BRAGANZA AND BEYOND: WHY RATIONALITY MATTERS IN EXERCISING CONTRACTUAL DISCRETION
Commercial contracts frequently grant one party discretionary powers – for example, the power to grant or withhold consent. These clauses can provide important flexibility, but English law has developed limits on how such discretions may be exercised.
The ‘Braganza duty’ derives its name from the 2015 judgment in Braganza v BP Shipping Ltd in which the Supreme Court held that a term may be implied into a contract to ensure that a contractual discretion is exercised in a manner that is not unreasonable, irrational, arbitrary or capricious. This is an exception to the general rule in English law that contractual rights are enforceable irrespective of whether they are exercised in a reasonable manner.
Since the Braganza decision, the duty has been increasingly considered by the courts when construing commercial contracts in a number of different contexts and, 10 years on, a High Court judgment from January 2025, Macdonald Hotels v Bank of Scotland, was the first to apply a Braganza duty to a consent right in a financing agreement.
We set out below the scope of the Braganza duty and discuss how it has been applied in Macdonald. We then consider some of the practical implications for commercial parties when negotiating and performing their contracts.
When is the duty implied?
A Braganza duty is likely to apply where one party is given sole discretion to make a subjective decision on a matter which affects both parties. There need not be a range of decisions available to that party: the duty can be implied even if there are only two options from which a party can choose.
Jan-Mar 2026 issue
Milbank LLP