Supreme Court sets standard of review of contractual decisions
March 23, 2015
On 18 March 2015 the Supreme Court handed down judgment in Braganza v. BP Shipping, holding that contractual decisions affecting both parties would be reviewed by the court in the same way as administrative decisions.
The case concerned death benefits accruing under an employment contract. The employee, Mr Braganza, had vanished while on board the respondents’ vessel. The respondents were of the opinion that he had committed suicide, and that no benefits were therefore due to his widow.
In the Commercial Court, Teare J had held that there was real uncertainty about what had happened to Mr Braganza, meaning whether his death had been an accident (possibly because he was out on the deck for work purposes) or suicide. The respondents’ opinion that he had committed suicide had to have been formed reasonably. Reasonableness in the present context meant Wednesbury reasonableness: the decision should have been taken rationally (by taking into account all relevant matters and not taking into account irrelevant matters), honestly and in good faith. “Although the present case concerns the exercise of a contractual power rather than a statutory power the same principles apply”. Teare J found that the respondents had failed the rationality aspect of the test and had not considered the possibility that the employee’s death could have been an accident. The widow’s claim succeeded, and death in service benefits were payable by BP under the contract.
The Court of Appeal (Longmore LJ, with whom Rimer and Tomlinson LLJ unanimously agreed) reversed this decision and held that no such benefits were payable. The court thought that it was “not entirely clear” whether Teare J had considered that the respondents’ failure to direct themselves as to the need for cogent evidence before making a finding of suicide was in itself enough to render their opinions unreasonable. As to the failure to appreciate that there might be work-related reasons for Mr Braganza to go on deck, that failure could not make the employer’s opinion unreasonable in the absence of a mechanism explaining how he could accidentally fall overboard. The widow appealed.
The Supreme Court allowed the widow’s appeal. The majority was 3 to 2 in favour of the appeal (with Lady Hale giving the lead judgment and Lord Hodge giving a concurring judgment, and Lord Kerr agreeing with Lady Hale and Lord Hodge). Lord Neuberger gave a dissenting judgment, with which Lord Wilson agreed. It was held as follows:
- There were two issues to be answered here: a particular one (the proper approach of a contractual fact-finder considering whether a person may have committed suicide) and a general one (what it meant that the decision of a contractual fact-finder should be reasonable).
- For contracts involving one party taking decisions which affected the rights of both parties, the court would imply a term into the contract that the decision-making process be lawful and rational in the public law sense: i.e. that the decision was made rationally, in good faith and consistently with the contractual purpose. Whatever term would be implied depended on the terms and context of the particular contract. The test had two limbs: the decision-making process (whether the right matters had been taken into account in reaching the decision) and the outcome (whether, even though the right things had been considered, the result was so outrageous that no reasonable decision-maker could have reached it).
- The particular context here was an employment contract, which was different from an ordinary commercial contract. Any decision-making entrusted to the employer had to be exercised in accordance with the implied obligation of trust and confidence. In deciding that the employee had committed suicide the respondents had not acted rationally or reasonably, in the public law sense of the decision having been formed without taking relevant matters into account. They respondents should have asked themselves whether the evidence was sufficiently cogent to overcome the inherent improbability of suicide (and it was not, as there were no positive indications of suicide here).
- Lord Neuberger (dissenting) agreed with the majority that where a contract allocated power to a party to make decisions which had an effect on both parties, the court should review the decision in the same way as administrative decisions. However, he would have held that there was a combination of reasons which could fairly be said to be sufficiently cogent to justify the finding that Mr Braganza had committed suicide.