Discretion

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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 us say a bond issuer is expecting to raise a million pounds, and wishes to make arrangements with its own settlement agent to hold those issued but as yet unsubscribed securities, pending remittance of funds for them 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 some end point to its commitment. Now, should it care? Not really; it costs almost nothing to hold an unissued security in a settlement account, and one can extract a fat fee for it. But that is as may be.

To quell its beloved agent’s misgivings, the issuer presents a draft. It says:

“If I have not paid you in 10 days, at your absolute discretion you may cancel the transaction immediately by notice at any time.”

Granted, “at your absolute discretion” adds nothing to “you may”, but we know how craven and paranoid our learned friends can be, so are trying to be accommodating.

The draft comes back marked thus:

“If I have not paid you in 10 days, at your absolute discretion you may must cancel the transaction immediately by notice at any time.”

Now why would an agent prefer to be obliged, rather than simply entitled to act? We think this stems from an ancient, but irrational, fear of mis-exercising a discretion. “What if my action is challenged? I might be found to have breached an implied duty of reasonableness, of good faith, or something like that.”

Rejoining that this is not how implied terms work in contracts will hardly 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.”

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.

See also

• Commercially reasonable manner
• In good faith