Contractual discretion: how to get it right

Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are common. This case considers what such a party must do to avoid having the decision challenged by the court.

The facts of this case are tragic. In the early hours of 11 May 2009, Mr Braganza, Chief Engineer on one of BP’s oil tankers, then in the mid-North Atlantic, disappeared. No-one knows for certain what happened to him. However, his employer, BP, formed the opinion, based on an investigation involving two internal reports, that the most likely explanation for his disappearance was that he had committed suicide by throwing himself overboard. Under his contract of employment, this finding meant that his widow was not entitled to certain death benefits. The relevant clause stated:

“For the avoidance of doubt compensation for death, accidental injury or illness shall not be payable if, in the opinion of the Company or its insurers, the death, accidental injury or illness resulted from amongst other things, the Officer’s wilful act, default or misconduct whether at sea or ashore …” (emphasis added)

Mrs Braganza brought a claim in contract against the employer for death benefits of USD 230,265.

The court had to decide whether BP was entitled to form the opinion that it had. At first instance, Teare J held BP was not. The Court of Appeal held that Teare J had erred in his analysis. The Supreme Court decided (3:2) that BP should have sought more cogent evidence of suicide than it had before finding that suicide had taken place.

The majority decision was that of Lady Hale and Lord Hodge (with whom Lord Kerr agreed).

Lady Hale noted that the case raised two inter-linked questions of principle:

• What is the proper approach of a contractual
  fact-finder who is considering whether a person may have committed suicide?
• What makes the decision of a contractual
  fact-finder reasonable?

Lady Hale stressed that it is not for the courts to re-write the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions that affect the rights of both parties to the contract has, she thought, a clear conflict of interest. That conflict is heightened where there is a significant imbalance of power between the contracting parties - as there often will be in an employment contract.

Lady Hale acknowledged that the decided cases revealed an understandable reluctance to adopt the fully developed rigour of the principles of judicial review of administrative action in a contractual context, but at the same time they had struggled to articulate precisely what the difference might be.

She noted that the well-known test adopted by Lord Greene MR in Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223 is often abbreviated to “irrationality”, but in fact the test has two distinct limbs. The first limb focusses on the decision-making process – whether the right matters have been taken into account in reaching the decision.

The second focusses upon its outcome – 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 danger of talking about “irrationality” is that it focusses only on the second limb. Lady Hale’s view (with which she understood Lord Neuberger agreed) was that both limbs should apply.

Whatever the test, Lady Hale stressed that it would be a mistake to expect of a lay person the same expert, professional and almost microscopic investigation of the problems, both factual and legal, that is demanded of a court.

Ultimately, Lady Hale found it unnecessary to reach a final conclusion on the standard required in all cases since the context would vary. The case before concerned employment, which she noted carries with it an implied obligation of trust and confidence.

Lady Hale concluded by finding that Teare J had been right that the investigation team’s reports and conclusions could not be regarded as “sufficiently cogent” evidence to justify BP having formed the positive opinion that Mr Braganza had committed suicide. No-one, she stressed, would suggest that the decision was “arbitrary, capricious or perverse”, but in her view it was unreasonable in the Wednesbury sense, having been formed without taking relevant matters into account.

Dissenting decision – Wednesbury test passed

The dissenting decision was given by Lord Neuberger (with whom Lord Wilson agreed). He considered that Mrs Braganza was disentitled from obtaining the death benefits. Like Lady Hale – and unusual perhaps for a Supreme Court decision – a significant part of Lord Neuberger’s decision involved analysing the facts.

Lord Neuberger emphasised that, far from being the primary finder of fact, Teare J was carrying out a reviewing function of the primary finder of fact (which was BP). The mistakes in the investigation reports that were prepared did not justify interfering with BP’s decision which had been taken on the basis of them.

Lord Neuberger looked at the standard which the court should expect of the decision-maker or opinion-former in such circumstances. Like Lady Hale, he thought that there was considerable force in the notion that the approach is, and at any rate should be, the same as for a decision of the executive in the public law sense (that is, by reference to the Wednesbury decision). However, he disagreed that the employment angle was relevant. In his view, once it was accepted that BP had to carry out the investigation with “honesty, good faith, and genuineness” and had to avoid “arbitrariness, capriciousness, perversity and irrationality”, he did not see what trust and confidence could add.

In Lord Neuberger’s view, what mattered was that this was a kind of “jury question” and should be treated with appropriate respect by an appellate court.

Finally, he considered the question of whether there was sufficient evidence to justify the conclusion of suicide; in other words, was the opinion that Mr Braganza committed suicide unreasonable? In short, he believed that that there was a combination of reasons which could fairly be said to be “sufficiently cogent” to justify the opinion, based on the two reports, that Mr Braganza had taken the unusual and tragic course of committing suicide. The opinion formed did not fall foul of the test laid down by Rix LJ in Socimer International Bank Ltd v Standard Bank Ltd [2008] EWCA Civ 116 and could not be characterised as arbitrary, capricious, perverse or irrational.

COMMENT

Clearly the full judgment of the court is the only authoritative document, but it is interesting to note that in the official Supreme Court YouTube broadcast, Lady Hale chose to highlight that the court was agreed that the test for whether a contractual discretion has been properly exercised comprises both limbs of Wednesbury reasonableness.

While the court was at pains to stress that it should not interfere with contractual decision-making, one cannot help but feel the tragic facts of this case had some bearing on the result. The detailed analysis of the facts by both the majority and the minority as well as the reference by the majority to the employment nature of the relationship may enable this case to b The case is also an example of the circumstances in which the court will imply terms into a contract: namely, to control the exercise of contractual discretion (since this is the mechanism by which the Wednesbury test takes effect in commercial contracts). It is very difficult to conceive of circumstances in which one can contract out of the test. The important practical point for parties exercising a contractual discretion, for example to determine the value of something or to decide whether something is necessary, is that they need not just to make sure that they avoid reaching an unreasonable outcome but also to ensure that the right matters have been taken into account in reaching the decision. In certain circumstances this may require “sufficiently cogent” evidence.