The plaintiff sought to claim under the rules of the P and I club of which it was a member. After defining the risks in respect of which members were to be indemnified, the rules made the following proviso in Rule 8(k): ‘A member shall at the discretion of the Committee, be liable to have a deduction made from any claim where the Committee shall be of opinion that the Member has not taken such steps to protect his interests as he would have done if the ship had not been entered in this class. This deduction shall be of such an amount as the Committee in its discretion shall decide.’
Held: Whenever a discretion is afforded to a party by contract it is an implied term that it must not be exercised unreasonably. The common law principles applicable to the exercise of a contractual discretion include fairness, reasonableness, bona fides and absence of misdirection in law.
Mocatta J said: ‘Where, as here, the success or failure of a claim depends upon the exercise of a discretion by a lay body, it would be a mistake to expect the same expert, professional and almost microscopic investigation of the problems, both factual and legal, that is demanded of a suit in a Court of law’.
and ‘To the exercise of such discretion the common law principles must apply and these undoubtedly include fairness, reasonableness, bona fides and absence of misdirection in law’
‘The next point of law arising is whether a deduction of 100 per cent or any other lesser figure that cannot be shown at least approximately to amount to the quantum of claim that would or might have been avoided had the member acted as a prudent uninsured owner can be deducted. Would such ill-founded deduction be invalid as being a penalty? I confess it came as a surprise to me to hear [counsel] argue that the penalty doctrine had any place in English law other than in connection with the question whether a clause in a contract providing for payment by the party in breach of an agreed sum was a genuine pre-estimate of pecuniary loss or was included as a term in terrorem and, therefore, unenforceable as a penalty. The authority upon which [counsel] relied was Gilbert Ash . . Having given this recent authority careful consideration, I am unable to take the view that it has any application here or to insurance law generally. Here the Committee is given a complete discretion under r. 8(k) . . and while they must comply with the general principles applicable to the exercise of such discretions previously discussed, in my opinion they cannot be faulted on the basis of the law against penalties if they decide . . to make a deduction of 100 per cent under r. 8(k) . . One may further ask how is the penalty argument to be reconciled with the rules in insurance law about warranties . . which must be complied with whether material or not, or about non-disclosure of material facts . . where the insurers may avoid the contract although the fact not disclosed, and quite innocently, has no causal relation to the loss in respect of which indemnity is sought? Apart from insurance law, there are innumerable cases in the books where a defendant, because, for example, of a sudden fall in the market price of a commodity or of freight or hire rates, rescinds the contract on the basis of the breach of a condition precedent, thereby causing heavy loss to the other party, who is left without a remedy, whereas the breach of the condition precedent has of itself caused no loss or damage to the party relying upon it.’
 1 Lloyds Rep 557
England and Wales
Applied – Associated Provincial Picture Houses Ltd v Wednesbury Corporation CA 10-Nov-1947
Administrative Discretion to be Used Reasonably
The applicant challenged the manner of decision making as to the conditions which had been attached to its licence to open the cinema on Sundays. It had not been allowed to admit children under 15 years of age. The statute provided no appeal . .
Cited – First National Tricity Finance Ltd v OT Computers Ltd; In re OT Computers Ltd (in administration) CA 25-May-2004
The company had gone into liquidation. They had sold consumer policies as extended warranties on behalf of the claimant. The company had insured its own joint liability under the contracts, and the claimant sought information from the company’s . .
Cited – Braganza v BP Shipping Ltd SC 18-Mar-2015
The claimant’s husband had been lost from the defendant’s ship at sea. The defendant had contracted to pay compensation unless the loss was by suicide. They so determined. The court was now asked whether that was a permissible conclusion in the . .
Cited – Braganza v BP Shipping Ltd and Others CA 22-Mar-2013
The claimant widow sued in negligence after the disappearance overboard of her husband from the respondent’s ship. The court had found insufficient evidence to establish the cause of death, either as to negligence as suggested by the claimant, or as . .
Cited – Socimer International Bank Ltd v Standard Bank London Ltd CA 22-Feb-2008
Rix LJ considered the restraints operating a party to a contract in exercising any discretion gien under it, preferring the use of the term ‘irrationality’ to ‘unreasonableness’: ‘It is plain from these authorities that a decision-maker’s discretion . .
Lists of cited by and citing cases may be incomplete.
Updated: 25 July 2021; Ref: scu.198398