Sometime between 1am and 7am on 11 May 2009, Renford Braganza, the chief engineer aboard the MV ‘British Unity’, stepped out of his cabin. The ship, an oil tanker, was in the middle of the North Atlantic. He was never seen again.
How Mr Braganza’s employers, BP, responded to the unsolved mystery of his disappearance was the subject of the Supreme Court judgment in Braganza v BP Shipping Limited [2015] UKSC 17. The Supreme Court held that fundamental principles of public law governing the exercise of discretion by public authorities can be equally applicable in private law to the exercise of discretion by one of the parties to a contract.
Background
After Mr Braganza’s disappearance, and an unsuccessful search for his body, BP established an inquiry team. It carried out an extensive inquiry over four months. Having rejected all other alternatives, it concluded that the only possible explanations were accident and suicide, i.e. he must have fallen, or thrown himself, overboard. There was no strong evidence for either scenario, but the team thought suicide the more likely of the two.
Mr Braganza’s contract of employment provided that his widow was entitled to death benefits if he died in service. However, the contract provided for an exclusion –
‘…compensation for death, accidental injury or illness shall not be payable if, in the opinion of [BP] the death, accidental injury or illness resulted from, amongst other things, the Officer’s wilful act, default or misconduct…’ (emphasis added).
In the light of its inquiry team’s conclusions, BP formed the opinion that Mr Braganza’s death had been the result of his ‘wilful act’ of suicide, and so exercised its contractual discretion to withhold death benefits from his widow.
The legal issue to which this gave rise was as follows. Where a contract says that something must be ‘reasonable’ – such as a reasonable price or a reasonable time – the question of whether it is (or not) is to be decided on an objective basis. It ultimately stands to be determined by the court (see Rix LJ in Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, at [66]). But what happens when, as here, a contract appears to give one of the parties the discretion to decide a question on the basis of its own subjective opinion? To what standard of decision-making, if any, should that party be held?
These are the questions that came before the Supreme Court in Braganza.
The Judgment
As Lady Hale pointed out, a party with a power to to make a decision that affects the rights of both parties to the contract has a clear conflict of interest. That is especially the case where, as in this case, there is a significant imbalance of power between the two parties [18].
It is not surprising then that the courts should want to subject such contractual decision-making to an appropriate degree of judicial scrutiny. For that purpose, an obvious parallel is that of a public authority exercising a statutory power which gives it a wide discretion. By analogy, the courts have decided on several previous occasions to hold the contractual decision-maker to a similar standard as in a judicial review [19]. Nonetheless –
‘The decided cases reveal 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 have struggled to articulate precisely what the difference might be.’ [20]
The Supreme Court was only partly successful in resolving this lack of clarity. It asked itself two questions – what should the standard of review be, and when should it be applied?
The first of these questions received a clear answer, at least in the circumstances of Braganza. The standard of review is that of Associated Provincial Picture Houses v Wednesbury Corporation [1948] 1 KB 223, and not merely in the sense that is now synonymous with rationality, but in the fuller meaning of that case. As Lady Hale noted, the Wednesbury test has two limbs –
‘The first limb focuses on the decision-making process – whether the right matters have been taken into account in reaching the decision. The second focuses 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 latter is often used as a shorthand for the Wednesbury principle, but without necessarily excluding the former.’ [24]
For Lady Hale, it is fundamental that not only must a decision be rational on its face, but it must have been made taking into account all obviously relevant considerations and excluding all extraneous ones [29]. What’s more, just as a public authority must take into account the purposes of the statute under which it acts, so a contractual decision-maker must take into account the underlying purpose of the contract [27].
The standard of review applicable to a contractual discretion therefore crystallises in an implied term –
‘…that the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose. For my part I would include both limbs of the Wednesbury formulation in the rationality test.’ [30]
As to this, all five Justices of the Supreme Court were agreed. Lord Kerr agreed with Lady Hale, and Lords Hodge [53] and Neuberger (with whom Lord Wilson agreed) [103] gave concurring judgments.
However, while the Supreme Court was therefore clear as to the appropriate (public law analogous) standard of review in the circumstances of Braganza, it was less successful in providing clarity as to when that standard might apply more generally.
For Lord Hodge, there was something special about an employment contract that made it particularly suitable for this treatment [54], and decisions made under other commercial contracts might attract less intense scrutiny [55]. For Lord Neuberger, this was a nonsense. The employment context added nothing material to the nature of the decision-making process, and the standard of review should be the same in any ‘normal commercial context’ [104].
Lady Hale was inclined to side with Lord Hodge, but in the end hedged her bets with a form of the ‘in law, context is everything’ proposition –
‘It may very well be that the same high standards of decision-making ought not to be expected of most contractual decision-makers as are expected of the modern state.
However, it is unnecessary to reach a final conclusion on the precise extent to which an implied contractual term may differ from the principles applicable to judicial review of administrative action. Given that the question may arise in so many different commercial contexts, it may well be that no precise answer can be given.’ [31-32]
The Supreme Court therefore left the potential reach of this public law standard across different contracts as a question to be worked out in another case on another day.
Outcome
In spite of agreement as to the principles to be applied in this case, there was no unanimity in the Supreme Court as to their application to the facts.
For the majority (Lady Hale, Lord Kerr and Lord Hodge), BP’s decision that Mr Braganza committed suicide failed to meet the Wednesbury standard. Suicide was inherently improbable and there was a need for cogent evidence to support a positive finding. Not only was there no such evidence, but there were other relevant considerations, such as Mr Braganza’s Roman Catholicism, to which BP had no, or insufficient, regard (Lady Hale [41], Lord Hodge [60]).
Importantly, Lady Hale emphasised that she would not have come to this conclusion by applying the second limb of Wednesbury alone – the decision was not ‘arbitrary, capricious or perverse’ in the classic meaning of Wednesbury irrationality – but only on the basis of the first limb. BP’s failing was that its decision had ‘been formed without taking relevant matters into account‘ [42].
For the minority (Lords Neuberger and Wilson), it was important to remember that each of the two candidate causes of death was improbable. The only question was which of those improbable events occurred. No particularly cogent evidence for either was needed in order to decide between them. The decision reached was plainly open to BP [116].
The reason for these differences of opinion is less well-articulated than than it ought to be. In the end, it perhaps came down to a fundamental detail of the contract, which was that BP was under no obligation to form any opinion at to the cause of death.
Lord Neuberger – rightly pointing out that just because a conclusion is serious does not mean that it requires unusually cogent evidence, but merely the application of the basic civil standard of proof – said that: ‘In the end, the decision-maker has to come to a conclusion on the particular facts of the case‘ [112]. But the fact was, in this case, that the decision-maker did not have to come to any conclusion at all. BP merely had a contractual discretion to form an opinion, without any requirement that it do so.
Had BP, for instance, considered that the evidence for either possibility was too tentative for any reasonably firm opinion to be expressed, the default position was that the contractual exclusion would not have been invoked and Mrs Braganza would have received benefits for her husband’s untimely death.
Therefore perhaps what really underlies the conclusion of the majority of the Court is that BP had three conclusions open to it – suicide, accident, and a (de facto) verdict of not proven – and that it had insufficient regard to the third of these options, and the possibility of deciding to reach no formal opinion at all. If so, the majority view is to be preferred.
In any event, that view of course prevailed. BP’s decision was held to breach an implied term of the contract, and was invalid. Mrs Braganza’s claim (for the comparatively modest sum of $230,265 in death benefits) succeeded.
Significance
Rumours of the death of Wednesbury as a public law standard of review, and its replacement by another more flexible tool such as proportionality, have been much exaggerated. Wednesbury continues to have an important role in holding public authorities to account, as any number of recent judicial review cases attest.
The Supreme Court judgment in Braganza is a reminder that Wednesbury is not only the basis of the modern public law on the rationality of outcomes, but also of the rationality of decision-making processes. And it remains sufficiently powerful and flexible as to have a life not merely in a public law context but, by analogy and extension, in private law too.
Public Law & Regulation 