CASE UPDATE
2(d)
4 July 2018
DIFFERENT
STANDARDS
APPLICABLE TO A
BANK’S EXERCISE
OF
CONTRACTUAL
DISCRETION
Crowther v Arbuthnot Latham & Co Ltd
[2018] EWHC 504
SUMMARY
In Crowther v Arbuthnot Latham & Co Ltd [2018]
EWHC 504, the English High Court (“HC”)
interpreted a clause in a settlement agreement,
which provided that the defendant-bank would not
unreasonably withhold its consent to the sale of a
property over which it held security. The HC held
that this clause required the bank to act in
accordance with an objective standard of
reasonableness, as opposed to a lower standard
of Wednesbury reasonableness or rationality in
arriving at its decision.
This case illustrates that depending on the proper
construction of the relevant clause, the Courts may
apply different standards to a bank’s exercise of its
contractual discretion.
BACKGROUND
The claimants took various loans from the
defendant-bank which were secured by their
property in France (“Property”). In 2011, the
claimants brought claims against the bank under
the Consumer Credit Act 1974, in respect of the
loans. The parties eventually entered into a
settlement in respect of the claims (“Settlement”).
Pursuant to the Settlement, all but one loan was
discharged, and the bank agreed to extend that
loan (“Loan”) for another five years. Clause 8.
of the Settlement provided that if “with the prior
approval of the bank (such approval not to be
unreasonably withheld or delayed) the property
is sold, [the claimants] shall immediately repay to
the bank the net proceeds of sale” (emphasis
added). The Settlement also provided that if such
sale took place, the net proceeds of sale would be
used for the sole purpose of repaying the Loan.
As of 2016, the claimants still owed the bank some
€5.9 million under the Loan. They took steps to sell
the Property in order to reduce their indebtedness,
and eventually received an offer of some €4.5
million. However, the bank refused to approve the
sale unless the claimants provided further security
in respect of the balance owed to the bank after
the proceeds of sale were applied to repay the
Loan. Since no further security was provided by
the claimants, the bank refused to approve the
sale. The sale opportunity was lost.
The claimants brought an action for a declaration
that the bank’s refusal to consent to the sale of the
Property was unreasonable. They also argued that
the bank’s condition of further security was
unreasonable.
THE HC’S DECISION
The HC held that the bank had unreasonably
withheld its consent to the sale of the Property, in
breach of the Settlement. In construing the scope
of the bank’s rights and obligations under Clause
8.2(d), the HC found that:
(a) the key issue was the proper purpose of the
clause, and this had to be gleaned from the
particular contractual, factual and commercial
context of the clause;
(b) the scope of the clause was to permit the
disposal of the Property at a proper price.
This was clear in light of the following
contractual, factual and commercial context
of the clause;
(i) at the time of the Settlement, the
estimated value of the Property was
considerably less than the claimants’
outstanding indebtedness under the
Loan, with no prospect of it
increasing. In other words, the bank
agreed to enter into the Settlement
 with the Property as the sole
security, notwithstanding the fact
that it would be unsecured for the
outstanding portion of the Loan
which exceeded the value of the
Property; and
(ii) creditors do not usually object to the
sale of security provided they are
not undervalued and the proceeds
go directly to discharging the
indebtedness of the borrower;
(c) in the premises, the reasonableness of any
refusal of consent must be determined by
reference to whether the proposed sale was
at fair market value and at arm’s length.
property to pay off the Loan in its entirety.
Accordingly, the HC found that the bank’s refusal
to consent to the sale, without the provision of
further security by the claimants, was
unreasonable and in breach of Clause 8.2. The HC
deferred questions of relief (eg damages) arising
from the bank’s breach to be dealt with at a later
stage.
COMMENT
The objective standard of reasonableness applied
in Crowther differs from the test applied by the
Singapore and English Courts to clauses which
confer on a bank:
(a) “sole” or “absolute” discretion; or

Regarding the standard of reasonableness in

(b) the discretion to make certain determinations
Clause 8.2(d), the HC held that this was an
“in the reasonable belief” of the bank, “in a
“objective assessment of reasonableness”. The
commercially reasonable manner”, “at its
HC relied on the facts and holding of Straudley
reasonable discretion” or “as it considers
Investments Ltd v Mount Eden Land Ltd [1996]
reasonable”;
EWCA Civ 673 (where the English Court of Appeal
had construed a similarly worded clause in a
1 which are commonly found in banking contracts.
tenancy) in arriving at this finding. The HC did not
accept that Clause 8.2(d) simply required the bank
In those cases, the Courts have applied the lower
to act in a Wednesbury reasonable (ie rational)
threshold of Wednesbury reasonableness, which
manner in reaching its decision. In this regard, the
simply requires the bank to exercise its discretion
HC distinguished the English Court of Appeal’s
in good faith and not arbitrarily, capriciously or
observations in Barclays Bank v Unicredit [2014] 2
irrationally (ie so outrageous in its defiance of
All ER (Comm) 115 that a clause requiring
reason that it can be perverse) – see for example
“consent to be determined by Barclays in a
ABN AMRO Clearing Bank NV v 1050 Capital Pte
commercially reasonable manner” merely imported
Ltd [2016] 1 SLR 186 at [77] – [85].
an obligation of Wednesbury reasonableness, on
the basis that Clause 8.2(d) was “not about
However, Crowther should not be understood as
process or manner … it [was] about outcome”.
setting out a general principle that all clauses
requiring the bank’s approval “not to be
On the facts, the bank’s refusal to consent to the
unreasonably withheld or delayed” impose an
sale had no connection with obtaining a sale at a
objective standard of reasonableness. Instead, it is
proper value. Instead, it was motivated by the
clear from Crowther that the appropriate standard
“collateral purpose” of obtaining further security for
governing a bank’s exercise of its contractual
the unsecured shortfall. In arriving at its
discretion would depend on the proper
construction of Clause 8.2(d), the HC observed
construction of the relevant clause, which in turn is
that the bank had been prepared in entering the
context-dependent.
Settlement to accept security which would not fully
cover the claimants’ indebtedness. There is no
In light of the decision in Crowther, banks should
basis to suggest that the parties intended for the
be mindful of how they phrase their right to
1
In the written judgment, the HC cited Mount Eden Land exercise contractual discretion in their standard
Limited v Bolsover Investment Limited [2014] EWHC terms. This is because the language employed in
3523, which appears to be an erroneous citation as the the relevant clause is the starting point for the
case does not stand for the facts and propositions
summarised in the HC’s judgment. These propositions Court’s determination of the parties’ intentions, the
instead appear in Straudley Investments Ltd v Mount proper construction of the relevant clause, and the
Eden Land Ltd [1996] EWCA Civ 673, which is referred appropriate standard to consider the
to above.

2
reasonableness of the bank’s exercise of If you have any questions or comments on this
contractual discretion. If in doubt, the bank should article, please contact:
obtain legal advice on the appropriate language to
be employed in respect of their contractual
discretion under their standard terms.

________________________________________

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by any means, in whole or in part, without prior written approval.
Director, Dispute Resolution
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Pauline Chong
Head, Banking & Finance
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