"Absolute Discretion" Does Not Mean Absolute Freedom: Lessons for Lenders from Australian Agrivision v Wolstenholme

Case: Australian Agrivision Pty Ltd v Wolstenholme (Stay) [2025] FCA 364

Court: Federal Court of Australia

Judge: Stewart J

Citation: [2025] FCA 364

Full text: judgments.fedcourt.gov.au

The Federal Court's decision in Australian Agrivision Pty Ltd v Wolstenholme [2025] FCA 364 is a timely reminder that even the broadest "absolute discretion" default clause has limits — but for lenders who document their concerns and act in good faith, those limits are easy to meet.

The Facts in Brief

Capital Bridging Finance advanced $5.19 million (including a $1.5 million application fee, at 3% per month interest) to fund a deposit on a $32.5 million ACT property purchase. When the borrower failed to secure the balance of the purchase price, Capital served a default notice relying on the loan's "Adverse Effect" clause. The personal guarantors challenged the notice, arguing the default was invalid, the lender had acted in bad faith, and the proceeding was an abuse of process. All defences failed.

The Legal Principle

The clause gave Capital "absolute discretion" to form the opinion that an Adverse Effect had occurred. The Court held that this power, whilst wide, carried two implied constraints:

1. The opinion must be honestly held — the clause cannot be invoked by pretending to hold the requisite view.
2. Because exercise of the power significantly affects the other party, it must also be reasonably held.

The Court declined to go further and impose a free-standing good faith obligation, noting the "absolute discretion" language, the inherently subjective nature of risk assessment, and the absence of any good faith clause elsewhere in the contract.

Critically, courts will not substitute their own view for the lender's. The question is not whether the court would have reached the same conclusion — it is whether the lender's opinion was genuinely and reasonably formed.

Acting Commercially Is Not Bad Faith

After the default notice was served, a director of the lender company entered into an arrangement with the vendor to acquire the same property — contingent on the borrower's contract not completing. The guarantors argued this showed the default had been engineered to clear the way for that deal.

The Court rejected this. The borrower's representative had himself introduced the lender to the vendor, had helped arrange their meeting, and raised no complaint when it proceeded. Extensive contemporaneous correspondence demonstrated that the lender's concern about the borrower's ability to perform was genuine and pre-dated the default notice.

The key principle: a requirement of reasonableness and honesty does not prevent a lender from pursuing its own commercial interests. It prevents only a pretence — invoking default without genuinely holding the requisite opinion.

Practical Lessons

1. Document concerns in writing before invoking default. Contemporaneous correspondence was decisive in this case.

2. Communicate with the borrower. Written demands for evidence of finance helped establish the opinion was genuine.

3. The decision-maker must actually form the opinion. Genuine engagement with the relevant question is required — assertion alone is not enough.

4. Name the right clause in the default notice. The Court's decision may have been different if the default notice had not been specific. An event of default not relied upon in the notice is irrelevant to both claim and defence.

5. No obligation to accept refinancing proposals. Once a valid default is called, there is no duty to entertain debt purchase or refinancing offers.

A Note on Unfair Contract Terms

UCT was not raised by either party — a notable omission given the fee structure and interest rate. It is not clear whether the loan contract was considered not to be a standard form contract, or whether the defence simply omitted to engage with this option.

Conclusion

Lenders with a genuine, documented basis for calling an Adverse Effect default have little to fear from the implied constraints of reasonableness and honesty. Those constraints do not require a lender to subordinate its own commercial interests — they simply require that the opinion underlying the default is real.

If you would like to discuss this case, or its implications for your documents or lending procedures, please contact Phil Hustler or Victor Asoyo.

This article is for general information purposes only and does not constitute legal advice. Independent legal advice should be sought before acting on any matter arising from its contents.