situation in which the Ledger were positive, there was ample scopefor ambiguity and misunderstanding.

95. All this meant that the transcripts which were subjected to detailed analysis during the hearingcould give only an incomplete picture, and quite possibly a misleading picture, of the sense of thecritical exchanges between Mr Wrobel and Dr Spaeth.

96. The negotiations for the HVB-1 Guarantee were extensive and fluid, with many conversations,sometimes taking place late at night. Topics were raised, discarded, parked and revisited, as oftenhappens in such negotiations. It is dangerous to assume that something discussed without dissent ata particular stage of such negotiations was part of the overall final understanding of the deal.Commercial parties sometimes prefer not to try to tie down every detail which might give rise to adispute, but to leave it for post contractual argument or negotiation if the dispute happens toeventuate. The approach may be "I hear what you say, but we'll cross that bridge if we come to it".

97. Moreover, the conversations took place against the background that there were multiple decisionmakers on each side. Although the discussions took place mainly between Mr Wrobel and DrSpaeth, there were some additional channels of communication. The understanding of each party asto the deal was to be set out in a carefully drafted written document, to which people other than MrWrobel and Dr Spaeth would be expected to pay close attention. Mr Wrobel and Dr Spaeth were notconcluding an oral agreement, and did not think that they were. What Mr Wrobel and Dr Spaethknew, when having their discussions, was that the terms of the agreement would be the subject ofcareful drafting by lawyers; and would be considered by others in the management structure onboth sides. Mr Wrobel and Dr Spaeth were concerned to agree the commercial terms of the deal, butcould not be expected to have done so with the attention to precision of expression upon which theircross examination in Court focussed.

98. All these circ*mstances, a number of which Mr Wolfson QC characterised as "the fog of war",render the extant translated transcriptions of conversations between Mr Wrobel and Dr Spaeth (andMs Streck) an unreliable source from which to draw a conclusion as to UniCredit'scontemporaneous understanding.

99. Secondly, Barclays' case as to the interpretation to be put upon the extensive passages relied uponwas explored fully with Dr Spaeth in cross examination, with a view to establishing that theydemonstrated her understanding to be the same as Barclays'. Her evidence, maintained under asustained, vigorous and fair cross examination by Mr Railton QC, was that the understanding forwhich Barclays contends was not her understanding at the time. Mr Railton QC accepted that shewas an honest witness and had not been seeking deliberately to mislead the Court. This realisticassessment illustrates the potential ambiguities, or nuances of interpretation, in the language uponwhich Barclays' argument relied.

100. Mr Wolfson QC contended that the concession that Dr Spaeth was an honest witness was fatal toany case based on a shared understanding. Mr Railton QC contended that I could conclude that herevidence was honest but mistaken as to her contemporaneous understanding, for any of the reasonsfor which witnesses give honest but mistaken evidence. In particular he referred to witnesses beingmistaken as a result of the passage of time, or because they have convinced themselves of amistaken view after the event in the light of the dispute which has arisen. These were notpossibilities which applied to Dr Spaeth's careful evidence when taken through the transcripts of thetelephone conversations and other documents passage by passage. Her honest evidence that she didnot share Barclays' understanding at the time at which the transactions were concluded cannot beexplained by mistaken recollection. It was her honest evidence because it was true: she did notshare Barclays' understanding at the time the transactions were concluded.

101. Thirdly, there is one exchange in a telephone conversation late in the negotiations which is difficultto reconcile with Barclays' allegation that Dr Spaeth understood Barclays were to get five years'fees come what may. The conversation started at about midnight on 28/29 September 2008, thenight before the HVB-1 deal closed. The subject matter of discussion in the relevant exchange wasearly termination in the event of illegality or a tax change. When Mr Wrobel indicated that in thosecirc*mstances Barclays would want five years' fees, Dr Spaeth immediately responded with asarcastic "oh that's just great… bold actually". She did not agree to it. Although this was in thecontext of an illegality or tax call, she could not have reacted in this way had it been herunderstanding up to that point that Barclays would be guaranteed to receive five years' fees, comewhat may, including in the event of a regulatory change call.

102. Barclays contended that even if UniCredit did not share the understanding, so that there was nocommon assumption, nevertheless UniCredit are estopped from denying it by operation of anestoppel by convention or estoppel by acquiescence. Such an estoppel can arise where one party toa transaction acts on an assumed state of facts or law, which is communicated to the other party andacquiesced in by the other party, if it would be unjust to allow the acquiescing party to go back onthe assumption: see Republic of India v India Steamship Co Ltd (The Indian Endurance and TheIndian Grace) (No2) [1998] AC 878, per Lord Steyn at 913-4 and ING Bank v Ros Roca SA[2012] 1 WLR 472 per Carnworth LJ at [56]-[60]. Barclays argued that UniCredit knew theassumption Barclays was making; that it did not say anything to correct or contradict thatassumption; and that it therefore acquiesced in Barclays' assumption.

103. This argument fails on the facts. For the reasons given above, I am not able to conclude that DrSpaeth, or anyone else at UniCredit, clearly understood that Barclays was making the assumption;nor that she or UniCredit said or did anything, which conveyed acquiescence in it to Mr Wrobel, orBarclays.

Issue 5: Remedies and the White & Carter point

104. Barclays' claim was for a declaration that its consent had validly been refused, and for orders for thetaking of accounts to enforce periodic payments in accordance with a recreated AccumulationLedger, which would amount in effect to an order for specific performance. As a result ofdiscussion during the course of closing submissions, it was agreed that I should grant declaratoryrelief, but leave over any further consideration of specific performance or damages to enable theparties to consider their positions in the light of my determination, subject only to a point aboutwhether the Guarantees had already automatically come to an end as a result of UniCredit'sunaccepted repudiatory breach. UniCredit relied on the decision of the House of Lords in White &Carter (Councils) Limited v McGregor [1962] AC 413 to support a submission that the Guaranteeshad already come to an end because Barclays was not entitled to insist on the ongoing performanceof the Guarantees, even if Barclays had refused consent to early termination in a commerciallyreasonable manner.

105. This point emerged for the first time in UniCredit's skeleton argument at the beginning of thehearing. The document did not identify with precision exactly what conduct constituted therepudiation relied on. In oral closing submissions Mr Wolfson QC identified it as either the letters inJune 2010 in which UniCredit purported to terminate the Guarantees irrespective of Barclays'refusal of consent; or alternatively UniCredit's conduct since that date in failing to perform itsobligations to calculate the payments due by each party under the Guarantees and seek or makepayment in accordance with such calculations each quarter, i.e. on 30 September 2010 or at least bythe time of the commencement of the trial. As a result of the way in which the point emerged, littleargument was addressed to the question whether or when any repudiation took place, but MrRailton QC made clear that Barclays did not accept that the UniCredit letters in June 2010 wererepudiatory because they purported to be relying upon the contractual terms.

106. White & Carter confirmed the general rule that, if one party to a contract repudiates it by refusingto carry out its obligations, the innocent party has a right of election to accept the repudiation andsue for damages or to keep the contract in effect (see page 427). Lord Sumption recently articulatedthis "elective theory of repudiation", as it is sometimes called, in Raphael Geys v Societe Generale[2012] UKSC 63:

113. The general rule is that the repudiation of a contract does not necessarily bringthe contract to an end. The innocent party has a right to choose either (i) to accept therepudiation, thus bringing the primary obligations in the contract to an end but leavinghim with a right to enforce the secondary obligation to pay damages for the loss of thebargain; or (ii) to treat the contract as subsisting and claim any sums falling due underit as and when they fall due, together with any damages for the repudiating party'sfailure to perform as and when performance should have occurred. These principleshad been applied for many years by the time that they were first articulated inHochster v De la Tour(1853) 2 E & B 678 in England and Howie v Anderson (1848)10 D 355 in Scotland, as the citations in the former case show. Their most recent andauthoritative restatement is to be found in the speech of Lord Diplock in PhotoProduction Ltd v Securicor Transport Ltd [1980] AC 827. The concept wasmemorably expressed by Asquith LJ in Howard v Pickford Tool Co Ltd [1951] 1 KB417, 421, when he described an unaccepted repudiation as "a thing writ in water."

107. There are two limitations to the principle. The first limitation is that in many cases the party inbreach can compel the innocent party to restrict his claim to damages by refusing co-operation: seeWhite & Carter at page 428 and Geys at [114]-[116]. This is because, if the contract is kept alive, itis kept alive for both parties and so the innocent party must also perform its contractual obligationsif it is to earn the right to claim the price that is due to be paid by the party in breach. If theinnocent party cannot earn the right to claim the price due to it for its performance without the cooperationof the party in breach, it will not be able to pursue a debt claim and will be limited to aclaim in damages. The limitation does not apply in this case because Barclays' payment obligationsare triggered only if positive steps are taken by UniCredit to claim payment upon the occurrence ofa Credit Event; if UniCredit do nothing, their own payment obligations to Barclays will simplyaccrue on a quarterly basis but Barclays will not itself be obliged to make any payments. That iswhat has happened since 30 June 2010.

108. The second limitation arises from an obiter dictum by Lord Reid (at page 431) that "it might be saidthat, if a party has no interest to insist on a particular remedy, he ought not to be allowed to insiston it". This is the basis of the UniCredit's submission advanced for the first time in UniCredit'sopening submissions in terms that Barclays "is not entitled to assert that it has any interest ininsisting on performance".

109. Later authorities make clear that this second limitation referred to by Lord Reid is a narrow one,which will be applied only in exceptional cases. These authorities were recently considered byCooke J in The Aquafaith [2012] 2 Lloyd's Rep 61. His conclusion at [44] was that "The effect ofthe authorities is that an innocent party will have no legitimate interest in maintaining the contractif damages are an adequate remedy and his insistence on maintaining the contract can be describedas 'wholly unreasonable', 'extremely unreasonable' or, perhaps, in my words, 'perverse'".

110. This is not such a case. At the hearing, UniCredit advanced two reasons for the application of LordReid's dictum. The first was that it has not been monitoring the Reference Portfolios, and hencedoes not know how they would have performed, or what Credit Events have occurred. In theopening submissions, where this point was raised for the first time, the effect was said to be that itwould be "incredibly difficult, if not impossible" to recreate the "portfolios and credit events" since30 June 2010. In the written final submissions this was elevated to being "impossible". Theunsatisfactory way in which this point emerged meant that there was no evidence given byUniCredit to support this allegation in either form, still less as to what the difficulty was or whenthe difficulty or impossibility arose. That is fatal to the submission.

111. If it were the case that recreation of the Accumulation Ledger would now be impossible, that mightbe a relevant consideration when the Court has to consider whether to exercise its discretion togrant equitable relief by way of specific performance or to confine Barclays to a remedy indamages. But that is a different issue from whether the Guarantees have already come to an end as aresult of UniCredit's repudiation, and not one with which I am concerned at this hearing.

112. The second ground advanced for the application of Lord Reid's dictum was that there was no goodreason for Barclays to insist upon performance, including calculation of the Ledger, when Barclays'only interest was in its fees. Barclays accepted that its primary interest in the Guarantees is the feesit should have received, and will receive, under them; and was prepared to accept in principle that itmight be compensated appropriately by way of damages for non-performance by UniCredit. Butwhether an award of damages would in fact give it full compensation for its losses would dependupon the basis on which damages were assessed, and in particular whether it would be by way ofassumption that no further Credit Event Notices would be served, or whether some (and if so which,and when) would be served; whether it would recognise Barclays receiving the present value (as atthe date of judgment) of its quarterly fees under the Guarantees until the Guarantees reached theirWAL date; whether it would recognise that Barclays acted reasonably in the hedges it entered intoboth before and after June 2010; and whether Barclays would recover its costs in unwinding hedgeswhich it has entered into.

113. These are matters which have not yet been explored between the parties and were not the subjectmatter of evidence or argument before me. The parties had agreed, before this point emerged, thatshould there be any need for a determination of any amount to be paid (by way of damages, orotherwise), following my determination of the issues of principle, then it was to be dealt with byway of an assessment to take place at a subsequent hearing. If there is any basis on which it mightbe argued that Barclays' position by way of damages is less favourable to it than continuedperformance of the Guarantees, Barclays has a very clear interest in continuing to insist onperformance of the Guarantees. In those circ*mstances, Barclays has not adopted an unreasonableapproach in seeking to hold UniCredit to the performance of its contractual obligations.

114. Accordingly I reject UniCredit's submission that the Guarantees have come to an end as a result ofany unaccepted repudiatory breach by UniCredit.

Conclusion

115. Barclays determined its refusal of consent to early termination of the Guarantees in a commerciallyreasonable manner, and the Guarantees have not been validly terminated or come to an end.