Bryan Caplan  

Sole and Absolute Discretion

A Book I Wish Someone Else Had... Goodbye Mini-meds...
I've signed some bizarre contracts in my day.  When I bought my house, for example, the terms "sole and absolute discretion" frequently appeared in the builder's contract.  Taken literally, my contract basically said, "I give you a pile of money, and you give me whatever you want in exchange."  Rod Long would not have been pleased.

Nevertheless, I got what I paid for.  The builder did a fine job, finished early, and fixed scores of minor problems free of charge.  So why did they offer such a one-sided contract?  You'd think that an honest, competent firm would want to give its customers plenty of recourse to put their minds at ease.

Since firms are free to offer more generous terms in exchange for higher prices, though, a charitable view is in order.  Firms don't offer better terms because they raise firms' costs more than they raise customers' benefits.  Or from a slightly different perspective, the point of "sole and absolute discretion clauses" is to avoid inefficient lawsuits. 

The most obvious version of the story: Firms have deep pockets, which exposes them to legal extortion by parasitic and unreasonable customersIt's not legally practical to contractually forbid "parasitic and unreasonable" lawsuits, so firms do the next best thing: Try to contractually forbid all lawsuits. 

Sure, the absence of legal protection makes regular customers nervous, too, but it's cheaper to reassure them using reputation.  I'd rather deal with a reputable firm I couldn't sue than a crooked firm I could.  Plus, since the courts won't literally enforce "sole and absolute discretion" clauses, customers always have some legal recourse.

The main question in my mind: If all contract disputes were handled by private arbitration, would "sole and absolute discretion" clauses remain?  Or would private legal systems evolve to explicitly quash "parasitic and unreasonable" lawsuits, while protecting legal recourse for claims with merit?

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COMMENTS (8 to date)
John Jenkins writes:

In American contract law, there is an implied duty of good faith and fair dealing that applies to each provision of the contract (and sometimes an implied requirement of reasonableness).

If there were a provision that said that something is in X's discretion, then that means that X is subject to being sued for breaching the implied duty or for being unreasonable.

Good faith and reasonableness are squishy concepts that are hard to quantify, so adding "sole and absolute" to discretion takes that calculation out of the issue simply gives X the opportunity to exercise the option without regard for any implied covenant. It's not that they are worried about frivolous suits, it's that they are worried about issues that are hard to prove one way or the other and end up basically as a toss-up (for the draftsman, the contract is ideal if any suit on it would be resolved on summary judgment).

There are still implied warranties in a construction contract (unless they are waived) and probably express warranties (and maybe statutory warranties).

Without having reviewed the contract, I suspect that you are misreading it if you believe that what it said "I give you a pile of money, and you give me whatever you want in exchange."

Peter St. Onge writes:

I would plump for private arbitration to quash frivolous suits, my evidence being length of pre-modern contracts. I assume shorter contracts is because the courts had long-settled precedents for what is reasonable in cases of breach and lacunae.

The modern fetish appears to be to meticulously and sometimes absurdly define terms (e.g. multi-page cellphone contracts), perhaps specifically because courts have become so unpredictable (vis-a-vis a common law or lex mercatoria).

Off-hand, this meticulous and sometimes absurd enumeration does resemble government regulation in general (e.g. 2400-page health reform), hinting at the cause.

bill shoe writes:

Good post. Bryan is beginning to pursuade me.

Bryan's question-
"If all contract disputes were handled by private arbitration, would "sole and absolute discretion" clauses remain?"

Yes. Cell phone contracts require any dispute to be handled by private arbitration and the contracts are probably even more extreme than the traditional "sole and absolute discretion" clauses.

Kurt Couchman writes:

Maybe "loser pays" for civil suits would help. That way, filers of frivolous lawsuits wouldn't simply promise a portion of their possible winnings to their lawyer(s)--instead they'd be on the hook for both sides' attorney fees. It seems reasonable that increasing the cost of junk lawsuits would decrease their quantity.

John Thacker writes:
I'd rather deal with a reputable firm I couldn't sue than a crooked firm I could.

I am reminded of Chris Farley in Tommy Boy, explaining why a non-guaranteed quality product is better than a guaranteed piece of crap.

frankcross writes:

I think this is a little naive. They not only don't want parasitic lawsuits, they don't want good lawsuits. They intend to do a good job and try to do so for reputational reasons. If they legitimately screw up, they still get off free.

If you are right that courts won't enforce the clause, then it is meaningless, as is the whole analysis. It's not to protect against parasitic lawsuits, if the court won't enforce it.

If you think courts will enforce it against parasitic lawsuits but not good ones, that doesn't make sense either, because if the court could identify it as parasitic, it would throw it out anyway.

It may be there to scare off consumers who aren't aware of their legal rights (assuming it is not enforceable).

Hyena writes:

You'd really have to read the entire contract and have a good understanding of contract law in your state to actually know what those provisions do. As Jenkins pointed out, it's highly unlikely that "I give you a pile of money, you give me anything you want" is an accurate description of the actual mechanics of the contract.

My family's construction company had a lot of terms of a similar sort, but they largely applied to questions about how the house was constructed. We, not you, had sole discretion over whether--barring actual failure--a certain type of ductwork or wood product was up to the task. Also, had we ever actually given you anything other than what had been broadly agreed to, we'd have been sued and the customer would have won handily.

Stephen Schweizer writes:

The first comment showed your argument to be unsound, but I still think your broader point is correct. Many contracts have force majeure clauses, and they are enforced, but people still deal with the companies that insert them.

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