At MSCD 3.168–.196 and in this article, I discuss why the phrase at its sole discretion and its variants are pernicious. That’s because the unfettered discretion that it seems to suggest can fall foul of the implied duty of good faith.
Peter A. Mahler (@PeterMahlerEsq) of the law firm Farrell Fritz offers in this post on his New York Business Divorce blog another cautionary tale to that effect. The moral of that story: even if under a contract between a company and an officer the company’s board could “at its sole discretion” determine the fair market value of the company for purposes of repurchase of the officer’s shares, the board’s determination that the shares had a value of $0 was at odds with its obligation under the contract to use good faith.
In this case, the obligation to use good faith was explicit, but in many jurisdictions an implied obligation will be read into a contract. So be skeptical of at its sole discretion. Usually it’s and-we-really-mean-it rhetorical emphasis that serves no purpose. It might point to a legitimate issue, in that my exercise discretion might work to your disadvantage, and I don’t want you to claim that that’s a reason to constrain my discretion. But it’s best to address that issue head on, as I discuss in MSCD and the article I link to above.
2 thoughts on “A Reminder of the Limitations of “At Its Sole Discretion””
I only skimmed, but it seemed that while the Board had ‘sole discretion’ in determining the value of the shares, the same contract provided that the determination be made in ‘good faith’. So the clash was between express contract provisions rather than between a ‘sole discretion’ provision and a ‘background’ (statutory or common law) duty of good faith and fair dealing. This detracts not at all from your scepticism of ‘sole discretion’ clauses, both generally and as bad attempts to circumvent a duty of good faith. A drafter aiming to give contours to a good faith duty can find advice for that in MSCD.
Thanks. I’ve revised the post to make it clearer what’s going on.