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The basic principles of contract

The Jolly Contrarian holds forth™

Discretion and compulsion.jpeg
The Unbearable Tension Between Compulsion And Choice (von Sachsen-Rampton, 1906)

Resources and Navigation

Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent
Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation
Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee
Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent
Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability
Not contracts: Restitutionquasi-contractquasi-agency

Index: Click to expand:
Index: Click to expand:

Too long, didn’t read

Template:M tldr contract 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 holding an unbounded discretion — yes, pitfalls: it seems odd, doesn’t it — are a window into the legal mind.

Let’s say a bond issuer, expecting to raise a million pounds, asks its own settlement agent to hold its issued but as yet unsubscribed securities pending their delivery, against payment to the betrothed subscriber. (With all the will in the world there can be unforeseen delays, so this is not uncommon.) The settlement agent is happy enough to act, for a suitable fee, but wants the certainty of an end-point to its commitment.

Now, should the agent care how long it must hold this paper? Not really: the issuer will indemnify it for what little cost it incurs, and the longer it holds, the fatter its fee. But that is as may be: the agent says it wants an end-point, and that is that. The issuer presents it with a draft. It says:

“If the issuer has not been paid within 10 days the settlement agent may, at its absolute discretion, cancel the arrangement immediately by notice.”

(Granted, “at your absolute discretion” adds nothing to “may”, but knowing how craven and paranoid inhouse legal eagles can be the Issuer is trying to be accommodating.)

It turns out that the issuer has underestimated its agent’s paranoia. The draft comes back marked thus:

“If the issuer has not been paid within 10 days, the settlement agent may, at its absolute discretion, must cancel the arrangement immediately by notice.”

Now, why on Earth would an agent prefer to be compelled, and not just entitled, to terminate a remunerative arrangement? We think this stems from an ancient fear of mis-exercising a discretion.

“What if my action is challenged? In exercising my discretion I might be found to have breached an implied duty of reasonableness, or good faith, or something like that. If it is mandatory, there can be no argument.”

A rejoinder that this is not how implied terms work under the law of contract will hardly ingratiate your to your opponent. Nor will reminding her of The Moorcock [1889] 14 PD 64: it 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 is compelled to act, the matter is clear.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. “All of it. Discretions are for artistic types. This is commerce. What we lawyers practice may be dismal, but it is science. Tell my client what it must do, and it will do it. Do not ask it to have an opinion.”

We might see in this that epochal struggle between substance and form: as long as one does not have to use one’s brain, one cannot get in trouble. If one is not allowed to, so much the better.

Yet, manifestly, this leads to worse outcomes. We can picture it: an issue proceeds, the settlement agent takes delivery of the unissued bond, then there is a subscription hitch that persists a while. Before you know it, the tenth day rolls around, whereupon the subscriber, having surmounted whatever hurdles lay before it, has has committed to payment in full, upon the morrow. Instructions are matched, cabin-doors locked, missiles armed and all are braced for lift-off until the 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 today. My compliance department says I have no choice. We have no discretion to act.”

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.

Professionals in a complicated markets are not automatons. They are meant to know what they are doing. That is why we pay them. They are there to inject just the sort of flexibility, judgment and — well, discretion — to keep the machinery oiled and the wheels turning in the face of unexpected obstacles. They fail at that job if they are afraid of their own shadows.

See also



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