The recent Court of Appeal decision in Socimer International Bank Limited v Standard Bank London Limited (2008) EWCA Civ 116 provides some helpful guidance on the extent of a party’s discretion when the contract was silent on the issue.
This case concerned a portfolio of forward sales of securities that Socimer had bought from Standard Bank. When Socimer went into liquidation, the relevant contract entitled Standard Bank to value the portfolio of securities. The case turned on the nature of Standard Bank’s discretion in valuing the portfolio. The relevant clause stated that “the value of [the portfolio] and any losses, expenses or costs arising out of the termination or sale of [the portfolio] shall be determined on the date of termination by [Standard Bank].
Socimer argued that the Court should imply into the contract a term that Standard Bank use reasonable care to ensure that the valuation properly reflected the actual value of the relevant securities. The securities in question were relatively illiquid. The two key securities were a corporate bond and a species of Brazilian sovereign debt. There was a very material difference between the parties’ respective valuations of the securities. If the Court had accepted Socimer’s higher valuations, then Standard Bank would be obliged to pay an additional $7.5 million plus consequential interest. However, the Court of Appeal did not accept the Socimer argument. Lord Justice Rix drew a distinction between agreements containing:
(a) a duty to act reasonably, when the decision maker must deploy entirely objective criteria; for example, when the agreement requires the fixing of a reasonable price or a reasonable time. The concept of reasonableness in this situation is entirely mutual and thus guided by objective criteria. The Court becomes the decision maker if the parties litigate the meaning of the clause; and
(b) a duty to act rationally, when the decision remains that of the decision maker and not of the court. In this case the decision maker is obliged to act in good faith and honestly and not perversely or capriciously. For lawyers, this is the Wednesbury test (confusingly often referred to as “Wednesbury reasonableness”). If the duty is to act rationally only, then the court is concerned simply that the decision maker’s discretion is not abused, and the decision-maker need only show that he has acted rationally.
It is important to consider the conclusions drawn by the Court of Appeal in this case when considering any contract that gives one party a wide discretion.
Gibson & Co.
April 2008