Must your opinion be reasonable?

Friday 20 March 2015

Authors: Ian Gault, Andy Glenie and Delia Cormack

​​Yes, if you are exercising a contractual power to form an opinion on a question of fact. So says a recent decision of the UK Supreme Court.

Braganza v BP

Mr Braganza was the chief engineer on a BP oil tanker. He disappeared one night in the middle of the North Atlantic.

His contract with BP provided that it would pay his widow US$230,000 death in service benefits unless, “in the opinion of the Company or its insurers”, his death was caused by wilful act, default or misconduct. Following an internal investigation, BP concluded that Mr Braganza had most likely committed suicide by throwing himself overboard. It refused to pay the death benefits.

Mr Braganza’s widow sued BP. By a 3-2 majority, the Supreme Court found in her favour.1

Implications

Several key points emerge from the case:

  • A contractual term which gives one party power to make a decision affecting the rights of both parties presents the decision-maker with a clear conflict of interest. To avoid abuse, the courts are likely to imply a term into the contract as to how the power may be used.

  • Such implied terms vary according to context, but often hold a contractual decision-maker to a standard similar to that which administrative law imposes on public decision-makers.

  • A contractual decision-maker must therefore act with honesty, good faith and genuineness (rather than arbitrariness, capriciousness, perversity or irrationality). In particular, a decision may fail if:

    • the decision-maker took into account irrelevant matters, or failed to take into account relevant matters; or

    • the decision was so outrageous that no reasonable decision-maker could have reached it.

The Supreme Court held that BP did not have sufficient evidence to conclude that Mr Braganza had taken his own life. Its decision was therefore unreasonable, and was overturned. The case serves as a reminder for New Zealand organisations that contractual powers to determine matters of fact must be undertaken honestly, fairly and in accordance with the parties’ agreement.2


1 Braganza v BP Shipping Limited [2015] UKSC 17.

2 There is also considerable case-law affecting the exercise of other contractual discretions (such as the granting of consent to assignments, or the exercise of a unilateral option to renew a contract), or the implication into a contract of a general duty of good faith.


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.

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  • Ian Gault

    Partner and Deputy Chair Auckland
Related areas of expertise
  • Litigation and dispute resolution