Introduction
In Deutsche Bank AG Singapore Branch v ARJ Holding Ltd and another[2025] SGHC 163 (DB v ARJ), the General Division of the High Court (High Court (GD)) held that there is an implied term in law in an agreement between a bank and its borrower whereby the bank has to exercise its contractual discretion in good faith, in the sense that it should not be arbitrary, capricious or perverse. This was notwithstanding that the contractual discretion was expressed in the agreement to be an absolute one. We will first summarise the key points arising from the High Court (GD)'s decision and then discuss the practical implications of this decision for banks in Singapore.
This is one of the latest of recent cases on this issue of absolute discretion afforded to lenders under usual banking documentation.
Decision inDB v ARJ
InDB v ARJ, Deutsche Bank (DB) extended loan facilities of up to US$400 million to ARJ Holding Ltd (ARJ), which were secured by a portfolio of securities which DB required to be diversified. DB was concerned with the high concentration of certain bonds in the portfolio and the declining collateral value of the same, and repeatedly requested ARJ to rectify the concentration issues and shortfalls. However, it appears that ARJ did not rectify the concentration issues, and DB's concerns were compounded by missed coupon payments on the bonds, among other things.
The agreement between DB and ARJ allowed DB to, in its "absolute discretion", prescribe the amount of collateral that ARJ was to provide to DB to secure its liabilities. Further, if DB for any reason deems there to be insufficient or ineligible existing collateral that is available to satisfy ARJ's liabilities, ARJ was to deliver additional collateral of a type acceptable to DB in DB's sole discretion. A failure to deliver such collateral to DB when required would constitute an event of default and entitle DB to terminate the agreement. After ARJ's repeated failures to rectify the concentration issues and to address the shortfall in the collateral value as required by DB, DB exercised its discretion and reduced the lending value of the bonds (ultimately to zero) and DB terminated the loan facilities.
DB commenced a claim against ARJ and its director to recover the outstanding amounts owed to DB. DB's termination and the manner in which DB exercised its contractual discretion was challenged on the basis that DB's discretion was subject to an implied term of good faith, among other things. It was argued that DB's actions were arbitrary and capricious, particularly given ARJ's ongoing efforts to diversify the portfolio and transfer assets to another bank. DB contended that its discretion was absolute under the terms of the agreement, and such a good faith term should not be implied.
The High Court (GD) held that there was an implied term in law that the contractual discretion had to be exercised in good faith. The High Court (GD) considered a line of cases where the courts have expressed the view that where a contract grants one party discretionary powers that may adversely affect the other, the law implies a term that such discretion must not be exercised arbitrarily, capriciously, or perversely. This is because it is presumed to be a reasonable expectation and therefore the common intention of parties that there should be a genuine and rational exercise of discretion, and that there is a concern that the decision maker's discretion should not be abused.
On the facts of the case, the High Court (GD) found that DB had acted in good faith and did not breach the implied term of good faith. There were good reasons for DB to exercise its discretion to reduce the lending value of the bonds, such as ARJ's breach of the diversification requirement, missed coupon payments, and the failure to follow through on promised asset transfers.
This article only focuses on the High Court (GD)'s decision on the issue of absolute discretion being subjected to the implied term in law.
Discussion: An emerging treatment of absolute discretion clauses in Singapore?
WithDB v ARJ, there appears to be a clear trend in Singapore's recent jurisprudence towards recognising an implied term in law to not exercise one's discretionary powers arbitrarily, capriciously, or perversely when such an exercise of discretion may adversely affect the other contracting party. This reflects a growing judicial willingness to limit contractually agreed to absolute discretion through implied obligations of good faith, particularly in relation to banking agreements.
Notably, shortly following the judgment ofDB v ARJ, a different judge sitting in the High Court (GD) inZhong Shan Strategic Fund v RG Strategy Fund VCC[2025] SGHC 174 also held, citingDB v ARJwithout any disapproval, that the exercise of contractual discretion should not be arbitrary, capricious, perverse or in bad faith in the context of directors' discretion under a variable capital company's offering documents to suspend, amongst others, the determination of net asset values.
Yet such an approach in the context of banking agreements appears to diverge from the High Court (GD)'s earlier decision inMaybank Singapore Ltd v Synergy Global Resources Pte Ltd[2024] 3 SLR 1316 (Synergy Global), decided by a different judge, which did not appear to have been cited in the grounds of decision ofDB v ARJ.
Synergy Globalconcerned a winding up application brought by a bank against the borrower, after the bank recalled the banking facilities granted to the borrower. The borrower resisted the winding up application, arguing that the bank had wrongfully exercised its absolute discretion to recall the banking facilities. Rejecting the borrower's argument, the High Court (GD) cited the remarks of the Appellate Division of the High Court (High Court (AD)) inDong Wei v Shell Eastern Trading (Pte) Ltd and another[2022] 1 SLR 1318 (Dong Wei), that the limitations on contractual discretion should not apply to a discretion to terminate a contract, for this would limit the parties' freedom to contract. Therefore, even if the bank had not provided clear reasons for recalling the banking facilities, the High Court (AD)'s remarks inDong Weiwould preclude a court from even questioning whether the bank had exercised its discretion wrongfully.
It appears from the different conclusions on this issue reached by the High Court (GD) inDB v ARJandSynergy Globalon whether a good faith obligation should be implied to limit a bank's exercise of its contractual absolute discretion may depend, at least in part, on whether the discretion is one to terminate the banking agreement, or to do something else, e.g., to reduce the collateral value of securities. However, it is unclear whether such distinctions should be made.
Incidentally, there was a recent case from Australia where the bank was found to have an obligation to exercise contractual powers in good faith, although the legal basis to restrict the bank's contractual discretion appears to be different. In the Australian New South Wales decision ofHuman Appeal International Australia v Beyond Bank Australia Ltd (No 2)[2023] NSWSC 1161 (Human Appeal), the bank exercised its discretion and closed the borrower's bank accounts, without providing any reasons other than to say that a review had been conducted and the borrower's business was not suitable. It was held that the bank's discretion to terminate was limited by a requirement of valid commercial reason. Apart from the bank's concession that the bank had to have a valid commercial reason for termination, there was also room to argue that the contractual obligation of good faith was an express term of the agreement as the court observed that the bank's terms and conditions had expressly incorporated the Customer Owned Banking Association Code of Practice (COBA Code), which provided that the group of banks would act honestly and with integrity, and treat its customers fairly and reasonably in all its dealings.
In Singapore, the Association of Banks in Singapore (ABS) publishes various codes of practices that may also contain similar provisions. For instance, the ABS Code of Consumer Banking Practice1contains the general commitment for the member banks to act "fairly and reasonably in all its dealings with [its customers]". It remains to be seen whether and how the Singapore courts would take the ABS codes into account in deciding whether a bank's exercise of contractual discretion should be limited by a good faith obligation.
Practical implications for banks
Generally, under Singapore law, when a term is implied in law in a particular type of contract, the same term would be implied in the future for all contracts of the same type. Therefore, following the High Court (GD)'s decision inDB v ARJ, banking agreements with similar contractual discretion clauses (possibly save for those relating to termination of the contract) will likely be interpreted to be subject to the same good faith implied term. This is the current legal position in Singapore, until and unless it is decided otherwise by an appellate court.
Until there is further guidance from our appellate courts, banks should proceed on the basis that they should exercise any contractual discretion in good faith, i.e. not arbitrarily, capriciously, or perversely, even if such contractual discretion is expressed to be an absolute one. Further, it is important to document the reasons for such decisions so that the bank can demonstrate why there is no arbitrariness, capriciousness or perversity.
We highlight some consequences and steps that banks may want to consider moving forward to mitigate if not manage the risk of breaching the good faith implied term:
- When exercising the bank's contractual discretion, the basis / reasons for the bank's decision should be communicated to the borrowers and these reasons should be valid and commercially rational. Further, as far as possible, reasonable time should be given to borrowers to remedy or attend to the bank's concerns before exercising its discretion.
- All decisions made (including reasons for the decisions), including the communications with the borrowers, should be documented. Such documentation may serve as contemporaneous evidence of the bank's considerations in the event of any objections / challenges raised by borrowers.
- Given that implied terms may be excluded by clear express terms to the contrary, it may be possible for banks to incorporate suitably worded express terms to make clear that their absolute contractual discretion is indeed absolute. Whether this will be eventually upheld may nonetheless remain an open question.
Footnote
1 See the Code of Consumer Banking Practice prepared by the Association of Banks in Singapore (last revised in November 2016) athttps://abs.org.sg/docs/library/code-of-consumer-banking-practice.pdf
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.
