Supreme Court clarifies the limits on contractual discretion

Article by Reynolds Porter Chamberlain LLP

In Braganza v BP Shipping Limited [2015] UKSC 17 the Supreme Court has confirmed that the limits on contractual discretion include a requirement to take relevant issues into account and that the discretion is not exercised irrationally…

Contractual discretion

Where a party exercises its discretion under a contract (even if that discretion is expressed as "at its sole/absolute discretion", etc), it must be exercised without arbitrariness, capriciousness, perversity or irrationality. (This should be contrasted with the exercise of "reasonable discretion", which applies additional limits on the discretion in that the reasonableness of the decision reached is then considered by reference to external, objective standards).

The Supreme Court has confirmed that the reference to "irrationality" in the context of contractual discretion is analogous to the judicial review standard of "Wednesbury unreasonableness", ie that contractual decisions will be subject to the same review as administrative decisions.

Importantly, the Wednesbury test has 2 limbs:

• firstly, that the decision maker has considered those matters it ought to have taken into account (and excluded those matters it ought not to have considered); and
• secondly, even if proper matters considered, was the decision reached so unreasonable that no reasonable decision maker could ever have come to that conclusion.

Previous cases on the exercise of contractual discretion have typically focussed on the second limb, by considering whether a decision was "arbitrary, capricious, perverse or irrational", but the Supreme Court has clarified that the first limb also applies in the context of commercial agreements…

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Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1947] EWCA Civ 1