Jason Varuhas: Judicial Review beyond Administrative Law: Braganza v BP Shipping Ltd and Review of Contractual Discretions

Judicial supervision of decision-making powers is often associated with administrative law. However courts also review the exercise of discretions in other fields. For example courts review powers exercised by trustees, and indeed much of equity might be characterised as a law of administration. Our focus here will be the legal principles sourced in the law of contract which regulate the exercise of powers of decision, including discretions, under contracts (‘contractual review’) and the interrelationship between these principles and those common law principles regulating exercise of administrative powers under statute (‘administrative law review’).

Many contracts confer powers of decision, including discretions, often upon one party to the contract, the exercise of which will affect the interests of the other party. One common example is that loan contracts between individuals and financial institutions often confer a discretion on the latter to amend the applicable interest rate. It is clear that such discretions are not unfettered. They have time and again been held subject to an implied term, which imposes constraints on the discretion. However, English courts have long debated the content of the implied term and how the content of the implied term relates to the principles of administrative law review.

In the landmark decision in Braganza v BP Shipping Ltd [2015] 4 All ER 639 the UK Supreme Court went a long way towards resolving this controversy: it not only applied principles identical to those applied in administrative law review, but explicitly read across administrative law principles to contractual review. Similar developments have occurred in other common law jurisdictions (see McLean [2016] NZ L Rev 5, 25-27 (New Zealand); Bartlett v ANZ Banking Group Ltd [2016] NSWCA 30 (Australia)).

The contract was one between two private parties: Mr Braganza and his employer, BP Shipping Ltd. Mr Braganza was an engineer on of one of BP’s vessels. One evening, while the vessel was in the North Atlantic, Mr Braganza disappeared. No one knows exactly what happened but he was presumed drowned. Pursuant to the contract Mr Braganza’s widow would be entitled to a death benefit, except that would not be payable if ‘in the opinion of [BP] or its insurers’ Mr Braganza’s death resulted from his own wilful act. Following an investigation BP concluded the most likely cause of death was suicide. As such death benefits were not payable. Mrs Braganza sued BP, inter alia, in contract for death benefits of $US230,265, arguing that the decision-power was subject to an implied term and that BP’s decision-making failed to meet the standards imposed.

The Supreme Court unanimously held that the decision-power was subject to an implied term, and by a majority (Lady Hale, Lord Kerr and Lord Hodge, Lord Neuberger and Lord Wilson dissenting), ruled BP’s decision-making fell short of the requirements imposed by the implied term – BP’s finding that suicide was the most likely cause of death was not supportable on the evidence – and awarded Mrs Braganza the death benefit. The critical issues before the Supreme Court were the principles that governed exercise of the contractual power, and the general approach a court ought to take to applying those principles.

The decision raises many important issues. My concern here is to identify the core features of the Justices’ approach and examine how these interrelate with core features of administrative law review. In sum the approaches are very similar, and near identical in certain respects; this should not surprise us because both contractual and administrative review are forms of supervisory review. But the approaches differ in a number of important ways reflecting, inter alia, differences in the normative foundations of each field. However, the differences are not always uniform because the nature of review varies within each field.

Grounds of review. The Supreme Court effected a striking alignment of the grounds of review as between contractual and administrative law review; albeit the Justices disagreed as to the outcome of the appeal they agreed upon the content of the term to be implied. Whereas lower courts have been reluctant to acknowledge explicitly that the principles of contractual review are directly informed by administrative law, Lady Hale observed that those courts had struggled to articulate what the difference might be, and recognised that ‘[t]here are signs … that the contractual implied term is drawing closer and closer to the principles applicable in judicial review’ ([28]). In so doing she cast off the blinkers that invariably go with a belief in a general divide between public law and private law, which has too often constrained the legal imagination, distorted our understanding of the law, and artificially cut-off insights that might be gained from looking across the putative division (on this point see further Varuhas, Damages and Human Rights (Hart 2016) ch 4). The exact fetters imposed by the implied term, and how they will be applied, will vary according to a number variables (discussed below). But in Braganza the recognised grounds included lawfulness, good faith, consistency with contractual purpose, arbitrariness, capriciousness and perversity, while the decision must abide the two limbs of Lord Greene MR’s classic statement of principle in Wednesbury: irrelevant considerations must be excluded and obviously relevant considerations taken into account, and the decision must not be so unreasonable that no reasonable decision-maker could come to it. Lord Hodge also appeared to accept procedural fairness as a ground. Not only do these grounds echo administrative law grounds, but certain of them, such as Wednesbury, were directly read across from administrative law. Of course there are further grounds for intervention in administrative law than those mentioned in Braganza. One question going forward is the extent to which newer review concepts beyond the ‘classical’ principles adopted in Braganza, such as legitimate expectations and the anxious scrutiny variant of reasonableness or proportionality, may be applied in contractual review. This will likely depend, inter alia, on the rationale for contractual review, and may vary among different ‘types’ of contract, as we shall see.

Nature of Implied Term and Rationale. One basis on which one might justify distinctions between the principles applied in contractual and administrative law review is that the rationale for the principles is different in each field. It might be argued, for example, that in contract the principles reflect and give effect to the unexpressed intentions of the parties; in the language of contract law, the term is one implied in fact. However, none of the Supreme Court Justices explicitly justified the implied term on the basis of what Mr Braganza and BP intended. Rather, the rationale given by Lady Hale, in her lead judgment, was based on wider considerations of public policy: to prevent abuses of power (see further below). This suggests the term was implied in law; thus it will be implied by operation of law and is not dependent on an inquiry into intentions. That the term was one implied by law is reinforced by the fact that the rationale given is one that would likely justify implication of the term into any decision-power conferred on one party. Furthermore implication of the term and its content was justified largely by reference to prior case law, indicating the matter was a crisp one of law, while the standard tests for implying terms in fact were not applied. A term fettering exercise of a discretion will in general be implied into a discretion barring very clear language to the contrary (BT Plc v Telefonica O2 UK Ltd [2014] UKSC 42, [37]) (note echoes of the principle of legality), again suggesting implication of the term does not depend on a finding that the parties intended to fetter the decision-power. It may be that the content of the implied term will differ with different categories of contract (eg employment v loan v charterparty) (see further below). However, such approach only reinforces that the term is one implied by law: a feature of a term implied by law is that the term will generally be implied into contracts of a general class.

So it does not appear that the implied term is a reflection of the will of the parties to any given contract, and thus dependent in each case upon an inquiry into unexpressed intentions. Rather the term is grounded in a general normative concern that ‘contractual powers are not abused’ ([18]). There will be such a risk where one party has the power to make decisions ‘which affect the rights of both parties to the contract’ ([18]). And this risk is exacerbated where there is ‘a significant imbalance of power between the contracting parties’ ([18]). Thus, it appears that the normative driver for recognition of such terms is the juridical inequality that goes with being subject to the decision-power of another and this normative concern may be exacerbated when such juridical inequality arises in the context of a relationship more generally characterised by a power imbalance. Proper understanding of the normative basis of the term is important because this may explain and justify variation in the content of the implied term and/or how it is applied from one context to the next. For example, the term may impose greater obligations or be applied more strictly in the context of a relationship characterised by an imbalance of economic power, as in a contract between a multinational bank and an individual.

Thus the guiding concerns lie outside the intentions of the parties in wider considerations that decisions should be made genuinely and not for ulterior motives and the risk of a decision-maker going off-track in this way, abusing the decision-power, is exacerbated where the decision-maker has significant power over the subject of the decision. That the concern is to keep the decision-maker on track is reinforced by the grounds of contractual review. For example the decision-maker must exercise the power honestly and genuinely in conformity with the contractual purpose, and must exclude considerations that are irrelevant in light of the contractual terms and context. Albeit the normative foundations of administrative law review are contested, on one plausible view (which I consider to be the right view) it is similarly concerned to keep powerful decision-makers on track, ensuring powers are properly exercised and not abused. On one view the principles of review are implied into the terms of the parent statute conferring the power, and may be based in normative concerns independent of parliamentary intention. If this is the view one takes of the foundations of administrative law review, then it seems the basic normative concerns underpinning the principles in contractual and administrative law review are similar and do not, on their face, justify variation in the principles to be applied between the two fields – and it is thus not surprising the principles are strikingly similar between the fields.

However, what may justify differences as between the fields are the reasons why a decision-power is conferred. Statutory powers are typically conferred on officials to enable them to pursue specific public goals set by Parliament. On the other hand pursuit of the common good is not relevant to a bank’s contractual power to alter interest rates. This difference may plausibly and justifiably feed through into a difference between the principles governing exercise of powers, or it may be that the same principle is applied differently. For example underlying a bank’s contractual power to alter interest rates may be a concern that the bank should be able to protect its own financial interests given changes in market conditions. It would be consistent with this purpose for the bank to act in its own self-interest (albeit not for any self-interest). In contrast it is never acceptable for a public official to exercise a discretion for their own interests, because the discretion is conferred only for the purpose of serving the common good. That there may be legitimate differences of this type between contractual and administrative law review is reflected in Lady Hale’s observation that ‘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’ ([31] and see [20]). On the other hand Lord Neuberger said that there was ‘considerable force in the notion’ that the approach to review of contractual powers ‘is, and at any rate should be, the same as the approach which domestic courts adopt to a decision of the executive’ and he considered all members of the Court were in agreement on this point ([103]). Whether one agrees with this view may depend on the level of abstraction at which one views the relevant principles. Further, as discussed below, Lord Neuberger’s observation was likely coloured by the nature of the specific decision-power under consideration in Braganza.

Variables. Thus we may expect differences in the principles or the way those principles are concretised and applied as between contractual and administrative law review. But it is also the case that the practice of review may, within each respective field, vary from one case to the next. Within administrative law review the applicable principles and how they are applied may vary between different contexts according to a range of variables. Traditionally statutory context was the most important variable however over time a host of other factors, not sourced within the statute, have been held to be potentially salient in setting the court’s overall approach. Similarly, in Braganza the majority Justices considered that context will shape the content of the implied term and the practice of contractual review. What was meant by ‘context’ however is relatively narrow. The Justices seemed very reluctant to look beyond the terms of the contract and importantly the type of contract and obligations under it.

Lord Hughes laid significant emphasis on the contract between Mr Braganza and BP being an employment contract. He considered that a more intensive approach to review was justified in the employment context, within which contracts are characterised by special obligations of trust and confidence, versus a purely commercial contract, not characterised by such obligations. Lady Hale also considered the employment context to be important. It makes sense that the manner of application of the principles contained in the implied term may vary with contractual context. If it is a defining feature of a particular contractual relationship that the parties have duties to consider each other’s interests, then it seems an irresistible proposition that the decision-maker must take into account, as one relevant consideration, the effect of the decision on the other party’s interests. As suggested by Lord Hughes the court may apply the reasonableness ground more strictly when reviewing an employer’s exercise of contractual discretion which seriously prejudices the employee’s interests. Context may have even greater ramifications, affecting not only the way principles are concretised and applied but also potentially altering the content of the implied term and obligations owed under it. Lady Hale considered the term could vary with contractual context, as did Lord Hughes who justified inclusion of the relevant considerations ground explicitly on the basis of the employment context ([54]). This opens up interesting possibilities. For example there may be an argument for the implied term to include a doctrine of legitimate expectations in the employment context on the basis that parties to a relationship of trust and confidence should be entitled to rely on each other’s representations as to how decision-powers will be exercised (albeit courts may be unwilling to introduce a new doctrine relating to representations alongside promissory estoppel).

That we ought to expect such variations is reinforced by the fact the rationales for the implied term may be more or less squarely engaged from one type of contract to the next. In the employment context there will often be a power disparity between employer and employer beyond the juridical inequality of the employer having certain powers of decision. As such there is a greater risk of abuse of power and thus potentially a need for stricter application of review principles and/or greater obligations.

It is worth noting that experience teaches us that care needs to be taken as to how contracts are categorised, where categorisations have normative implications. For example it would seem ill-advised to group together and take a uniform approach to review of commercial contracts given that class can be incredibly varied, and different sub-classes of commercial contract may routinely be characterised by significant power imbalances between the parties. It may thus be preferable to adopt more specific categories, such as employment, charterparty, tenancy, insurance and loan agreements.

In Braganza more general features of the case, such as the stigma associated with a finding of suicide, were not considered relevant in themselves. For example it was not held that a more intensive approach to review ought to be applied because the finding was a serious one of suicide that would impact Mr Braganza’s family. This likely reflects a concern not to be seen to be going outside the four corners of the contract. However, it seems clear from the judgments that the seriousness of a finding of suicide was a factor that weighed heavily upon the majority Justices. As such it is perhaps unsurprising that they found ways to render this factor legally salient. Lady Hale and Lord Hodge adopted the general view that some things are more likely to occur than others, and for a decision-maker to conclude that something inherently unlikely did in fact transpire the decision-maker would need strong evidence to support such conclusion (Lord Neuberger did not disagree). They both considered death by suicide was an occurrence of this kind, so that BP required strong evidence to reach the conclusion that Mr Braganza killed himself (which they did not have, according to the majority). Note that this is meaningfully different from the court holding that BP required strong evidence because suicide was a conclusion that could seriously affect Mr Braganza’s family.

Lord Hodge, in addition, went further suggesting that cogent evidence was required because of the employment context. He observed obiter that an employer would require cogent evidence before reaching a finding that would have serious consequences for the employee and his family, given the employer’s more general obligations of trust and confidence, and because an employment contract is a relational contract (see also Lady Hale at [32]). Note, however, that again there was no bare appeal to the seriousness of a finding of suicide; the stigma attaching to suicide was rendered legally salient by the nature of the contract.

In contrast to Lord Hodge, Lord Neuberger in the minority did not think the type of contract affected the applicable principles nor how they should be applied. He thought a sound decision was a sound decision regardless of context. This is a plausible and also an attractive view given the nature of the decision-power at stake in Braganza: it was a decision over facts, and good fact-finding is good fact-finding whether in an employment setting or a commercial setting. However, one would perhaps expect an approach closer to Lord Hughes’ approach in the case of review of a contractual discretion. As discussed above, we might expect the grounds to be applied differently in an employment context compared to a construction context.

Further considerations, familiar to administrative lawyers, were also mentioned in the judgments in passing. Lord Neuberger considered that the ‘expertise or experience’ of the decision-maker may alter the degree of respect the court would afford their decisions ([106]). This concern for relative institutional expertise seems one that is neutral as to statutory or contractual context and should be relevant wherever the courts supervise the decisions of a primary decision-maker. But what of constitutional constraints? In administrative law the courts must be careful how far they enter the substance of a decision on the basis that Parliament has bestowed the power on the administrative official, and the courts should not undermine Parliament’s will. This consideration is not relevant in a case such as Braganza. However, there is a similar type of constraint: it was the parties’ intention to confer the power of decision on the prescribed decision-maker and the courts should not undermine the intentions of the parties by themselves stepping into the decision-maker’s shoes. This reasoning led the Justices in Braganza to adopt a conception of the role of a reviewing court that mirrors that which has traditionally prevailed in administrative law: the court is performing a supervisory role, it must not supplant the role of the primary decision-maker, and its role is limited more to examination of decision-making processes than substance. This approach was reinforced by Lord Hodge’s view, echoing administrative law orthodoxy, that courts are better placed to scrutinise the process by which decisions are made as opposed to the substance of decisions which implicate qualitative judgements. However, as with the grounds enumerated in Braganza, arguably administrative law review itself has (for better or worse) moved beyond this ‘classical’ conception of a supervisory role, and especially the view that the courts are generally limited to reviewing process.

Lastly there was one further variable which influenced the majority Justices, which might be described as the ‘big beast’ factor. This was mentioned in passing once by each of Lady Hale and Lord Hodge, clearly influencing them. But the factor was not squarely confronted or justified as one relevant to exercise of contractual review. Lord Hodge framed the factor this way: ‘a large company such as BP is in a position to support its officials with legal and other advisory services and should be able to face scrutiny’ ([57] and see [39]). One can understand why the Justices saw this as a relevant factor: what might be reasonably expected of a small business might be different from what might be expected of a huge multinational. Further, this factor arguably engages the underlying rationale for the implied term – a stricter approach to review or more onerous requirements may be justified for an extremely powerful entity. However, this factor is arguably more controversial than others discussed above as it is not necessarily implicated by the terms of the contract, obligations under it, the contractual purpose, or the general type of contract, nor is it a characteristic feature of a supervisory jurisdiction. This brings into focus a key question going forward: to what extent will courts limit the relevant context, which may shape the application of review principles, to the terms and type of contract, and to what extent might they take into account factors beyond the contractual matrix? There may be no neat solution. On the one hand the term is based in considerations removed from the intentions of the parties, so why should application of that term only be informed by the contractual matrix? On the other hand the term is imported into a normative framework which takes the intentions of the parties as the starting-point.

Procedure and Remedies. It is not possible to examine procedural and remedial differences between administrative law and contractual review in any depth. However, several points should be briefly noted: (i) different remedies are available, in particular damages are available for breach of contract. (ii) the consequence of breach of the implied term is not clear: does it lead to voidness and if so what are the implications for claiming contract damages?; (iii) administrative review claims must generally proceed via review procedure, which provides special safeguards for public authorities, whereas a contractual claim will proceed via ordinary procedure (but quaere the procedural implications where a public authority is a defendant in a contractual review); (iv) standing will generally be limited to the parties within contract law (but note Mrs Braganza had standing as a third party beneficiary), whereas broad standing rules apply within administrative law. This difference, along with other differences such as the availability of damages, reflect that the nature of the duties imposed by the implied term are individualistic, owed to the other contracting party, whereas the duties owed in administrative law, such as duties of reasonableness and legality, are public duties owed to the public at large – as such a citizen may have standing simply by virtue of being a citizen. This is an important conceptual difference, which also reflects a core difference as to who the intended beneficiaries of the duties are in each context: specific individuals or the public as a whole.

It has not been possible to consider the implications of these developments for judicial review of administrative action where contract is an aspect of the factual matrix, however the reader will find a concise discussion of this point in Elliott and Varuhas, Administrative Law (5 ed OUP 2017) [4.5.5]. It has also not been possible to assess whether the term implied in Braganza and the Justices’ general approach to review are normatively justifiable. However, any justification would, I think, start with two propositions. (1) Contractual freedom is not absolute, nor should it be, and it has been and ought to be subject to constraints imposed on the basis of important public and other policies. (2) There has long been a ‘growing acceptance of a philosophy that all those who wield power should be accountable and should be subject to general principles of good administration’ (Borrie [1989] PL 552, 558-559), and this philosophy is one that ought to inform legal development.

The author would like to thank Mark Aronson, Mark Elliott, Jeff King, Andrew Robertson and Cheryl Saunders for comments. The usual disclaimer applies.

Jason N E Varuhas is an Associate Professor at Melbourne Law School.

(Suggested citation: JNE Varuhas, ‘Judicial Review beyond Administrative Law: Braganza v BP Shipping Ltd and Review of Contractual Discretions’, U.K. Const. L. Blog (31st May 2017) (available at https://ukconstitutionallaw.org/))