Contractual discretion; implication of Braganza duty
UK Acorn Finance Ltd v Markel (UK) Ltd [2020] EWHC 922 (Comm)
The questionWhen will an implied obligation to act rationally when exercising a contractual discretion (a Braganza duty) be implied into a contract, and what impact will a Braganza duty have on a party’s discretion to make a decision?
The key takeaways
Even if a contractual discretion is expressed to be “sole” or “absolute”, it is subject to certain restrictions implied by law (a Braganza duty). Where a Braganza duty applies, the decision maker needs to act rationally, in good faith and take relevant factors into account when reaching its decision.
The factual background
UK Acorn Finance Ltd (Acorn) was a bridging finance lender which had obtained default judgments against an insolvent surveyor (the Insured). Markel (UK) Ltd (Markel) were the professional indemnity insurers of the Insured. Acorn sought to claim against Markel under the Insured’s professional indemnity policy.
There was an innocent non-disclosure clause (IND Clause) in the insurance policy which provided:
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“In the event of non-disclosure or misrepresentation of information to Us, We will waive Our rights to avoid this Insuring Clause provided that
(i) You are able to establish to Our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive.”
Markel came to the conclusion that there had been a deliberate misrepresentation and non-disclosure by the Insured and sought to avoid the policy on the basis of the IND Clause.
The decision
A so called “Braganza duty” (named after the leading Supreme Court decision in Braganza v BP Shipping Ltd [2015]) is an implied obligation to act rationally when exercising contractual discretion. It is implied where:
- the contract gives discretion to one party to make a decision
- the manner in which the discretion is exercised will impact rights held by both parties under the contract
- there is a conflict of interest for the decision maker.
The Court found that the Insured was required to demonstrate that any misrepresentation had been innocent. The effect of the IND Clause was to give Markel the decision-making power. As such, the Court considered it necessary to imply a Braganza duty so that Markel would not be able to exercise its decision-making powers under the IND Clause arbitrarily, capriciously or irrationally.
The Court found that Markel failed to comply with that duty as they had not approached the decision with an open mind or taken into account the Insured’s misunderstanding of the term “sub-prime”.
Further, assumptions had been made about the reliability of the Insured and these had wrongfully been taken into account.
The Court concluded that it was not possible for the same decision to have been reached under the IND Clause if the decision had been approached properly.
Why is this important?
This decision provides further guidance on when a Braganza duty can arise and the approach the Court takes when considering the issue. The question of what factors should and should not be taken into account is key.
Any practical tips?
Identify any clauses within contracts that may give rise to a Braganza duty. Consider whether these can be restated as contractual rights, without any discretionary element. For discretionary matters, consider whether particular factors should be identified within the contracts; whilst this may limit discretion, it may provide greater certainty.
When decisions are being made, ensure that the decision makers go through a proper decision-making process, identifying the factors that were taken into account and the decision(s) reached. It is good practice for these to be recorded (perhaps with internal/external legal support), so they can be evidenced/justified if challenged.