Braganza [2015] [1] was hailed as a significant development in English contract law. Whilst there had been a long-standing thread of case-law establishing limits on the exercise of a contractual discretion, the Supreme Court went further than previously in adopting wholesale the concepts and principles found in public law to the exercise of a private contractual discretion.
Ten years on from the Supreme Court’s judgment, far from marking a watershed moment, it has since received a lukewarm reception from the English courts, at least in the context of wholesale, commercial agreements. Uncertainties remain in both the identification of a contractual discretion (as opposed to an absolute right) and the proper limits thereon, whilst at the same time successful challenges to the exercise of a discretion remain few and far between.
Introduction
Contractual discretions are common in commercial contracts. Examples include: withholding or granting of consent (acting reasonably); making determinations of fact; and valuing assets under finance and derivatives contracts.
The English courts had long recognised that the exercise of a contractual discretion was not unfettered, even in the absence of any express provisions to that effect. The rationale lay less in any general doctrine of “good faith” or fair dealing, but as a matter of necessary implication in order to achieve a contract’s commercial purpose. In other words, “it is presumed to be the reasonable expectation and therefore the common intention of the parties that there should be a genuine and rational, as opposed to an empty or irrational, exercise of discretion“.[2]
As to its proper limits, “not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably“.[3] “Unreasonableness” in this context is to be equated with Wednesbury-unreasonableness (i.e. a decision which no rational decision-maker could have made).[4]
The unusual feature is that the decision-making standard here is distinct from the traditional standard of objective reasonableness applied in private, contract law, whereby in the case of a dispute, the courts are prepared to step into the role of decision-maker themselves, guided by objective criteria.[5] Applying the looser standards of arbitrariness, capriciousness and irrationality – with a degree of deference to the party exercising the discretion – they were tending towards a standard which was more at home in the context of public administrative law.
That there might be an analogy to administrative law had previously been expressly acknowledged. Dyson LJ, in Paragon v Nash [2001],described the analogy to administrative law as “helpful“.[6] But that was a decision of the Court of Appeal and it fell short of directly reading public law principles into the implied contractual term between two private parties.
Thus was the significance of Braganza. Where previously there had been – per Lady Hale in Braganza – an “understandable reluctance to adopt the fully developed rigour of the principles of judicial review of administrative action in a contractual context“[7], the Supreme Court now applied administrative law principles directly to assess the potential abuse of a contractual discretion. In this regard, a notable feature of Braganza was the review, for the first time, of the process by which a party had exercised its discretion, in addition to the result itself, completing the full importation of the two-stage Wednesbury test.
However, the Supreme Court emphasised the specific context of that case (being an employment matter, where the employee was in a particularly vulnerable position as against the employer [8]) and left open the question of whether the courts would apply the full scope of the Wednesbury tests in the exercise of contractual discretion in different contexts – particularly when dealing with experienced, well-advised commercial counterparties of comparable bargaining power.
The post-Braganza landscape
The decision in Braganza appeared to be a watershed. Placed alongside the development of an implied good faith duty in the context of so-called “relational contracts”[9], it seemed to signal a move away from the broadly laissez-faire nature of English contract law. However, this has – thus far – proved to be a false dawn.
Threshold issue: discretion vs absolute right
The courts have continued to circumscribe the application of the “Braganza duty” by underlining that it does not apply to qualify an absolute right.[10] The distinction between an absolute right and “making an assessment or choosing from a range of options, taking into account the interests of both parties”[11], being a contractual discretion to which a Braganza duty applies, has been upheld by the courts.
Thus, an attempt to argue that a Braganza duty should be implied into a bank’s contractual right to require repayment of a loan on three months’ notice at its “absolute discretion” failed in UBS AG v Rose Capital Ventures Ltd [2018][12], on the basis that the “calling in of the loan is not the exercise of a discretionary power of the type Baroness Hale [in Braganza] describes.”[13] Similarly, in Taqa Bratani v Rockrose [2020][14], in which the claimant challenged the exercise of an unqualified right to terminate a party’s role under the contract, the Court held that it was “clear that on the current state of the authorities, the Braganza doctrine has no application to unqualified termination provisions within expertly drawn complex commercial agreements between sophisticated commercial parties such as those in this case.”[15] The same reasoning was applied in Cathay Pacific Airways Ltd v Lufthansa Technik AG [2020] in relation to the exercise of an option to remove all of its engines from a maintenance programme, which deprived the service provider of revenue.[16]
However, in practice, it remains the case that the question of what constitutes an absolute right as opposed to a discretionary one sometimes requires detailed consideration. As Males LJ held in Equitas Insurance v. Municipal Insurance [2019][17], whether a provision of a contract gives a party an absolute right:
is the result of a process of construction which takes account of the characteristics of the parties, the terms of the contract as a whole and the contractual context… It is only possible to say whether a term conferring a contractual choice on one party represents an absolute contractual right after that process of construction has been undertaken [18]
Males LJ
Equitas Insurance v. Municipal Insurance [2019]
Ultimately, this remains something of a penumbra. The distinction can be a fine one. Take, as an example, the decision of Waksman J in Shurbanova v Forex [2017].[19] There, Forex had the right to revoke a transaction where there had been abusive trading practices. The judge held that the question of whether there had been abusive trading was an objective one – either there had, or there had not, and this was for the court to decide (objectively). And if there had, FX had the absolute right to revoke the transaction. There was no discretion involved and the relevant term was not subject to an implied Braganza duty.[20]
For now, the open-ended guidance in Equitas gives claimants enough of a handhold to suggest that even terms which plainly on their face are not discretionary might be subject to the Braganza duty. Unless and until more granular principles are set down, we can expect claimants to continue to throw Braganza into the mix when they are dissatisfied with the decision made by a counterparty.
Process vs result
As mentioned above, Braganza introduced the possibility of judicial scrutiny of the decision-making process, in addition to the final result of the exercise of a discretion. In a commercial context, this was expressly rejected by the court in LBIE v ExxonMobil [2016] [21]. The court decided that this was inappropriate in the context of a US$250 million repo financing extended by an oil major to an international investment bank. In Lehman Brothers v Klaus Tschira Stiftung [2019][22], the court once more endorsed the view, in the context of the calculation of Loss under the 1992 ISDA Master Agreement, that it should not “readily become involved in a detailed assessment of whether the determining party took into account all relevant factors and ignored all irrelevant factors“, which “would encourage challenges to be made to the determination by the Non-defaulting Party which would cut across the desire for speed and commercial certainty of determination”.[23]
However, it would be imprudent for a decision-maker to ignore its processes altogether. Recent decisions indicate that the courts are prepared to interrogate decision-making processes in the commercial setting (although the intensity of that review is likely to be highly dependent on the specific facts).[24] And in practice, a robust and defensible process is more likely to lead to a result that withstands any challenge and judicial scrutiny. Further, the court may well be influenced by what it has seen from the decision-making process in determining whether the end outcome was a compliant one.
Finally, parties may expressly agree to set certain standards for both the process and the outcome. For example, the 2002 ISDA Master Agreement expressly provides that the Close-out Amount will be determined by using “commercially reasonable procedures“, which means that the counterparty is able to challenge, and the court will scrutinise, the process undertaken by the determining party.
Own interests
The cases continue to support the view that the decision-maker may have regard to (and even prioritise) its own interests in exercising a discretion. As far back as Socimer, in the context of the valuation of illiquid assets in stressed market conditions, which the non-defaulting party was forced to hold as a result of the counterparty’s default, the court opined that the non-defaulting party was “entitled primarily to consult its own interests” in valuing the assets[24]. This was echoed in LBIE vs ExxonMobil (the non-defaulting party holding the collateral was “entitled to have regard to its own commercial interests“[25]). Finally, in Macdonald Hotels v Bank of Scotland [2025], the court stated that while, in principle, the Braganza duty could have applied to a secured lender’s decision to force the sale of a lender’s asset, it was not required to carry out any balancing of its interest against the debtor’s, “much less defer” to the latter.[26]
If there is a middle ground, it might be found in the Court of Appeal decision in Property Alliance Group v Royal Bank of Scotland [2018]. The court agreed with the claimant that the Braganza duty applied to RBS’s apparent right to require a valuation on various secured properties to be undertaken by the claimant at any time. Further, whilst RBS was under no duty to balance its interests against those of the claimant, it could equally not commission a valuation “for a purpose unrelated to its legitimate commercial interests or if doing so could not rationally be thought to advance them“.[27] Ultimately, however – for a series of technical reasons – they found that the valuation did not fall into this category, and the claimant’s appeal on this ground failed.
Finally, parties are advised to exercise caution in placing too much weight on their own interests. In many of the cases discussed, the commercial rationale for giving a discretion to a non-defaulting party to value assets was to protect it from the risk and the difficulty of the valuation in question, often under difficult and uncertain market conditions. These were key factors weighing in favour of the court’s conclusion that such a party may take its own interests into account. In other instances, the rationale for affording one party the discretion may not (or not primarily) be to protect its own interests. In such cases, it remains to be seen whether one’s own interest being a major driver for the decision will satisfy the Braganza duty.
Conclusion
In a commercial context at least, decisions since Braganza are something of a cautionary tale for claimants. They have often struggled to demonstrate that the relevant contractual provision amounts to a contractual discretion, as opposed to an absolute and unfettered right. And even where they have, the courts have been reluctant to interfere with the decision-making of sophisticated market participants. In this regard, the principles applied by the courts remain largely as they were pre-Braganza.
That is not to say that a challenge to the exercise of a contractual discretion is a completely blunt instrument. Even if a dispute does not reach trial or even the commencement of formal proceedings, a cogent challenge in and of itself may constitute a powerful negotiating tool for a claimant. Further, in LBIE vs ExxonMobil, LBIE successfully challenged and overturned ExxonMobil’s valuation in relation to the vast majority of the securities in question. And in Watson v Watchfinder [2017],[29] where a board had relied upon a contractual technicality to refuse to issue shares to the claimants under an option agreement, the court found that they had failed to comply with their Braganza duty and held in favour of the claimants. Ultimately, and as ever with commercial contracts, the analysis will always come down to the precise terms of the contract itself and its surrounding factual matrix.
Footnotes
[1] Braganza v BP Shipping [2015] UKSC 17.
[2] Cantor Fitzgerald International v Horkulak [2004] EWCA Civ 1287, at [30].
[3] Abu Dhabi National Tanker Co v. Product Star Shipping Ltd (The “Product Star”) (No 2) [1993] 1 Lloyd’s Rep 397, at [404].
[4] See, for example: Socimer International Bank Ltd (In Liquidation) v Standard Bank London Ltd (No.2) [2008] EWCA Civ 116; WestLB AG v Nomura Bank International Plc and another [2012] EWCA Civ 495; Braganza; Lehman Brothers International (Europe) (in administration) v ExxonMobil Financial Services B.V. [2016] EWHC 2699 (Comm); and LBI EHF (in winding up) v Raiffeisen Zentralbank Österreich AG [2017] EWHC 522 (Comm).
[5] For a helpful assessment of the distinction between the two standards, see Socimer at [22].
[6] Paragon Finance plc v. Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685, at [41].
[7] Braganza, at [20].
[8] The discretion in question concerned a finding of fact by BP as to the cause of its employee’s (Mr Braganza’s) death. On the basis of BP’s finding that it had been caused by suicide while working on one of its tankers, Mrs Braganza would not be entitled to death-in-service benefits. The Supreme Court ruled by a majority of 3-2 that BP had failed to exercise its discretion properly.
[9] Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111 (QB).
[10] This is on the basis that to imply a term that qualifies an absolute right is not permitted as a matter of law, because this would result in an implied term which contradicts an express term of the contract – see Marks and Spencer Plc v. BNP Paribas Securities Services Trust Co (Jersey) Limited [2015] UKSC 72; [2016] AC 742, at [28].
[11] Mid Essex Hospital Services NHS Trust v Compass Group [2013] EWCA Civ 200; [2013] BLR 265 at [83].
[12] UBS AG v Rose Capital Ventures Ltd [2018] EWHC 3137 (Ch).
[13] Ibid., at [56].
[14] Taqa Bratani Limited and Others v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm).
[15] Ibid., at [46].
[16] Cathay Pacific Airways Ltd v Lufthansa Technik AG [2020] EWHC 1789 (Ch).
[17] Equitas Insurance Limited v. Municipal Insurance Limited [2019] EWCA Civ 718; [2019] 3 WLR 613.
[18] Ibid., at [113].
[19] Shurbanova v Forex Capital Markets Ltd [2017] EWHC 2133 (QB).
[20] Ibid., at [96].
[21] LBIE v ExxonMobil. Travers Smith acted for Lehman Brothers in this matter.
[22] Lehman Brothers Finance AG (In Liquidation) v Klaus Tschira Stiftung GmbH, Dr H C Tschira Beteiligungs GmbH & Co KG [2019] EWHC 379 (Ch), 2019 WL 00859499.
[23] Ibid., at [174].
[24] In Tribe v Elborne Mitchell LLP [2021] EWHC 1863 (Ch), it was held that the decision-maker “should not take into account irrelevant matters or ignore relevant ones.” In Macdonald Hotels v Bank of Scotland [2025] EWHC 32 (Comm), the court was similarly prepared to interrogate the decision-making process, albeit guided by the question of whether that decision was reached “for a reason or reasons unconnected with what it perceived to be its own commercial best interests.”
[24] Socimer, at [112].
[25] LBIE v ExxonMobil, at [287].
[26] Macdonald, at [182].
[27] Ibid. at [169].
[28] Watson and others v Watchfinder.co.uk Limited [2017] EWHC 1275.
