Abdulali Jiwaji discusses the Braganza duty in New Law Journal

In Brief

• The courts are increasingly recognising duties of good faith, especially in ‘relational’ contracts and where discretion is exercised.
• The Braganza duty requires discretionary decisions under contracts to be rational, honest and not arbitrary, and may be relevant across a number of sectors, including banking and insurance.
• Clear and prescriptive contract terms will help to reduce the scope for disputes, and leave less room for implied good faith or discretion-based duties.

For English law contracts, the concept of a duty of good faith has traditionally not been as relevant as in civil law jurisdictions. In recent years though, the courts have displayed more willingness to give recognition to such duties.

The types of contracts to which a duty of good faith applies is limited, but interestingly, we have seen the introduction of public law standards in respect of contractual decision-making, following the Supreme Court decision in Braganza v BP Shipping Ltd [2015] UKSC 17, [2015] 4 All ER 639.

Public law duties in private contracts?

The courts have shown themselves as more likely to imply a good faith duty in a ‘relational’ contract, such as in a joint venture arrangement. These are the types of contract that normally involve a degree of trust and confidence, and expectations of loyalty, collaboration and commitment.

But if a Braganza duty applies, some decisions made pursuant to contractual provisions now also have to be assessed by reference to the standards expected of decisions made by governmental bodies. So if a contract includes a decision-making process with the exercise of a discretion, that must be undertaken in good faith, and must not be done arbitrarily or capriciously.

Braganza duty rejected

The following are examples of cases in which the court has rejected the argument that a Braganza duty arises.

Shurbanova v Forex Capital Markets Ltd [2017] EWHC 2133 (QB): The court was considering rights accrued to a broker if it considered that a client was trading abusively. The court said that in the event of abusive trading, the broker had a number of options—for example, revoking the trades, adjusting the client’s account and raising an event of default. But this did not raise a discretion of the Braganza type—for example, an evaluation by a decision maker which affected the interest of both parties, and which would give rise to a potential conflict of interest.

UBS AG v Rose Capital Venture Ltd [2018] EWHC 3137 (Ch): The borrower claimed a Braganza duty in relation to a decision by a bank to require payment in full under a mortgage contract on three months’ notice. The court held that the decision to demand repayment did not involve a conflict of interest, as the action was solely for the benefit of the bank.

Lombard North Central Plc v European Skyjets Ltd (in liquidation) [2022] EWHC 728 (QB): The court found that a contractual termination right could not be analysed in terms of a discretion being exercised. As a matter of fact, the lender had been entitled to terminate as an event of default had occurred. Once the event of default had arisen, the lender’s decision to exercise that right was not subject to a Braganza duty.

Braganza duty applied

By contrast, in the following, the court found that a Braganza duty applied.

BHL v Leumi APL Ltd [2017] EWHC 1871 (QB): The relevant clause allowed the finance provider under a receivables financing agreement to recover fees of ‘up to 15%’ of the receivables recovered. The court found that there was a discretion which would need to be exercised in a way that was not arbitrary, capricious or irrational. On a review of the process, the court found that the finance provider had simply charged 15% without even considering what the actual cost of collection would be, and whether it should charge less.

UK Acorn Finance Ltd v Markel (UK) Ltd [2020] EWHC 922 (Comm): In relation to an insurance policy, the question was whether the insurer could invoke an unintentional non-disclosure clause to avoid paying out on a claim. The court found that in this case, the non-disclosure clause placed the burden on the insured to establish that any misrepresentation of non-disclosure was innocent. This had the effect of conferring a decision-making power on the insurer, and it was necessary to imply a term that the insurer must not exercise that power arbitrarily, capriciously or irrationally.

Macdonald Hotels Ltd v Bank of Scotland Plc [2025] EWHC 32 (Comm): Under a loan facility, there was a restriction on the borrower from, among other things, disposing of secured properties without the prior written consent of the lender. So, the borrower was entitled to ask for consent to a change in the security. The court said that in considering a request, neither party could have intended that the lender could refuse consent for reasons unconnected with its own commercial best interest, or to refuse consent when no reasonable entity in the position of the lender could have refused.

Take away points

The Braganza duty can become relevant across a number of different types of contract. Features that will go towards upholding the position of the party exercising a contractual discretion include: