Singapore – Exercise Of A Bank’s Contractual Discretion Under Banking Documents – No Free Reign, Even With Absolute Discretion.

Contractual terms which give a bank the power to exercise a discretion are common in banking documents. However, such discretions – even absolute ones – are not unfettered. Banks exercising their contractual discretion are still subject to acting in good faith and not arbitrarily, capriciously or irrationally.

 

Introduction

 

It is usual for banks to be conferred certain contractual discretions in banking documents, to further protect their position over certain matters and mitigate the risk of commercial uncertainties over the duration of the contract. Such discretions span over a range of subject matters, such as a discretion to vary each party’s contractual performance (eg varying interest rates payable), to a “determination discretion” (eg the valuation of assets). It is either an “absolute or sole discretion”, or “a reasonable discretion” to determine and act upon certain events.

 

However, the courts have held that such contractual discretions are not unfettered and are subject to an implied term that this discretion cannot be exercised arbitrarily, capriciously, perversely, irrationally, and/or in bad faith.

 

“Sole or absolute discretion”

 

In clauses which confer upon a party the “sole or absolute discretion” to make certain decisions, such discretion must be exercised properly and must not be exercised in an arbitrary, capricious or irrational manner.

 

In the case of Al Shams Global Ltd v BNP Paribas [2018] SGHC 143, the Singapore High Court upheld this principle in the context of a bank having the sole discretion to refuse to accept any incoming payment in a customer’s deposits account. This was in line with previous local cases: MGA International Pte Ltd v Wajilam Exports (Singapore) Pte Ltd [2010] SGHC 319 (“MGA International”), a case involving the extent of a party’s discretion to decide its own remuneration and commissions for services rendered and Edwards Jason Glenn v Australia and New Zealand Banking Group Ltd [2012] SGHC 61 (“Edwards Jason Glenn”), a case involving a bank’s discretion in the valuation of a customer’s securities. The UK cases include: Socimer International Bank Limited (in liquidation) v Standard Bank London Ltd [2008] EWCA Civ 116 (“Socimer”), a case involving a bank’s sole discretion in selling a customer’s assets, as well as Ludgate Insurance Co ltd v Citibank [1998]  Lloyd’s Rep IP 221 (“Ludgate”), a dispute on the sole discretion on a bank’s retention of collateral deposits following the collapse of certain companies in the London insurance market.

 

These cases illustrate the wide ranging uses of such contractual discretionary clauses seeking to confer an absolute discretion to the banks for certain decisions. The uniform principle arising from the various courts’ decisions was that such contractual discretion was not unfettered. This discretion must be exercised honestly and in good faith for the purposes for which it was conferred (Edwards Jason Glenn, Ludgate). The courts would impose an implied term that the discretion should be exercised in good faith and not arbitrarily, capriciously or irrationally (MGA International). In turn, whether a party had acted in an arbitrary, capricious or irrational manner, are fact dependent inquiries unique to each case. The standard here is not an objective test of unreasonableness, but rather a lower threshold of Wednesbury unreasonableness (MGA International, citing Socimer.)

 

This means that a party can take actions that it subjectively considers reasonable, subject to an implied term that such actions must not be arbitrary, capricious or irrational. Nonetheless, courts will refrain from rewriting the bargain struck by the parties by implying additional terms which contradict the express terms of the contract (Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] 4 SLR 193).

“Reasonable discretion”

 

In addition to sole or absolute discretion clauses, it is now commonplace for clauses that confer a “reasonable discretion” to a party in banking documents. For instance, in the local case of ABN AMRO Clearing Bank NV v 1050 Capital Pte Ltd [2016] 1 SLR 186 (“ABN AMRO”), the bank was entitled “at its reasonable discretion” without prior consultation to take actions they considered reasonable in an event of default. Similarly, in the English case of Barclays Bank plc v UniCredit Bank AG & another [2014] EQCA Civ 302 (“Barclays”), the guarantor in respect of credit default swaps was required to determine certain matters “in a commercially reasonable manner”.

 

In cases conferring a “reasonable discretion”, the courts took a similar stance in the issue of conferring a sole or absolute discretion, and the standard imposed was the Wednesbury standard of unreasonableness. The English Court of Appeal summed it up nicely in Barclays:

 

“It is the manner of the determination which must be commercially reasonable; it does not follow that the outcome has to be commercially reasonable although, if it is not, that would no doubt cause one to look critically at the manner of the determination”.

 

Again, what is important is the subjective state of mind of the party exercising the discretion, and whether that party considered its actions reasonable. The court would only interfere if such a decision was shown to be arbitrary, capricious, perverse or irrational (ABN AMRO).

 

The objective standard?

 

In the recent English High Court case of Crowther v Arbuthnot Latham & Co Ltd [2018] EWHC 504 (“Crowther”), the court held that a clause conferring on a bank approval rights for the sale of a secured property, “such approval not to be unreasonably withheld or delayed”, was to be interpreted with an objective standard of reasonableness (ie what would the reasonable man do). Accordingly, the court found the bank’s conduct of withholding the sale of the property in Crowther to be unreasonable. In doing so, the court looked at the proper purpose of the clause, and in the given circumstances, whether the bank’s decision to withhold the sale was reasonable.

 

While Crowther does deviate from the general stance of Wednesbury reasonableness taken in the line of cases preceding it, it is yet to be seen whether Crowther will be persuasive before the courts. Courts will still give deference to the wording of clauses and are unlikely to imply a term against the clear and express terms of a contract.

 

Conclusion

 

The line of cases illustrates that courts would not intervene and will still give deference to contractual discretions, so long as these are exercised honestly and in good faith for its proper purposes, and not arbitrarily, capriciously or irrationally. Nonetheless, banks need to be fully aware that their decision making is not unfettered. Given that the exercise of such discretions would manifest in very varied scenarios, banks can also take steps to mitigate risks arising from these transactions. These steps include:

 

1. (a)  understanding the borrower’s business and operation model in order to incorporate appropriate and clear conditions where such discretion can be exercised;

2. (b)  the inclusion of scenarios whereby the discretion granted might be exercised a certain way;

3. (c)  any mutually agreed rubrics (eg a method of valuation); and

4. (d)  other commercial, legal and practical safeguards to complement the exercise of these contractual discretions which will depend on each transaction.