TAKING THE BULL BY THE HORNS: SINGAPORE HIGH COURT CLARIFIES THE SCOPE OF ABSOLUTE CONTRACTUAL DISCRETION
Recently, the Singapore High Court considered the scope of actual contractual discretion in the case of Shipworks Engineering Pte Ltd and another v Sembcorp Marine Integrated Yard Pte Ltd and another and another appeal [2026] SGHC(A) 22 (“Shipworks”).
In brief, the Court clarified that such powers are not unfettered and explained the juridical basis for it.
The decision is a useful reminder that contractual powers expressed in unrestricted term must be considered in their contractual context. Further, where a discretion has been exercised or “spent”, there may be no further discretion left to exercise.
Background
Shipworks Engineering Pte Ltd and Lanka Marine Services Pte Ltd (collectively, the “Contractors”) were engaged by Sembcorp Marine Integrated Yard Pte Ltd and Jurong Shipyard Pte Ltd (collectively, the “Shipyards”) to carry out various works and services: Shipworks at [1]-[6].
The parties’ agreements contained two provisions on contractual discretion, of which Clause 17 is of central importance in understanding the true scope of actual contractual discretion.
Clause 17 stated that the Shipyards had “the absolute right and discretion to decide the extent of the works completed and the commercial value of the Works completed by” the Contractors: Shipworks at [20].
As can be seen, on a plain reading, Clause 17 conferred a wide discretion on the Shipyards to decide the extent of the works completed as well as their value.
The Court’s interpretation of Clause 17
The Court held that Clause 17 did not confer upon the Shipyards an unfettered discretion.
As a matter of law, the Court observed that any term that seeks to curtail a contractual discretion may only be imposed on the parties by implication. To this end, the Court cited its earlier decision in Leiman, Ricardo v Noble Resources Ltd [2018] SGHC 166: Shipworks at [225].
The Court then decided that such a term should be implied where there is a true gap in the contract. In this respect, the Court reiterated that an implied term that contradicts an express term in the contract will not be implied: Shipworks at [226].
The Court found that the language used in Clause 17 revealed a “true gap” in that it did “not expressly provide the grounds on which [the Shipyards] exercise of discretion may be challenged”: Shipworks at [227].
As the basis was ripe for implying a term that curtailed contractual discretion, a term that such discretion “must be exercised in good faith and not arbitrarily or capriciously” was to be implied: Shipworks at [228].
Interesting, the Court clarified that the source of implying such a term was not based on the Wednesbury standard from administrative law. Rather, it “is rooted in contract law and does not depend on any transposition of administrative law principles.”: Shipworks at [228].
Accordingly, the Court held that Clause 17 must be exercised in good faith and not arbitrarily or capriciously: Shipworks at [228].
When is the discretion “spent”?
An interesting aspect of the decision concerns what happens once the Shipyards had made a determination as to the extent and valuation of the works: did the Shipyards’ discretion under Clause 17 extend to reassessing the works after they had already been assessed?
The Court made it clear that where a party has already made such a determination, there is no room retroactively to assess the extent of the work done or depart from the previous valuation of the works.
Significantly, that is because to do so would be “in bad faith and outside the scope of the discretion conferred by cl 17” and “arbitrary and/or capricious”: Shipworks at [230] – [231].
Finally, as regards to any residual discretion that remains under Clause 17, that “must be exercised in good faith and not arbitrarily or capriciously”: Shipworks at [232].
Key takeaway
Shipworks illustrates that absolute contractual discretion clauses do not necessarily make them invincible.
In determining whether such discretion may be curtailed by implied term, it needs to be determined whether there is a gap in a contract as to how the discretion may be exercised. Shipworks make it clear that, absent language that prescribes how that discretion is to be exercised, the Courts will not hesitate to imply a term that such discretion must be exercised in good faith and not arbitrarily or capriciously.
This means that where the parties in fact intended absolute discretion to bear its literal meaning, the drafting of such clauses must make that intention clear. Otherwise, the parties are at risk of that discretion being curtailed by an implied term.
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