A Contractual Obligation to Act Rationally? The Braganza Duty In An Irish Context

English courts have, for a number of years, recognised that there is an implied duty on a party exercising contractual discretion to do so reasonably or rationally, often referred to as a ‘Braganza duty’. This duty has been implied into contracts that exist in an entirely private law context. But what is the position in Ireland?

What is a Braganza Duty?

The so-called Braganza duty derives from the English Supreme Court decision in Braganza v BP Shipping Limited [2015] UKSC 17 (the ‘Braganza Judgment’). This was an employment law case in which no element of public law arose and which involved the exclusion of a death in service benefit where the employer was of the view that the deceased had died by suicide.

The English Supreme Court noted that while it is not for the courts to re-write bargain terms between parties, where the contract gives discretion to one party to make a decision that will impact rights held by both parties under the contract, there is a clear conflict of interest. It further noted that the conflict is heightened where there is an imbalance of power between the contracting parties, for example an employer/employee relationship and in these circumstances, the courts will imply a duty as to the manner in which those powers are exercised.

In Braganza, the court adopted a two-limb test for determining a breach of this duty; firstly, it will assess whether the correct matters have been taken into account by a party in reaching a decision to exercise its discretion under the contract, and secondly, the court will assess whether the result of this exercise of discretion is so outrageous that no reasonable decision-maker could have reached it.

The court held that a decision-maker is required to act with honesty, good faith and genuineness in arriving at a decision and the courts will imply a term into a contract requiring the relevant party to exercise its discretion in a way which is not arbitrary, irrational or capricious. As such, while the court recognised its existence, there is a high hurdle to establish a breach of the implied duty.

Braganza Duty in Ireland

A number of judgments of the Irish courts relating to banking and finance contracts and which predated the Braganza Judgment in England, rejected the argument that there was an implied duty to act reasonably. In Irish Bank Resolution Corporation Ltd (In Special Liquidation) v Morrissey [2013] IEHC 208 the High Court noted that it could not conduct a review as to the reasonableness or fairness of decisions taken by the plaintiff bank as it might do in a judicial review of a public body to which public law principles applied.

In Ryan v Danske Bank [2014] IEHC 236, which again involved a financial institution, the court rejected the argument that there was an obligation on the bank to act with a degree of reasonableness or fairness, which would more commonly be found in public law.

In Re Flynn Construction Co [2014] IEHC 458, the High Court again rejected the contention that the corporate defendant was obliged to act fairly and reasonably in the exercise of its discretion under finance documents.

However, a recent Supreme Court decision in O’Sullivan v The Health Service Executive [2023] IESC 11 considered the Braganza Judgment and adopted the test outlined in that decision. This case involved an appeal to a Court of Appeal decision granting the plaintiff an order of mandamus terminating his suspension and reinstating him to his position as a consultant. The relevant consultant contract had elements of private law and administrative law and so was not a wholly private contract matter, as had been the case in the Braganza Judgment. However, the Supreme Court noted that where discretion is to be exercised, it should be exercised in good faith and the decision reached should be one which is not arbitrary, capricious, perverse or irrational.

The Supreme Court noted that it follows that such a decision could be impugned not only where it was evidenced that no reasonable decision maker could have reached that decision but also where the decision-making process had failed to exclude extraneous considerations or to take account of all obviously relevant ones.

Conclusion

The Supreme Court in the O’Sullivan judgment noted that the Braganza Judgment arose in the context of a private law setting and that such an approach was “all the more” appropriate in the O’Sullivan case that had elements of private and administrative law. As such, the application of the Braganza test in a wholly private matter remains to be determined and future developments are keenly awaited.