It is now ten years on from the judgment in Braganza v BP Shipping Ltd [2015] UKSC 17, in which it was decided that a term may be implied to ensure that a contractual discretion is exercised in a manner that is not unreasonable, irrational, arbitrary or capricious [30] (generally referred to as the “Braganza duty”). When and how it applies continues to be a source of controversy and importantly, disputes between commercial parties. 

Braganza itself was a public law case, concerning the exercise of an employer’s contractual discretion to deny death-in-service benefits to the widow of an employee. Nevertheless, since its inception it has been increasingly applied by the courts when construing commercial contracts and recent case law indicates that the ambit of its application may be expanding. 

Early applications demonstrated applicability in commercial contexts. Relatively soon after the decision in Braganza, the Court made it clear that the duty could and should be applied in commercial cases. For example, in Watson v Watchfinder.co.uk Ltd [2017] EQHC 1275 (Comm), the court held that an option, which could only be exercised with the consent of a majority of the board, was subject to the Braganza duty. The court found that the Board had not complied with the Braganza duty as the board held no real discussion of the issue, did not focus on the correct matters, proceeded on a mistaken view of what the option was about and was arbitrary in making its decision.

Shortly thereafter in BHL v Leumi ABL Limited [2017] EWHC 1871 (QB), the High Court held that decisions regarding the discretionary imposition of certain charges payable in general loan transactions may be subject to the Braganza duty,  as they involve an exercise of a discretionary power under the contract by a lender [40]. On the facts, the Court found that the lender’s exercise of its discretion to apply a 15% charge was wholly arbitrary, irrational and manifestly failed to take into account important relevant factors. 

The Courts have also implied the Braganza duty when construing discretionary variations in interests rates in loan documentation (see e.g. Alexander v West Bromwich Mortgage Company Limited [2017] 1 All ER 942 (CA)), although the courts have generally considered that a lender’s decision to increase variable interest rates for commercial reasons is not, by itself, generally a breach of the Braganza duty [56]. 

Recent application of the Braganza duty suggests no qualifying language is necessary for the Braganza duty to be implied. This year, the Court considered the Braganza duty again in Macdonald Hotels v Bank of Scotland [2025] EWHC 32 (Comm). In this case, the Court considered whether the defendant bank was subject to the Braganza duty in relation to certain clauses of the facility agreement, by which the claimant was prohibited from creating security or disposing of relevant assets without the bank's prior approval. The court reasoned that the reference to prior approval meant that consent might be requested by the claimant and in that situation the defendant bank would have to consider a range of options available to it – it was not open to the bank simply to refuse the request either without considering it or for reasons unconnected with its commercial interests [160]. For further information on the facts of this case, see our previous blog post, available here. 

As a more general proposition, the judge also remarked that “if as a matter of construction, the right is not to be regarded as absolute or unqualified then it is probable that a Braganza term will be implied” [154]. The judge considered this was the case for the contractual requirement he was construing, even though there was no express language making clear that the requirement was qualified (e.g. a statement that consent would not be unreasonably withheld, which is commonly included in commercial contracts). This decision therefore suggests that, where such express language is not used, the court is prepared to imply a duty requiring the party with the right to make a discretionary decision to act in a way that is not irrational, capricious or arbitrary - a surprise to some commentators and commercial practitioners.

The court also noted that where in principle a Braganza type term is to be implied, the effect and scope of the term to be implied will to some extent depend on the nature of the right in respect of which it is being implied [155]. On the facts, the court implied a “constrained and narrow” qualification to the lender-bank’s power in circumstances where both parties were sophisticated entities [168] and found that the duty was not breached simply because the lender-bank preferred its own commercial interest over those of the claimant [213].

Supreme Court obiter comments suggest potential applicability beyond contractual discretions. In a recent Supreme Court decision (Tesco Stores Ltd v USDAW and others [2024] UKSC) the Supreme Court considered implied restrictions on a contractual right to terminate in the context of a collectively negotiated payment clause in certain employment contracts. The ratio of the majority did not reason by reference to the Braganza duty, but in explaining why he considered that the termination right under the contract was not absolute, Lord Leggatt referred obiter to the Braganza duty and indicated that it may have a broader application than has been considered to date. Lord Leggatt remarked that where a provision confers a power to alter the legal relationship between the parties there is no conceptual reason why the exercise of such a power should be unconstrained [116]. He also reasons that whether or not a contractual power is binary or requires a choice from a range of options should be irrelevant as to whether the Braganza duty applies – potentially bringing absolute powers e.g. a veto power, or absolute termination rights into scope for the Braganza duty.

At this point, it is worth noting that parties have previously tested whether the Braganza duty can be implied into termination clauses in commercial agreements, but the courts have usually refused to accept that these are subject to an implied Braganza duty, reasoning that these are absolute rights (TAQA Bratani Ltd and others v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm)). Lord Leggatt’s obiter comments may provide a foothold to challenge the use of termination clauses and other absolute powers in commercial contracts, demonstrating that even ten years on, the Braganza duty’s scope and applications are not certain and is likely to continue to be a source of disputes between commercial parties. 

Faye Presland, Managing Associate and Bhavisha Sharma, Associate (India Qualified) 

If you would like to discuss this article further or have any questions, please get in touch with our Banking Litigation team.

The views and opinions expressed in this paper are the personal opinions of the authors and do not necessarily represent the views and opinions of Linklaters LLP.