Questions remain regarding the New Zealand courts’ approach to assessing contractual discretions

15 September 2023

Contracts often give one party a discretion as to whether to exercise certain rights. The UK courts have previously imported public law standards into their assessment of such discretions – but could the New Zealand courts follow suit? The Court of Appeal (the Court) looked at the issue, but did not answer that question when it released its decision in Woolley v Fonterra Co-operative Group Limited in late June.1 The case, an appeal from the High Court decision we have previously discussed here, saw the Court consider the UK Supreme Court’s extension of the ‘default rule’ regarding the exercise of contractual discretions in Braganza v BP Shipping Limited.2

It concluded that the appeal in question was not “an appropriate vehicle for either general endorsement or rejection of the Braganza approach”.3 However, contracting parties should take note of the Court’s comments emphasising the high threshold that must be met before the courts will intervene in relation to the exercise of a contractual discretion.

For context, we set out a brief summary of the High Court’s decision and outline the Court of Appeal’s position.

Discussion of the ‘default rule’ in the High Court

The ‘default rule’ regarding the exercise of contractual discretion provides that a court may intervene in the exercise of that discretion if a party exercises contractual discretion “arbitrarily, capriciously, or unreasonably”.4 However, as noted by the High Court, the UK Supreme Court in Braganza expanded the rule to import public law considerations of reasonableness into the exercise of contractual discretions, including requirements that the decision-making process be reasonable, take into account all mandatory relevant considerations and ignore irrelevant considerations.

The High Court declined to follow the expanded default rule on the basis that Woolley involved a commercial contract, rather than an employment contract as was the case in Braganza. In any event, the Court determined it did not need to rule on the applicability of Braganza in New Zealand, because the default rule as it stood was sufficient to find Fonterra had not acted unreasonably.

However, Isac J did suggest that the default rule could ultimately be replaced by a new, interpretive approach to exercises of contractual discretion, based on the purpose for which a discretion is granted to a contracting party.

Discussion of the ‘default rule’ in the Court of Appeal

As noted, the Court of Appeal did not make a ruling on whether New Zealand should adopt an expanded default rule. It followed the High Court in noting that the present appeal centred on a commercial contract, rather than an employment case like Braganza which “involve[d] a relational contract of a different character from an ordinary commercial contract”.5

However, the Court’s discussion revealed that, as the UK Supreme Court did in Braganza, the Court took into account the nature of the contract when considering whether Fonterra’s exercise of discretion reached the threshold for intervention (in this case, arbitrariness, capriciousness or unreasonableness). Specifically, the Court noted that:

    1. There was an “asymmetry of power in the parties’ relationship”, as “Fonterra is a dairy co-operative which must act in the interests of its many farmer shareholders [and] Mr Woolley is an individual shareholder”.6
    2. If Fonterra exercised its contractual discretion, the implications for Mr Woolley would be “grave” as he would lose a significant revenue stream.7
    3. Despite this, “Mr Woolley was not in some special category” when contracting with Fonterra, because it needed to consider the implications of its actions for all its members.8

The Court concluded that Fonterra’s decision was “not only rational but unsurprising”.
Standing back, the decision confirms two key points about the extent of the default rule relating to contractual discretion:

    1. the threshold for the courts to intervene is high, as previously emphasised in the High Court; and
    2. the nature of the contract and the relationship between the contracting parties is relevant in determining whether that threshold is met.

Finally, the Court of Appeal did not consider whether Isac J’s ‘interpretive’ test was the correct approach to exercises of contractual discretion. The Court noted that ultimately, greater discussion on the conceptual underpinnings of Braganza “must await another day”.9

Where to next?

The Court of Appeal’s ruling has already been considered in the recently released decision in Christian Church Community Trust v Bank of New Zealand.10 In that case, the Christian Church Community Trust, more commonly known as Gloriavale, sought an injunction to prevent BNZ from terminating its banking relationship with companies/entities associated with Gloriavale. BNZ argued, including based on other cases regarding banks, that it had an absolute contractual discretion and so was not subject to even the default rule.

Justice Cull did not need to finally decide the point (as this was an application for an interim injunction); however, she found that it was reasonably arguable that either the default rule or the Braganza approach may apply to the banking relationship. Justice Cull then went on to consider whether BNZ’s decision was procedurally fair and substantively reasonable on either test (such that there could be no serious question to be tried which would defeat the application). On reasonableness, including under the Braganza test, the Judge considered that relevant factors would be the risks to BNZ’s banking operation (noting that, while Gloriavale’s practices were condemned by the Employment Court, they did not involve criminal behaviour such as trafficking), the reasonableness of unilaterally terminating the banking contract when there were no other banking services available to Gloriavale, leaving them effectively unable to operate their business, and whether banking is an essential service importing public interest obligations on BNZ. While she did not have to finally decide these points, Justice Cull held that they were seriously arguable, such that an injunction should be granted.

This case suggests that the issue of the default rule versus the Braganza approach may need to be revisited in the near future, while giving some insight into the sorts of factors a court may look to if ultimately required to consider the reasonableness of a contractual discretion.

If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.

[1] [2023] NZCA 266.
[2] [2015] UKSC 17.
[3] At [112].
[4] Abu Dhabi National Tanker Co v Product Star Shipping Ltd (No 2) [1993] 1 Lloyd’s Rep 397 (CA) at 404.
[5] At [112].
[6] At [104].
[7] At [108].
[8] At [107].
[9] At [115].
[10] [2023] NZHC 2523.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.