An absolute discretion won’t be absolute if that would be uncommercial

A recent Victorian supreme court decision has sent shudders down the spines of lawyers who draft contracts that allow their clients to do things (such as form an opinion, make a decision, or exercise a contractual power) in the client’s “absolute discretion”. 

The case concerned a vendor’s right to terminate a contract for the sale of land if the local council imposed a condition on the required subdivision that “in the opinion of the vendor (in its absolute discretion) is too onerous for the vendor to perform”. 

The council did impose conditions on the subdivision that the vendor wasn’t happy with, so the vendor purported to terminate the contract. The purchaser objected, saying the conditions imposed were not unexpected or out of the ordinary, and that it therefore wasn’t open or reasonable for the vendor to form an opinion that they were “too onerous for the vendor to perform”.  

The vendor argued it did not matter whether the conditions were capable, objectively, of being considered unduly onerous. It argued the only limitation on its discretion was that the conditions must be capable, subjectively, of being assessed as too onerous to perform.  In forming its opinion, the vendor considered it had absolute discretion – entitling it to assess, as it saw fit, whether the burden of performance was beyond what was desirable, fitting or right. 

The problem for the vendor with this interpretation is that it effectively gave the vendor the option to walk away from the contract for sale at its whim, rendering the contract a “commercial nonsense”. Accordingly, the court determined that this could not have been intended by the parties, despite the language used. 

So don’t assume that an express absolute discretion will be given effect if doing so would be uncommercial.