Reader Steven Sholk told me about this article on the phrase sole and absolute discretion that appeared last week in the New York Law Journal. It focuses on New York caselaw.
Having written an article of my own on the implications of this phrase (available here), I was interested to see what the article had to say. But it doesn’t provide much guidance to contract drafters, presumably because it was written by two litigation partners.
Here’s how the article concludes:
Although all of the decisions discussed above recognized that implicit in every contract is a duty of good faith and fair dealing, courts seem more willing to find that the exercise of discretion may violate the good faith covenant where the party with discretion overreaches and exercises it in a way not reasonably contemplated by the parties. Where a party has sole and absolute discretion to terminate a contract, however, the decisions appear less likely to find that the implied covenant of good faith and fair dealing may constrain the exercise of that right.
The courts thus seem generally to recognize the fundamentally different nature of a party exercising discretion to monitor or approve the other party’s performance in an ongoing contractual relationship, and a party’s contractual right to terminate that relationship in its discretion, the former invoking notions of good faith implicit in an ongoing contractual relationship, and the latter recognizing that the notions of termination and good faith may by definition not be fully compatible.
But I’m not sure the distinction is that clear cut. For example, in one of the cases discussed in connection with ongoing contract relationships, the court applied the duty of good faith in the context of a bank declining to make a new loan. By contrast, in one of the cases cited in connection with terminating a contract, the court declined to apply the duty of good faith in the context of a bank electing not to make a new loan under an existing line of credit. Given the similar contexts, I’m not sure how convincing it is to explain away the differences by applying a “termination” label to the latter case.
So if you use the phrase sole and absolute discretion in a termination context on the assumption that a court would allow you to do an end-run around the duty of good faith, you’re rolling the dice.
Instead, address directly whatever issue might otherwise prompt you to use the phrase sole and absolute discretion. (It’s unlikely that you just want to make sure that you can behave unreasonably.) The more specific you are, the less likely it is that a court would hold that your discretion is constrained by the duty of good faith. See MSCD 2.120 for an example of how you can accomplish this.