Template:M intro contract discretion
Discretion
/dɪsˈkrɛʃᵊn/ (n.)
Freedom. Choice. Happiness. Individuality. A snakeskin jacket. Optionality, unbound by considerations of what anyone else might think.
The stance one adopts by uttering the expression “I may” (or, if one is legally qualified, “I shall be entitled, acting for the avoidance of doubt in my sole and absolute discretion”.)
A simple idea that lawyers will work hard to make seem difficult.
The two-edged sword of discretion
The pitfalls of being offered unfettered discretion — yes: pitfalls — are a window into how the legal mind thinks.
Let’s say a bond issuer expects to raise a million pounds, and wishes to arrange forr its own settlement agent to hold its issued but, as yet, unsubscribed securities pending their delivery against payment by the betrothed subscriber. With all the will in the world, there can be unforeseen delays and so on, so this is not uncommon.
The settlement agent is happy to act, for a suitable fee, but wants the certainty of an end point to its commitment. Now, should it care how long it must hold this paper? Not really; it costs almost nothing to hold it, and the longer one does, the fatter the fee. But that is as may be: the agent wants an end-point, and that is that.
To quell its misgivings, the issuer presents the settlement agent with a draft. It says:
“If I have not been paid within 10 days, at your absolute discretion you may cancel the arrangement immediately by notice.”
Granted, “at your absolute discretion” adds nothing to “may”, but the issuer knows how craven and paranoid inhouse legal eagles can be, so is trying to be accommodating.
It turns out that the issuer has underestimated that paranoia. The draft comes back marked thus:
“If I have not been paid within 10 days,
at your absolute discretionyoumaymust cancel the arrangement immediately by notice.”
Now why would an agent prefer to be compelled, and not just entitled, to act? We think this stems from an ancient fear of mis-exercising a discretion.
“What if my action is challenged? I might be found to have breached an implied duty of reasonableness, or good faith, or something like that.”
Rejoining that this is not how implied terms work in the law of contract will not ingratiate yourself to your opponent. Reminding her of The Moorcock [1889] 14 PD 64 may induce her to regard you as bumptious.
“My client wants no debate about whether it should, or should not, have done what it did. If it must act, the decision is out of its hands.”
In more innocent times lawyers injected words like “sole”, “absolute” or “unfettered” to calm these fears. But modern lawyers are less apt to be placated with adjectivery.
“Just take it away,” they say. “Discretions are for artistic types. This is commerce. We lawyers are practitioners of science. Tell me what I must do, and I will do that. Do not ask me to have an opinion.”
We might see in this hints of that epochal struggle between substance and form.
Yet, manifestly, this leads to worse outcomes. We can picture it: an issue proceeds, there is a subscription hitch that persists a while. Before you know it, day 10 rolls around, whereupon the subscriber, having mounted whatever hurdles lay before it, has has committed to payment in full upon the morrow. Instructions are matched, cabin-doors locked, missiles armed until beloved settlement agent, who knows all of this perfectly well, comes on the line to say, “I am afraid I am obliged to terminate the arrangement. My compliance department says I have no choice. There is no discretion.”
But it leads to worse outcomes for the settlement agent too. It is a regrettable fact that contractual terms get overlooked. Deadlines are missed. Hardening this discretion into a prime directive puts the inattentive agent immediately in breach of contract.
So what, you might say? What damage flows?
By the time anyone is around to ask, of course, our contract negotiator and her learned counsel are well clear.