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The limits of good faith – when your counterparty can absolutely do what they want

A summary of the recent case High Court case of Sibner Capital Limited v Neil David Martin Jarvis & Suzanne Jane Hughes [2022] EWHC 3273 (Ch) (link to judgment):

What takes precedence between a general good faith clause and a clause allowing absolute discretion in certain actions? The High Court has ruled that, in a contract between commercial parties of equal bargaining power, discretion can indeed be wielded absolutely.

Jarvis and Hughes, the respondents, were guarantors to a loan provided by Sibner, the appellant, to a property developer. Sibner had absolute discretion in deciding how much of the loan would be repaid to them. To avoid the borrower defaulting, they accepted less than full repayment on the designated date. The borrower could not repay the balance, so Sibner served statutory demands on the guarantors, who argued that this breached the good faith clause in the contract.

Good faith can be included in contracts both explicitly – as with Clause 5.1 of the facility agreement between the counterparties – and implicitly, such as through the Braganza duty to act reasonably in exercising discretion.

Clause 5.3 of the facility agreement between the parties granted Sibner, the appellant, ‘absolute discretion’ in deciding how much of the loan repayment they accepted. They could accept repayment of less than the total commitment, under certain conditions, with the remaining sum added to a later repayment date. The conditions were not met, the borrower did not repay the balance, and the guarantors (the respondents) were unable to make good the sum, and sued in breach of contract. At first instance, the district judge held that the debt could be disputed under the Insolvency Rules 2016, and that, if the guarantors could establish a relationship that required good faith on the part of the lender, Braganza would apply. The lender appealed to the High Court.

Clause 5.1 of the facility agreement required both parties to act in good faith. Clause 5.2 provided that Clause 5.1 cannot prejudice or restrict Sibner’s rights. Therefore, Clause 5.3, allowing absolute discretion, freely negotiated by both parties, will always take precedence over the explicit good faith clause. In this way, the explicit good faith requirement was disregarded in favour of the appellant’s freedom to act as per their commercial rights.

Good faith can also be read implicitly into a contract. There is, however, no universal principle of good faith in English contract law (see Pakistan International Airline v Times Travel (UK) Ltd [2021] UKSC 40 [27]). The famous 20th century case law developments on freedom of contract were generally decided with contracts between companies and consumers in mind, such as train tickets, or terms and conditions. This case is different – it concerns ‘a commercial contract drawn up with legal assistance between experienced commercial parties’ [judgment paragraph 43]. Jarvis and Hughes, the guarantors, could not rely on ignorance or naivety as a defence – they freely negotiated the ‘absolute discretion’ clause, knowing it was unqualified, and so cannot rely on Braganza. The court highlighted the case of TSG Building Services v South Anglia Housing Ltd [2013] EWHC 1151 (TCC), where an unqualified right to make a decision defeated even a specific duty to ‘work together in a spirit of trust, fairness, and mutual cooperation’. Sibner’s unqualified right to act with absolute discretion was not fettered by such a clause so Jarvis and Hughes had even less of a shot at implying good faith.

The lesson from this case is quite simple: if you freely agree a clause granting unqualified absolute discretion to your counterparty, and they exercise their absolute discretion in a way that is disadvantageous to you, don’t be shocked when the court finds for your opponent.

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