authorities fortifying the notion of contractual discretion is relatively recent. In The
Product Star
72 the shipowner refused to proceed to a particular port in the Gulf,
based on a right of discretion contained in a time charterparty. The contract provided
that the shipowner could refuse to obey the charterers’ orders to load or discharge at
a port if the shipowner or the master considered it dangerous. The trial court found
for the charterer and held that the shipowner was in breach of contract. Its decision
was upheld by the Court of Appeal which opined that based on the facts, the
shipowner had not honestly believed that the port in question was dangerous. It
held that:
[W]here A and B contract with one another to confer a discretion on A, that does not render
B subject to A’s uninhibited whim. . . . Not only must the discretion be exercised honestly
and in good faith, but having regard to the provisions of the contract by which it was
conferred, it must not be exercised arbitrarily, capriciously, or unreasonably.
73
The decision in The Product Star was followed in a number of subsequent
cases.
74 In Paragon Finance Plc v. Nash,
75 mortgage loan agreements conferred
on lenders an express power to vary the rate of interest payable which affected the
rights of both parties, but no criteria were specified regarding how the rate was to be
fixed. The court held that the discretion of the lender to fix the rates, was subject to
implied restrictions, namely, that it was not to be exercised dishonestly, or for an
improper purpose, or arbitrarily or unreasonably. In another case, Novus Aviation
Ltd v. Alubaf Arab International Bank
76 the court held that the restrictions on the
unbridled application of discretion applied:
[N]ot only when a contract confers a duty or power on one party to take a decision which
affects the interests of both parties, but whenever the contract gives responsibility to one
party to make an assessment or exercise a judgment on a matter which materially affects the
other party’s interests and about which there is room for reasonable differences of view.
77
Based on these decisions, it is fair to conclude that in contracts where a party has
the right to exercise a discretion, there is an implied term requiring him to act
“honestly and in good faith” and not “arbitrarily, capriciously, or unreasonably”.
Perhaps a valid question in this context is what counts as not being arbitrary,
capricious or unreasonable? It is said that in the absence of any clear definition or
illustration of this test, an ill-defined standard may be invoked by the parties
opportunistically.
78 This is obviously not desirable.
72 Abu Dhabi National Tanker Co. v. Product Star Shipping Ltd (The “Product Star”) (No 2),
[1993] 1 Lloyd’s Rep 397.
73 [1993] 1 Lloyd’s Rep 397 at p. 404 per George Leggatt L.J.
74 See for example, Paragon Finance plc v. Nash [2002] 1 WLR 685 and Socimer International
Bank Ltd v. Standard Bank London Ltd, [2008] 1 Lloyd’s Rep 558.
75 [2002] 1 WLR 685.
76 [2016] EWHC 1575 (Comm).
77 Ibid., para. 65.
78 Morgan (2013), pp. 137–148; Morgan (2015), p. 486.
328
S. Jia and H. Yu
Product Star
72 the shipowner refused to proceed to a particular port in the Gulf,
based on a right of discretion contained in a time charterparty. The contract provided
that the shipowner could refuse to obey the charterers’ orders to load or discharge at
a port if the shipowner or the master considered it dangerous. The trial court found
for the charterer and held that the shipowner was in breach of contract. Its decision
was upheld by the Court of Appeal which opined that based on the facts, the
shipowner had not honestly believed that the port in question was dangerous. It
held that:
[W]here A and B contract with one another to confer a discretion on A, that does not render
B subject to A’s uninhibited whim. . . . Not only must the discretion be exercised honestly
and in good faith, but having regard to the provisions of the contract by which it was
conferred, it must not be exercised arbitrarily, capriciously, or unreasonably.
73
The decision in The Product Star was followed in a number of subsequent
cases.
74 In Paragon Finance Plc v. Nash,
75 mortgage loan agreements conferred
on lenders an express power to vary the rate of interest payable which affected the
rights of both parties, but no criteria were specified regarding how the rate was to be
fixed. The court held that the discretion of the lender to fix the rates, was subject to
implied restrictions, namely, that it was not to be exercised dishonestly, or for an
improper purpose, or arbitrarily or unreasonably. In another case, Novus Aviation
Ltd v. Alubaf Arab International Bank
76 the court held that the restrictions on the
unbridled application of discretion applied:
[N]ot only when a contract confers a duty or power on one party to take a decision which
affects the interests of both parties, but whenever the contract gives responsibility to one
party to make an assessment or exercise a judgment on a matter which materially affects the
other party’s interests and about which there is room for reasonable differences of view.
77
Based on these decisions, it is fair to conclude that in contracts where a party has
the right to exercise a discretion, there is an implied term requiring him to act
“honestly and in good faith” and not “arbitrarily, capriciously, or unreasonably”.
Perhaps a valid question in this context is what counts as not being arbitrary,
capricious or unreasonable? It is said that in the absence of any clear definition or
illustration of this test, an ill-defined standard may be invoked by the parties
opportunistically.
78 This is obviously not desirable.
72 Abu Dhabi National Tanker Co. v. Product Star Shipping Ltd (The “Product Star”) (No 2),
[1993] 1 Lloyd’s Rep 397.
73 [1993] 1 Lloyd’s Rep 397 at p. 404 per George Leggatt L.J.
74 See for example, Paragon Finance plc v. Nash [2002] 1 WLR 685 and Socimer International
Bank Ltd v. Standard Bank London Ltd, [2008] 1 Lloyd’s Rep 558.
75 [2002] 1 WLR 685.
76 [2016] EWHC 1575 (Comm).
77 Ibid., para. 65.
78 Morgan (2013), pp. 137–148; Morgan (2015), p. 486.
328
S. Jia and H. Yu