Recent Cases on the Braganza duty and the exercise of discretion: an intensification of scrutiny of the decision making process

June 12th, 2017

It used to be thought that in exercising a contractual discretion accorded to it, in relation for example to a bonus or a share plan, an employer could, so long as it addressed the matter honestly and genuinely, make subjective qualitative judgments which would only be reviewable if they were perverse or illogical.
Braganza appears to have changed this.  The decisions since Braganza appear to show an intensification of the scrutiny given to the employer’s decision making process.The majority of the SC in Braganza were not content that their review of BP’s decision making process should be limited to determining whether it reached the low standard of a requirement that there should merely be some logical connection between the evidence and the ostensible reasons for the decision. They considered that they could interfere with the decision on the grounds that it was arrived at without sufficiently cogent evidence. In other words, they considered the objective reasonableness of the decision made. To enable them to do so, they made a finding that the prior cases showed that in importing the Wednesbury unreasonabless standard from public law into the default term that the law implies to regulate the exercise of a contractual discretion, the courts had imported both limbs of the Wednesbury test. The first limb focuses on the decision-making process—whether the right matters have been taken into account in reaching the decision. The second focuses upon its outcome—whether even though the right things have been taken into account, the result is one that no reasonable decision-maker could have reached. They also found that a decision making function entrusted to an employer must be exercised in accordance with the implied obligation of trust and confidence; that employers are expected to know how they should approach making important decisions which they are empowered to make under the terms of the employment contract and where the discretion is one involving an element of fact finding they should know that cogent evidence is required to form a positive opinion that an improbable event has occurred.

The recent cases since Braganza show that the decision has led to challenges being brought based on the reasonableness of the employer’s decision making process itself as much as aspects of illogicality or perversity of reasoning.
In the most recent -Watson v Watchfinder [2017] EWHC 1275 (Comm)- HHJ Waksman QC referred to the Braganza duty as requiring the use of “a proper process for the decision in question”. That would he said require taking into account the material points and not taking into account irrelevant considerations. It would also entail not reaching an outcome which was outside what any reasonable decision-maker could decide, regardless of the process adopted. The process followed in that case was not compliant with the Braganza duty because there was barely any considered exercise of the discretion. One director spoke and the other directors concurred. It was all done very quickly in a difficult atmosphere and as the last item on the agenda. Evidence about prior consultation was unsatisfactory.  The directors laboured under a misapprehension that the discretion amounted to an absolute right of veto. There was no consideration given to one manifestly relevant consideration. There was no real discussion, it did not focus on the correct matters, and it proceeded on a mistaken view of what it was about.
Hill v Niksun  [2016] EWCA Civ 115 concerned a discretion exercised under a discretionary sales commission plan. The CA decided that the absence of evidence from the decision maker as to the process that had been adopted and the way in which the discretion was exercised rebutted any assumption that the decision was rational. The CA heard argument on whether Braganza had changed the burden of proof. It found that although the burden of proof still rested on the affected person to show there were grounds for thinking that the decision maker’s exercise of discretion was not reasonable, the evidential burden then shifted to the decision maker to show that its decision was reasonable. Where the decision maker had not led evidence as to the way the decision was taken, a court could not assume that the decision was a rational one. The judge could not decide that the decision was taken rationally unless he at least knew what was actually taken into account.

In Simpkin v Berkeley, [2016] EWHC 1619 (QB), the facts were at the other end of the evidence scale. The Defendant’s RemCo and Board had exercised discretions under the terms of certain Share Plans after receiving and hearing full and detailed legal advice on the nature of the discretions and of potentially relevant matters, all of which was carefully minuted. The Claimant challenged the exercise of those discretions as irrational because the decision makers had, it was alleged, listened to untested, unsupported, insubstantial anecdotal evidence given orally and informally of alleged performance and conduct issues, none of which had been put to the claimant and nor was it supported by evidence of sufficient cogency to support the serious allegations made. The Claimant alleged that the implied terms regulating the exercise of discretion post-Braganza include that it will be exercised taking into account matters that ought to be taken into account, and in accordance with a fair procedure which allows the person affected to have a say and to permit any allegations made to be properly tested. Foskett J. ordered the trial of a preliminary issue as to whether decisions disclosed by the minutes of the Defendant’s Remuneration Committee and Board of Directors were Wednesbury unreasonable.

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