Banks usually retain certain contractual discretions in banking documents. However, they are generally not unfettered, even with absolute discretion. Banks would generally still have to act in good faith and not arbitrarily, capriciously or irrationally.

Introduction

We update our previous article on this topic following the latest Singapore High Court case of Maybank Singapore Ltd v Synergy Global Resources Pte Ltd [2023] SGHC 258 (Synergy).

Banks usually retain certain contractual discretions in banking documents to protect their position over certain matters and mitigate the risk of commercial uncertainties arising over the term of the contract. These include a termination discretion (eg recalling facilities on demand), a discretion to vary another party's contractual performance (eg varying interest rates payable), and a determination discretion (eg the valuation of assets). It can be either an "absolute or sole" discretion, or a "reasonable" discretion.

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

A "sole or absolute discretion" must generally be exercised properly and not in an arbitrary, capricious or irrational manner. This is to ensure that such contractual powers are not abused.1

In the recent case of Synergy, the Singapore High Court upheld this principle in the context of a bank having the sole discretion to recall the entire banking facilities it had granted to a borrower that defaulted on repayment for a trust receipt facility even though another trade facility with the same bank was renewed.2 The bank succeeded because it gave "clear reasons on why it recalled the banking facilities, this being the borrower's failure to repay" while the borrower did not explain why it was wrongful.3

This follows previous local and English cases:

  • Al Shams Global Ltd v BNP Paribas [2018] SGHC 143, a case involving a bank having the sole discretion to refuse to accept any incoming payment in a customer's deposits account;
  • TYC Investment Pte Ltd v Tay Yun Chwan Henry [2014] SGHC 192 (TYC Investment), a case involving the directors' discretion under a company's articles of association to decide whether or not to approve payments made by the company;
  • 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;
  • 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;
  • 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; and
  • 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.

The cases show the wide-ranging uses of such contractual discretionary clauses seeking to give an absolute discretion to the banks for certain decisions. The uniform principle across them was that an absolute discretion was not unfettered. It 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 (Synergy, TYC Investment, 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 a lower threshold described above that is called the Wednesbury unreasonableness (MGA International, citing Socimer).

However, the courts will refrain from going beyond the bargain struck by the parties by implying other terms which contradict the express terms of the contract (Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] 4 SLR 193).

Facilities recallable on demand – an exception

An exception would be a bank's express right to recall facilities on demand. This is usual in overdraft facilities and other uncommitted facilities.

The court in Synergy remarked in obiter that even if the bank exercised its discretion to recall the banking facilities without reason, it would not have fettered discretions to terminate contracts.4 This follows the prior case of Oversea-Chinese Banking Corp Ltd v Infocommcentre Pte Ltd [2005] SGHC 134 (Infocommcentre), which involved a bank's contractual discretion to recall facilities on demand. The court there held that banks generally do not owe any duty of care to borrowers or anyone else when exercising their discretion to withdraw overdraft facilities.5

However, this exception does not apply to all facilities that are labelled so. The courts would look at the substance and not the form. A term loan cannot be an "overdraft facility" just because it is named so. In Infocommcentre, the court considered the following factors in deciding whether a facility is recallable on demand:

  1. the loan's purpose and the bank's rights – even if the bank knew how the loan would be used, it would not automatically mean the bank agreed to a specific purpose or tenure;
  2. whether parties agreed any terms expressly or impliedly on the tenure and/or the bank's right to exercise its right of review; and
  3. whether the right of review collides plainly or is inconsistent with or repugnant to the agreed intent and/or purpose of the facility.6

The court held the bank had a right to recall on demand as it had repeatedly included such an express term in each and every facility document and compromise agreement with the borrower over many years.7 The facility's purpose was also expressed to be for "working capital purposes", and not for any specific purpose, such as developing a property that the borrower argued the bank knew it was for. The borrower in fact did not apply the loan proceeds towards developing the property. As such, the bank's right to recall on demand was not inconsistent with the facility's purpose.8

Reasonable discretion

In addition to sole or absolute discretion clauses, "reasonable discretion" clauses are also common in banking documents. For instance, in the local case of ABN AMRO Clearing Bank NV v 1050 Capital Pte Ltd [2015] SGHC 271 (1050 Capital), 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] EWCA Civ 302 (Barclays), the guarantor of credit default swaps was required to determine certain matters "in a commercially reasonable manner".

In cases that dealt with a "reasonable discretion", the courts took a similar stance with those that dealt with a "sole or absolute discretion", and the standard imposed was the same lower threshold of Wednesbury 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 (1050 Capital).

The objective standard?

In the 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 lower threshold of Wednesbury reasonableness in prior cases, it is yet to be seen whether Crowther will be persuasive before the Singapore 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

These cases show the courts will not intervene and will defer to contractual discretions provided these are exercised honestly and in good faith for its proper purposes, and not arbitrarily, capriciously or irrationally. Nonetheless, banks must be aware that their decision making is not unfettered. As the exercise of such discretions would manifest in many scenarios, banks can also take steps to mitigate risks arising from these transactions. These include:

  1. understanding the borrower's business and operation model in order to incorporate appropriate and clear conditions where such discretion can be exercised;
  2. including scenarios whereby the discretion granted might be exercised a certain way;
  3. incorporating any mutually agreed rubrics (eg a method of valuation);
  4. ensuring that the Bank does not behave in any way that contradicts or compromises its contractual rights; and
  5. other commercial, legal and practical safeguards to complement the exercise of these contractual discretions which will depend on each transaction.

Liew Kai Zee (Head of Banking & Finance), David Lee (Partner) and Teo Yi Ting (Associate) authored this update.

Ng Yeow Khoon (Partner), Claudia Khoo (Partner) and Fiona Tham (Associate) acted for the bank in Synergy.

Footnotes

1. Leiman, Ricardo v Noble Resources Ltd [2018] SGHC 166 at [112]; Ong Ken Wei, The Limits to Contractual Discretion (2010) 33SAcLJ 919 at [7]

2. Synergy at [22]

3. Synergy at [25]

4. Synergy at [25]

5. Infocommcentre at [52]

6. Infocommcentre at [55]

7. Infocommcentre at [56]

8. Infocommcentre at [50]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.