Socimer International Bank Ltd v Standard Bank London Ltd

When a contract entrusts a decision affecting both parties to one contracting party, that party must act honestly, in good faith and rationally. The decision must be genuine and free from arbitrariness, caprice and perversity. This restraint does not ordinarily impose an objective duty of reasonable care or transfer the decision to the court.

If the contractual discretion was not exercised, the court must reconstruct the decision which the decision-maker would have made within those limits. It must not substitute its own objectively reasonable decision. A further term will be implied only where the strict requirements of necessity, obviousness, certainty and consistency with the express contract are satisfied. Duties imposed by law on mortgagees do not extend by analogy to a commercial transaction which is not a mortgage.

Socimer International Bank Ltd v Standard Bank London Ltd concerned forward sales of emerging-market securities. Following Socimer’s default, the agreement required Standard to value securities which it liquidated or retained as at the termination date and to credit that value against Socimer’s liabilities.

On a preliminary issue, Cooke J held in [2004] EWHC 1041 (Comm) that Standard had to make a termination-date valuation rather than account only for subsequent sale proceeds. At the valuation trial, Gloster J implied a duty to use reasonable care and arrive at an objectively proper market value. She also held that credits from other transactions would have reduced the unpaid amounts before valuation and awarded Socimer more than US$15 million including interest.

Standard appealed. The principal questions were whether the valuation remained Standard’s subjective decision, subject to good faith and rationality; whether the other credits would have been set off before valuation; and whether Socimer could rely on a late, unpleaded implied term while rejecting Standard’s unchallenged evidence.

1. Appeal allowed unanimously. Gloster J’s decision could not stand. The full consequential orders were left for further submissions, although the valuation would at least require a new trial.

2. A contractual discretion affecting both parties is constrained by honesty, good faith and genuineness. It must not be exercised arbitrarily, capriciously, perversely or irrationally. Reasonableness in this context means rationality analogous to the Wednesbury standard. It does not mean an objective duty to take reasonable care. Where the discretion was not exercised, the court must place itself in the decision-maker’s position and reconstruct the decision which would have been made within those constraints: Cantor Fitzgerald International v Horkulak [2004] EWCA Civ 1287 applied.

3. The agreement entrusted the valuation to Standard. Subject to good faith and rationality, Standard could apply its own judgment, consult its own commercial interests and allow for the risks of retaining volatile or illiquid assets following Socimer’s default. The court could not replace that valuation with its own assessment of true market value. No term requiring reasonable care or an objectively correct market value was necessary, sufficiently certain or consistent with the contractual allocation of risk.

4. The mortgage analogy did not justify a different result. The equitable duties of a mortgagee arise by operation of law because a transaction is a mortgage; they are not contractual terms implied under the ordinary law of contract. The parties’ agreement created neither lending nor security for a debt. Duties concerning the proper marketing of mortgaged property therefore provided no guide to the implication proposed here.

5. The credits from other transactions were not due on the termination date and would have been applied only after the valuation if a deficiency remained. They could not reduce the unpaid amounts before the valuation or support Socimer’s primary case concerning the Socma instruments. Socimer’s late implied-term case was also procedurally unfair. Having deliberately declined to cross-examine Standard’s witnesses about their proposed valuation, Socimer could not fairly obtain findings that their evidence was dishonest, irrational, negligent or incredible without putting those challenges to them.

1. Court of Appeal (Civil Division): Standard’s appeal was allowed unanimously. Gloster J’s judgment could not stand, and the court directed that further submissions were required concerning the consequences.

2. High Court (Gloster J): At the valuation trial, the court imposed an objective reasonable-care standard, accepted Socimer’s treatment of other credits and entered judgment for Socimer for US$15,215,232.02 including interest.

3. High Court (Cooke J): On the preliminary issue in Socimer International Bank Ltd v Standard Bank London Ltd [2004] EWHC 1041 (Comm), the court held that Standard had to value the designated assets as at termination and credit that value, rather than subsequent sale proceeds, against the sums due.