It has never been the law that contracting parties are entitled to enforce their rights only when acting reasonably. But, where a contract gives one party the power to make decisions that affect the rights of both, there is a clear potential for a conflict of interest – which is heightened if there is a significant imbalance of power between the parties.
The court cannot rewrite the parties’ bargain for them, or substitute itself for the contractually agreed decision-maker. But can it prevent such powers from being abused? The landmark decision of the Supreme Court in Braganza v BP Shipping Ltd [2015] UKSC 17 established that the court can imply a term that the exercise of a contractual discretion must be judged by the same principles that apply to the exercise of public law discretions – ie the discretion must be exercised honestly and in good faith, and not in an arbitrary, capricious or irrational way.
It is not possible to characterise every contractual decision as a discretion, to which Braganza applies. Furthermore, Monk v Largo Foods Ltd [2016] EWHC 1837 (Comm) confirms that rights to terminate, and to accept a repudiatory breach of a contract, are not the exercise of a discretion.
In Kwik Lets Ltd v Khaira [2020] EWHC 616 (QB) the High Court had to decide whether it was possible to imply a Braganza duty into a compromise agreement settling seven separate sets of proceedings involving numerous parties, arising out of the sale and purchase of plots of land, following allegations of fraud and dishonesty. The agreement required certain companies (not including Kwik Lets) to repurchase plots from the plot owners for £1.5m. The price was payable by instalments. But the companies were entitled to suspend payment if they considered the plot owners to be in breach of the settlement agreement – after serving formal notice of the breach. The companies took the view that there had been a breach of the confidentiality provisions in the settlement agreement, served the required notice and suspended the payments due under the agreement.
The plot owners asked the court to imply a Braganza duty into the settlement agreement, requiring there to be reasonable grounds for the service of such a notice. But the companies argued that a Braganza duty was completely inappropriate in the case of a provision that provides a remedy for an alleged breach of a contract. They argued that the provision conferred a contractual right, which was exercisable solely by reference to their own interests – as opposed to any public law duty, and that the provision could not be characterised as a contractual discretion.
The High Court ruled in favour of the companies. The agreement included machinery providing for a reference so that the court could decide whether there were grounds for the service of a default notice and for the suspension of payment. So the judge could not see how the companies could be described as the contractually agreed decision-maker charged with making a decision that affected the rights of both parties.
Consequently, the companies were absolutely entitled to act entirely in their own interests when serving a default notice, if they considered that there had been a breach of the settlement agreement and believed that action to be the best way forward.
Allyson Colby, property law consultant
