When can the Court intervene in the exercise of contractual discretion?

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“Since the landmark decision of the Supreme Court in Braganza v. BP Shipping Ltd [2015] UKSC 17 we have also learned that the exercise of a contractual discretion is to be judged by the same principles as the exercise of public law discretions “.

This brief sentence in Lewison LJ’s judgment in No.1 West India Quay (Residential) Ltd v. East Tower Apartments Ltd [1] belies its description of a radical development which imports the Wednesbury[2] tests into contracts where the decision maker is not subject to public law principles.

Braganza was a tragic employment-based decision and the majority ‘s leading judgment (delivered by Lady Hale) started with its disturbing facts and their consequences. Mr. Braganza was the chief engineer on a BP oil tanker. He disappeared whilst at sea. No -one knew for certain what happened to him but after a detailed investigation his employers formed the opinion that the most likely scenario was that had committed suicide by jumping overboard. If that opinion prevailed, then his widow was not entitled to death benefits in Mr. Braganza’s contract of employment.

Lady Hale affirmed that the Supreme Court’s function was not to decide what happened to Mr. Braganza rather that: “The task of the court is to decide whether his employer was entitled to form the opinion which it did. The issue of the general principles in this appeal, therefore, is the test to be applied by the court in deciding that question”. [3]

In Braganza it was noted that;

Contractual terms which only give one party power to exercise a discretion or to form an opinion which affects the other parties to the contract are extremely common.

Therefore, the courts have ensured that such powers are not abused by implying terms as to how that discretion is exercised.

There was an obvious parallel with contractual discretion and a public authority’s decision-making function, therefore the standard of review generally adopted by the court to the decisions of a contracting party should be no more and no less demanding than the standard of review in judicial review.

The first limb of the Wednesbury test focussed on the decision -making process, whether the correct matters were taken into account. The second limb is concerned with the outcome of the decision – whether even though the right things have been taken into account “… the result is so outrageous that no reasonable decision -maker could have reached it. The latter is often used as a shorthand for the Wednesbury principle, but without necessarily excluding the former “.[4]

At first instance Teare J. found for Mrs. Braganza, holding that the investigation team did not direct themselves that before making a finding of suicide there had to be cogent evidence commensurate with or proportionate to such a serious finding. They therefore failed to fully take account of the other reasons why Mr. Braganza might have gone overboard. The Court of Appeal could not agree with Teare J’s reasons for holding that an opinion of suicide was unreasonable.

The Supreme Court overturned the Court of Appeal’s judgment and in so doing it did not consider that the employer’s decision to accept the investigation’s conclusion of suicide was “arbitrary, capricious or perverse “under the second limb of Wednesbury. However, the decision maker had failed to ask itself whether the evidence of suicide was sufficiently cogent to overcome the “… inherent probability of such a thing “.[5] As such the finding was that the first limb of Wednesbury was not satisfied because the investigation did not give the “…evidential basis for forming the positive opinion that Mr. Braganza had committed suicide”.[6]

Lord Hodge was also “… struck by the paucity and insubstantial nature of the evidence from which BP inferred Mr. Braganza committed suicide.” [7] He also remarked on the tension in  finding the second limb is satisfied where the first limb was wrong – “… it is difficult to treat as rational the product of a process of reasoning if that process is flawed by the taking into consideration of an irrelevant matter or the failure to consider a relevant matter”. [8]

Whilst dissenting, Lord Neuberger agreed that the approach to reviewing a decision -makers exercise of contractual discretion should be as in Wednesbury [9].

Braganza was an employment case and as Lord Hodge observed “The personal relationship which employment involves may justify a more intense scrutiny of the employer’s decision -making process than would be appropriate in some commercial contracts”[10] . So how has Braganza been subsequently applied outside of an employment context?

Lehman Brothers International (Europe) v ExxonMobil Financial Services [11]  involved the valuation of securities in instances of default where a decision had to be made quickly and where the non-defaulting party could have regard to its own interests. In that context Blair J. did not accept that Braganza required a public law type analysis of the decision -making process. He noted that the contractual discretion for valuation was given by one commercial party to another commercial party and that Braganza left open the extent to which procedural judicial review objections could arise in commercial contracts.

However, in Watson v Watchfinder [12] (concerning the grant of shares under a share option agreement between commercial parties as part of fees due for services and introductions of potential investors) Waksman J. decided a Braganza duty did arise. The clause stated that the option could only be exercised with the consent of the majority of the board of directors which they decided not to give. The court held that option was discretionary and implied a Braganza duty not to exercise that discretion in an arbitrary, capricious or irrational way. Whilst noting that such a conclusion was not inevitable in every case it was held to be clearly appropriate given the conflict of interest caused by the grant of additional shares. That would dilute their own holdings and restrict the availability for other investors. Specific performance of the option agreement was ordered.

BHL v Leumi ABL [13] concerned an invoice discounting contract which granted a discretion to the finance provider to recover fees up to 15% of the sums collected by Leumi. Leumi charged the full 15% and in so doing it failed to consider all of the relevant factors when calculating its own likely future costs to which the recovery of its fees was directed. It simply charged the maximum without proper thought about the exercise of its discretion to charge up to that maximum. Waksman J. held that the discretion had to be subject a “qualification” otherwise the discretion could be exercised oppressively and had been so exercised in breach of the implied Braganza duty not to. The correct rate if the discretion was not abused was held to be 4% and that resulted in substantial restitution.

The decision in UBS AG v. Rose Capital Ventures Ltd[14] concerned a mortgagee’s absolute discretion to demand full repayment of a loan on 3 months’ notice and that discretion was held not to be restricted by a Braganza implied qualification. It was noted that not every contractual power or discretion should be subject to Braganza implied restrictions in order to make the contract work with practical commercial coherence. Those which were are in the nature of decisions which affected the rights of both parties and where the decision maker had a clear conflict of interest .The right here was a unilateral right to demand without cause and  there was no conflict – a mortgagor would have no beneficial interest in a demand it was always for the mortgagee’s benefit. This case distinguished Braganza by the relative equal bargaining strengths of the commercial entities whereas Braganza was an employment cases where relative inequality of bargaining strength was common.

Dymoke v Association for Dance Movement Psychotherapy UK Ltd[15] held that the Defendant had breached an implied duty of procedural fairness by terminating membership without first informing of criticisms and providing an opportunity to respond to potential termination. The decision noted the trend towards importing public law type review standards in the private law contractual context. [16]

Comment

Even in the commercial contract sphere, there is now a definite right to challenge the exercise of a discretion given to one party as per Wednesbury particularly when that decision affects rights of both parties – typically benefitting the decision maker and prejudicing the other party. In these circumstances there may be a conflict which will attract the implied Braganza duties – especially when there is an inequality of bargaining power.

However, the second limb of the Wednesbury test of unreasonableness is high; the court will not “re-write the parties bargains” “…still less substitute themselves for the contractually agreed decision -maker[17]. Applying those qualifications (and principally aimed at its first limb); it would be prudent to treat any discretion as potentially being subject to Wednesbury before the discretion is exercised: be clear about the decision to be made – that will inform as to what matters should be taken into consideration and what should not; carefully assess whether the grounds for the decision can justify the decision; keep a record to demonstrate that the decision was rational by showing what matters were taken into account and state what grounds and evidence were relied upon when reaching the decision.

[1] 2018 EWCA Civ 250. This case confirms that even if a reason for a decision is bad in law but can be disentangled from other good reasons so the public body would have reached the same decision without the bad one, then the court will not interfere.

[2] Associated Provincial Picture House Ltd v. Wednesbury Corporation [1948] 1KB 223. (Sharpe Pritchard acted for the Corporation and contrary to popular belief I was not an articled clerk here when judgement was delivered).

[3] Paragraph 2 of Braganza

[4] Paragraph 24 of Braganza

[5] Paragraph 39 of Braganza

[6] Paragraph 63 of Braganza

[7] Paragraph 49 of Braganza

[8] Paragraph 53 of Braganza

[9] Paragraph 103 of Braganza

[10] Paragraph 55 of Braganza and see paragraph 32

[11][2016] EWHC 2699

[12] [2017] EWHC 1275

[13] [2017] EWHC 1871 (QB)

[14] [2018] EWHC 3137

[15] [2019] EWHC 94 (QB).

[16] I do not believe that this decision, or any other that I am aware of, is “opening the door” to import a general public law/ common law duty to consult before exercising a contract given discretion – such as the “Tameside” duty of sufficient inquiry as considered in Hollow v Surrey County Council [2019]  EWHC 618 (Admin).

[17] Paragraph 18 of Braganza

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