Many commercial contracts include provisions entitling one of the parties to exercise their discretion (often in unqualified terms). However, in so exercising a discretion, do any qualifications apply?

In the recent case of Watson v, the court had to consider the exercise of a discretion in the context of a share option. Watchfinder argued that its board had an unconditional right to veto the exercise of the share option. The court rejected this argument and followed the earlier decision of the Supreme Court in Braganza v BP Shipping Ltd. 

In Bragnaza, in a majority decision, Lady Hale noted there were two limbs to be applied when considering an exercise of discretion; namely:

  • The decision making process: whether the right matters were taken into account in reaching the decision; and
  • The outcome: even though the right matters were taken into account, whether the result was so outrageous that no reasonable decision-maker could have reached it.

As to the second limb, Lady Hale stressed that the court should not substitute itself for the decision maker exercising the discretion and acknowledged that it would not be appropriate to expect a lay person to exercise the same expert and professional analysis that was demanded by a court. However, Braganza confirms that a party exercising a discretion must make sure that a reasonable outcome is achieved and that the right matters were taken into account in reaching the decision made.

In Watchfinder, the agreement (as would probably be expected) gave no guidance on what might be a reasonable basis to refuse consent. Notwithstanding, the court held that the exercise of the discretion, in this case a right to veto, was required to be exercised in a way that was not arbitrary, capricious or irrational in the public law sense. On the facts, the court found that in so exercising, Watchmaker had given barely any consideration to the exercising of the discretion.

Watchfinder is a reminder that the exercise of a discretion is not an absolute right. Rather, the party exercising the discretion must take into account the right matters and ensure that a reasonable outcome is achieved. Against this, as was the case in Watchfinder and Braganza, is the need to balance the inherent conflict of interest which often arises when exercising any discretion.