The Braganza Duty in Banking Litigation (Implied Contractual Term to Exercise Discretion Fairly)

This judgment (Braganza v BP Shipping Ltd [2015] UKSC 17) remains a cornerstone in UK administrative and contract law, establishing that decision-makers must act fairly and reasonably when exercising discretion. In the context of banking litigation, this duty ensures that banks and financial institutions adhere to procedural fairness when making decisions affecting customers or directors. The Braganza duty complements statutory frameworks such as the Companies Act 2006 and the Insolvency Act 1986, which govern conduct in insolvency and corporate governance.

The Braganza Duty Explained

The Braganza duty, established in Braganza v BP Shipping Ltd [2015] UKSC 17, originated from a dispute over BP’s refusal to pay a death benefit to the widow of an engineer who disappeared from an oil tanker. BP concluded he had committed suicide, relying on a contractual clause allowing denial of benefits if death resulted from a “wilful act.” The Supreme Court ruled BP’s decision unreasonable, emphasising that discretion must be exercised fairly, rationally, and with proper inquiry. This precedent now underpins challenges to banking decisions affecting insolvent companies and directors.

In banking litigation, disputes often arise when financial institutions exercise discretion during corporate distress. For example, in Macdonald Hotels v Bank of Scotland [2025] EWHC 32 (Comm), the Commercial Court considered claims brought by Macdonald Hotels Limited (MHL) against Bank of Scotland Plc (BOS) following the forced sale of several hotel assets, including the Randolph Hotel in Oxford. MHL alleged that BOS had acted in bad faith and capriciously by refusing to consent to alternative debt repayment proposals, effectively forcing the sale of these assets at historically low market prices.

However, the court ultimately rejected MHL’s claims, finding that BOS had acted within its commercial interests and had not breached the implied duty of good faith. The judgment clarified that while the bank must exercise discretion honestly and rationally, it is entitled to prioritise its own commercial interests without balancing those against the borrower’s interests. This case illustrates the nuanced application of the Braganza duty in banking contracts, particularly where lenders hold qualified rights to consent to asset disposals or security releases.

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Key Findings in Braganza-Related Banking Litigation

Rejection of Arbitrary or Irrational Decisions
The judgment in Braganza clarified that discretion must be exercised rationally and not arbitrarily. Decisions made without adequate reasoning or ignoring relevant considerations breach the Braganza duty. In UBS AG v Rose Capital Ventures Ltd [2018] EWHC 3137 (Ch), the High Court scrutinised the lender’s decision-making process and held that while the lender had absolute discretion to call in the loan, the exercise of that discretion must not be irrational or capricious. However, the court also recognised that in cases where the lender acts for its own commercial benefit, such as terminating a loan, the Braganza duty may not apply in full, provided the decision is not irrational.

Judicial Oversight of Discretion
The courts have confirmed their supervisory role to ensure that discretionary powers are not abused, particularly in contexts affecting insolvency estates and directors’ personal liabilities. This oversight aligns with the principles in the Insolvency Act 1986 and Companies Act 2006, reinforcing accountability. For instance, in CMC Spreadbet PLC v Tchenguiz [2022] EWHC 1640 (Comm), the court applied the Braganza principles to assess whether a spread-betting firm had acted rationally and fairly in closing out a trading account, ultimately finding no breach of duty but underscoring the importance of judicial review of discretion.

Evolving Scope of the Braganza Duty in Banking Contracts

Recent case law has refined the application of the Braganza duty in banking litigation, particularly concerning the nature of the discretion exercised by lenders. The High Court has clarified that not every exercise of contractual discretion by a bank attracts an implied Braganza duty. In UBS AG v Rose Capital Ventures Ltd [2018] EWHC 3137 (Ch), the court held that a lender’s exercise of an absolute contractual right such as demanding early repayment of a loan is not subject to an implied duty of rationality or fairness under Braganza. This is because such rights are typically exercised for the lender’s own commercial benefit without requiring evaluative judgment or fact-finding, which are hallmarks of the Braganza duty.

Similarly, the High Court has confirmed that a lender acting in its own commercial best interests does not amount to irrationality under Braganza principles. This distinction is particularly important in commercial lending where parties of equal bargaining power negotiate clear terms, including absolute discretion clauses, which courts are generally reluctant to qualify with implied duties. For example, in TAQA Bratani Ltd v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm), the court refused to imply a duty of good faith or Braganza-style constraints on the exercise of absolute termination rights, emphasising the parties’ freedom to contract on clear terms without judicial interference.

Nevertheless, where a bank exercises discretion involving evaluative judgments or fact finding such as consenting to the sale of secured property the Braganza duty remains relevant.

In summary, the Braganza duty applies to contractual discretions requiring reasoned judgment and procedural fairness but does not extend to the exercise of absolute contractual rights for commercial benefit. This nuanced approach balances protecting parties from unfair decision-making while respecting commercial certainty and freedom of contract.

Practical Guidance on Complying with the Braganza Duty

For banks and financial institutions, compliance with the Braganza duty requires that contractual discretion be exercised honestly, in good faith, and in a manner that is rational and procedurally fair. As Lord Hodge observed in Braganza v BP Shipping Ltd [2015] UKSC 17, when one party has a unilateral right to make decisions that affect the other, the law implies limits to prevent arbitrary or capricious outcomes. This means decision-makers must identify and consider relevant matters and disregard irrelevant ones.

In volatile or uncertain market conditions, banks should document their decision-making thoroughly and consider relevant regulatory obligations, such as the FCA’s Conduct of Business Sourcebook Rules (COBS). Failure to comply with such rules can compound breaches of the Braganza duty.

For directors and companies facing adverse banking decisions, understanding the limits and scope of the Braganza duty is critical. Legal advice should focus on whether the bank’s discretion was exercised within the bounds of rationality and procedural fairness, and whether any breach caused material prejudice.

Implications of Braganza Duty in UK Banking and Insolvency Litigation

The Braganza duty acts as a procedural safeguard protecting directors and insolvent companies from arbitrary or unfair decisions by banks. It reinforces judicial oversight of discretionary powers in commercial contracts, ensuring decisions impacting insolvency outcomes are made transparently and reasonably.

However, the evolving case law illustrates that the duty is not a blanket obligation. Courts distinguish between discretionary powers involving evaluative judgment and absolute contractual rights exercised for commercial benefit. This nuanced approach balances protecting parties from abuse while respecting commercial certainty.

Defending Claims Involving Braganza Duty

Defending claims invoking the Braganza duty requires meticulous review of the bank’s decision-making process and contractual terms. Solicitors should obtain comprehensive evidence, including internal communications and minutes, to demonstrate that discretion was exercised rationally and in good faith.

Early engagement with expert witnesses on banking practices and corporate governance can strengthen defences.

Where the bank’s discretion is exercised under absolute contractual rights, emphasising the commercial context and negotiated terms is vital to rebut claims of irrationality or unfairness.