05 February 2020 - Post by:Jason Rix
A couple of recent cases have looked at the vexed questions of contractual discretion and good faith. In both, the arguments have been unsuccessful (thankfully, given the facts). But the appetite for raising these arguments does not seem to have abated.
In Morley v RBS, a property developer defaulted on a loan and claimed damages from the bank, essentially, for not realising enough money from the security it held.
Morley argued (rather bravely) that the loan was a “relational” contract à la Yam Seng and so subject to a duty of good faith which the bank had breached by, variously: manufacturing a dispute and imposing default interest; obtaining a valuation to force a breach of a covenant; threatening to impose a pre-pack sale; and refusing to accept an offer of a buyout in a timely manner. Morley also claimed (much less controversially) that the power to obtain a valuation was one that could not be used to “vex … maliciously” (see PAG v RBS).
Mercifully, the court rejected the idea that the loan was a “relational” contract of any kind. The right to call in the loan was a contractual right and not a discretion. There were only two relevant contractual discretions: the bank’s power to obtain a revaluation of the charged assets; and its power to charge a default interest rate. These had been exercised for purposes rationally connected to the bank’s commercial interests and not so as to vex Morley maliciously.
In TAQA v Rockrose, TAQA sought to terminate the appointment of Rockrose as operator under joint operating agreements concerning oil and gas blocks in the North Sea.
Rockrose argued that the termination of appointment provisions were: contractual discretions subject to an implied term that their exercise be limited by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality (see Socimer) and/or – alleged to be of similar effect – subject to good faith obligations à la Yam Seng.
The court first looked at the provisions in question and held that they were intended to be unqualified – both on the basis of the language used and by comparison to language deployed elsewhere, for example, where the use of the word “if” clearly qualified the relevant provision.
While accepting that the law in relation to contractual discretions is developing, the court listed a series of authorities which consistently held that unqualified termination provisions take effect in accordance with their terms.
The court acknowledged that the joint operating agreements may be relational, but that did not mean that it was necessary to imply an obligation to act in good faith when exercising an unqualified right to terminate an appointment.
Finally, even if the arguments about implied terms had succeeded, the court held that they would not have been breached on the facts since the termination was founded on financial and operational risks that were subjectively but genuinely perceived.