[2024] UKUT 120 (LC)

The story starts with the decision in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, a decision fundamental to administrative law. Lord Greene MR explained at p.233-4 that the court could review decisions taken by a public authority in exercise of statutory powers on two bases:

“The court is entitled to investigate the action of the local authority with a view to seeing whether they have taken into account matters which they ought not to take into account, or, conversely, have refused to take into account or neglected to take

into account matters which they ought to take into account. Once that question is answered in favour of the local authority, it may be still possible to say that, although the local authority have kept within the four corners of the matters which they ought to consider, they have nevertheless come to a conclusion so unreasonable that no reasonable authority could ever have come to it. In such a case, again, I think the court can interfere.”

So the court in reviewing administrative decisions is looking both at process – has the decision-maker taken the right things into account? – and also, in a very limited sense, into outcome in the very narrow sense of what we have come to call Wednesbury unreasonableness. In this context the court cannot substitute its own view of reasonableness; it can intervene only where the decision is “so absurd that no sensible person could ever dream that it lay within the powers of the authority” (Lord Greene MR at p.229).

Turning now from administrative discretion to contractual discretion, Mr Morris explained that the state of the law prior to the Supreme Court’s decision in Braganza was summarised by Rix LJ in Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116 at paragraphs 60 to 66. I need not go through all the cases to which he referred; his conclusion is at paragraph 66:

“It is plain from these authorities that a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused. Reasonableness and unreasonableness are also concepts deployed in this context, but only in a sense analogous to Wednesbury unreasonableness, not in the sense in which that expression is used when speaking of the duty to take reasonable care, or when otherwise deploying entirely objective criteria: as for instance when there might be an implication of a term requiring the fixing of a reasonable price, or a reasonable time. In the latter class of case, the concept of reasonableness is intended to be entirely mutual and thus guided by objective criteria.”

So a distinction is made between “reasonable” in the very narrow Wednesbury sense and objective reasonableness which is an “entirely mutual” concept – in other words one which takes into account the interests of both parties. It may not be a synonym with “fair”, but an important difference can be captured by saying that an unfair decision might be Wednesbury-reasonable but will not be objectively reasonable. The distinction was illustrated in Paragon Finance plc v Nash and another [2001] EWCA Civ 1466 where a mortgagee had a discretion to vary an interest rate; the question was whether there was an implied term in the contract that the discretion would be exercised reasonably. The answer was yes, Dyson LJ explained, but in a limited, Wednesbury sense, but not in a sense that required the lender to consider the interests and point of view of the borrower. This was not objective, mutual reasonableness:

“41.

… It is one thing to imply a term that a lender will not exercise his discretion in a way that no reasonable lender, acting reasonably, would do. It is unlikely that a lender who was acting in that way would not also be acting either dishonestly, for an improper purpose, capriciously or arbitrarily. It is quite another matter to imply a term that the lender would not impose unreasonable rates. It could be said that as soon as the difference between the claimant's standard rates and the Halifax rates started to exceed about two percentage points the claimant was charging unreasonable rates. From the defendants' point of view, that was undoubtedly true. But, from the claimant's point of view, it charged these rates because it was commercially necessary, and therefore reasonable, for it to do so.

42.

I conclude therefore that there was an implied term of both agreements that the claimant would not set rates of interest unreasonably in the limited sense that I have described. Such an implied term is necessary in order to give effect to the reasonable expectations of the parties.

Those two different senses of reasonableness have been distinguished by referring to the narrower or limited standard as “rationality” – which is something of a relief since much mischief is caused when the same word is used to describe two importantly different concepts. Lord Sumption explained in Hayes v Willoughby [2013] UKSC 17 at paragraph 14:

“Rationality is a familiar concept in public law. It has also in recent years played an increasingly significant role in the law relating to contractual discretions, where the law's object is also to limit the decision-maker to some relevant contractual purpose: see Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyds Rep IR 221 , para 35 and Socimer International Bank Ltd v Standard Bank Ltd [2008] Bus LR 1304 , para 66. Rationality is not the same as reasonableness. 

In Braganza v BP Shipping Ltd and another [2015] UKSC 17 the Supreme Court had to determine the standard of review to be applied to a decision by a shipping company not to pay a death in service benefit to the widow of a sailor, on the grounds that he had committed suicide. That discretion was unqualified in the contract. Baroness Hale set out the issue as follows:

“The particular issue is the proper approach of a contractual fact-finder who is considering whether a person may have committed suicide. Does the fact-finder have to bear in mind the need for cogent evidence before forming the opinion that a person has committed suicide? The general issue is what it means to say that the decision of a contractual fact-finder must be a reasonable one. There are many statements in the reported cases to the effect that the principles are well settled and well understood, but this case illustrates that all is not as clear or as well understood as it might be.”

Baroness Hale referred with approval to the conclusion set out by Rix LJ at paragraph 66 of Socimer, quoted above. She then quoted from the decision of Lord Sumption JSC in Hayes v Willoughby [2013] UKSC17, where he distinguished between rationality and reasonableness. In paragraph 14, of which I quoted part above, he went on to describe the test of rationality as a matter of process which

“applies a minimum objective standard to the relevant person’s mental processes”, importing “a requirement of good faith, a requirement that there should be some logical connection between the evidence and the ostensible reasons for the decision and (which will usually amount to the same thing) an absence of arbitrariness, of capriciousness or of reasoning so outrageous in its defiance of logic as to be perverse.”

Baroness Hale observed that that characterisation of rationality encompasses only one aspect of the test described by Lord Greene MR in Wednesbury, which examines the decision-maker’s process but also assess whether the outcome of that process is one so absurd that no reasonable decision-maker could have reached it.

The issue the Supreme Court had to decide in Braganza was whether a lower standard is to be applied to contractual decision-making than is applied to administrative decisions; in other words, is it a lower standard than Wednesbury in both its limbs? The answer was no: the decision-maker in that case had to follow a rational process, as well reaching an outcome that was rational in the Wednesbury sense (but did not have to be objectively reasonable in the sense of mutuality or even-handedness between two parties). The issue in Braganza was about process rather than about outcome; but Baroness Hales’ explanation was a useful reminder that rationality is about outcome as well as process albeit in the limited, Wednesbury sense. Baroness Hale concluded at paragraph 30:

“It is clear, however, that unless the court can imply a term that the outcome be objectively reasonable - for example, a reasonable price or a reasonable term - the court will only imply a term that the decision-making process be lawful and rational in the public law sense, that the decision is made rationally (as well as in good faith) and consistently with its contractual purpose. For my part, I would include both limbs of the Wednesbury formulation in the rationality test.”

Lord Hodge at paragraph 52 and Lord Neuberger at paragraph 103 agreed with that approach.

In Hawk Investment Properties Ltd v Eames and others [2023] UKUT 168 (LC) I referred to Lord Sumption’s analysis and concluded that “rationality is therefore focused on process, while reasonableness is a higher standard focused on the outcome of that process.” That does not quite give the whole picture: as Baroness Hale’s analysis in Braganza demonstrates, there is a limited element of outcome in the analysis of rationality, although the major focus is on process.