Absolute discretion? Absolutely!
11 January 2023
An express absolute discretion has been held to be just that. It was not restricted by any implied duty to act in good faith or Braganza-style duty.
Sibner provided loans to the borrower for use in property development. The transaction was governed by a facility agreement and a joint venture agreement. The facility was guaranteed by Jarvis and Hughes.
Under clause 5.3 of the facility, Sibner had “absolute discretion” to accept less than full repayment on the repayment date, the balance to be repaid later. Clause 5.1 of the joint venture agreement required the parties to act in good faith, provided that this obligation would not restrict Sibner's rights under the finance documents.
On the repayment date, to avoid an event of default, Sibner exercised its discretion and accepted a lesser repayment. When the borrower subsequently failed to repay the balance, statutory demands were served on Jarvis and Hughes.
The statutory demands were set aside at first instance by a district judge and Sibner appealed to the High Court. Jarvis and Hughes claimed that Sibner had failed to satisfy its duty to exercise the clause 5.3 discretion in good faith (per clause 5.1) or to refrain from exercising it in a way that was “arbitrary, capricious or irrational” (Braganza v BP Shipping).
The court held that there was no realistic prospect of establishing that Sibner's discretion was subject either to a duty of good faith or to any other Braganza-style duty. Key factors included that:
- Clause 5.3 was unqualified and went “out of its way” to stipulate expressly that the discretion be absolute;
- Sibner was already agreeing to accept less than it would otherwise be entitled to;
- The contract was between two experienced commercial parties; and
- The joint venture agreement explicitly stipulated that clause 5.1 would not affect Sibner's rights under the finance documents.
However, the court also held (obiter) that if such a duty had been found there was a realistic prospect that Sibner's alleged conduct—deliberately proposing conditions which could not be satisfied and delaying in providing redemption statements with the intention of triggering a default—could have constituted a breach.
Judgment: Sibner vs Jarvis and Hughes (Westlaw)