In its recent decision of Bank of New Zealand v The Christian Church Community Trust & Ors, the Court of Appeal has clarified the New Zealand position on whether standards of reasonableness will apply to decisions made in the exercise of a contracting party's discretion.1 This decision follows the High Court's decision in early 2023 in which the Court granted an interim injunction preventing the termination of Gloriavale's contracts for banking services. It also follows the Court of Appeal's 2023 decision in Woolley v Fonterra Co-operative Group Ltd,2 and indicates where the New Zealand legal position on discretionary clauses in contracts may be heading.
Background
In July 2022, the Bank of New Zealand (BNZ) gave notice of its intention to terminate the provision of banking services to various entities associated with the Gloriavale Christian Community (Gloriavale entities). After unsuccessfully attempting to establish alternative banking arrangements, the Gloriavale entities applied for an interim injunction which would require BNZ to continue to provide banking services to them. An interim injunction was granted early in 2023 pending a full application for interim relief being made.3
The Gloriavale entities claimed that BNZ's termination of its banking relationship would constitute a breach of contract because the terms of the contract between BNZ and the Gloriavale entities, when properly interpreted, limit BNZ's ability to close their accounts.
In September 2023, an interim injunction was granted preventing BNZ from terminating the Gloriavale entities' accounts pending trial.4 That decision was appealed to the Court of Appeal.
Why is this case of interest?
One of the central arguments relied upon by the Gloriavale entities was that before a contract could be terminated, it was necessary, upon proper interpretation of the relevant express contractual clauses, to have a "reason" to close Gloriavale's accounts. Further, they argued that the contract between the parties contained implied terms that required that reason to terminate the contract to be one that was not a mistake of fact, unreasonable, capricious, arbitrary, or that required customers to meet standards of policies of which they were not aware.
In essence, the Gloriavale entities sought to have the Court assess the reasonableness of the decision to terminate the banking relationship between the parties.
The Court of Appeal confirmed that the New Zealand position on implied terms that limit the exercise of contractual powers and discretions is not settled.
A significant body of international case law suggests that a discretionary contractual power conferred on one party may be subject to implied limitations similar to the limitations governing the exercise of public powers. Much of the case law supports what is referred to as the "default rule". This rule provides that every contract granting discretionary power to one party includes an implied term providing that the power must not be exercised dishonestly, in bad faith, capriciously, or arbitrarily. The default rule may only be displaced by inconsistent express terms in the contract.
The debate, which remains unsettled, is whether the "default" rule is all that applies or whether, in certain circumstances, a broader requirement of reasonableness may apply. The United Kingdom Supreme Court's decision in Braganza v BP Shipping Ltd found that the "default rule" was not sufficient in the context of that case, and instead applied what has become known as the "expanded default rule".5 The expanded default rule not only requires a decision to be reasonable (in the sense of whether it was a rational decision which was neither capricious nor arbitrary), but also requires the decision-maker under the contract to make a substantively reasonable decision by taking into account all relevant matters and no irrelevant matters.
In Woolley v Fonterra Co-operative Group Ltd, the Court of Appeal proceeded on the assumption that the default rule applies in New Zealand, without expressly deciding the point, nor whether the Braganza approach should be endorsed or rejected in the New Zealand context. You can find more details about these cases in our previous article here.
In the High Court judgment granting the Gloriavale entities an interim injunction, Cull J considered it was reasonably arguable that the "expanded default rule" (the Braganza approach) was applicable in New Zealand. This was the position of the Gloriavale entities before the Court of Appeal. However, the Court of Appeal took a different view.
The Court stated its view that implying a term that the relevant power or discretion be exercised for a "proper purpose" was the most "promising" way to conceptualise any limits that might apply to contractual terms that confer a discretionary power on one party, rather than applying either the "default rule" or the expanded default rule using the Braganza approach. The Court considered that there is a fundamental difference between contractual discretionary powers and public law discretionary powers. It noted that public powers are conferred for the public good and cannot be used to pursue one's own self-interest, whereas parties with discretionary contractual powers may decide to act for self-interested reasons.
Unlike the position in a public law context, the parties to a contract decide themselves the values which are to apply to their contractual relationship. In some cases, the parties cannot have intended that the power-holder would be entitled to exercise the contractual discretion in their own self-interest, while in others, the purpose of the contractual discretion is to preserve the freedom of one party to act unilaterally in their own interests. In the latter case, courts must give effect to that intention.
On that basis, the Court concluded that the purpose of the discretion in the contract between BNZ and the Gloriavale entities was clear: to enable BNZ to end the relationship for any reason. Given this clarity, there was no need to add an implied term requiring powers to be exercised for a proper purpose. Further, even if the "default rule" or the Braganza approach applied, the express provisions of the contract would be inconsistent with and therefore override any such implied term that the Gloriavale entities claimed was breached. Accordingly, the appeal was allowed.
Implications for the legal position in New Zealand
The Court considered that this interlocutory appeal was not the appropriate setting in which to determine whether the "default rule", the Braganza approach, or the "proper purpose" approach (which was most favoured by the Court) ought to be adopted in New Zealand.
It therefore remains unsettled whether standards of reasonableness will be implied into contractual discretions in New Zealand. However, the case has given us some signals on how the New Zealand courts may approach the matter in the future. It will no doubt be welcomed by those parties who prefer the certainty of the express words they negotiate (rather than having to worry about implied terms that may limit their conduct) and also provides a useful confirmation that, if a contract clearly provides for a party to be entitled to act in a certain way, the courts are unlikely to imply a competing term.
Of course, the clearer parties can be in their contracts the better. It is not uncommon for parties to expressly record in a contractual term that a decision may be made in their "sole and absolute discretion" essentially to avoid any application of the default rule or expanded default rule. However, if this approach is taken, the contracting parties should be careful to either record that the wording is "to avoid doubt" or to make sure that the language is used consistently throughout the contract – to avoid any suggestion that some contractual discretions should be able to be exercised freely without restriction while others will be subject to limitations.
This article was co-authored by Bridie McKinnon (partner), Jacey McGrath (senior associate), Aylish Waldron (law clerk) and Claire Graham (summer clerk).
1 [2024] NZCA 645
2 [2023] NZCA 266
3 Christian Church Community Trust v Bank of New Zealand [2022] NZHC 3271.
4 Christian Church Community Trust v Bank of New Zealand [2023] NZHC 2523, [2023] 3 NZLR 190
5 [2015] UKSC 17, [2015] 1 WLR 1661
