Exercising a contractual discretion and the obligation to act in good faith
When parties agree to include discretionary rights in their agreement, one party will have the right to determine the outcome of some matter in prescribed circumstances. It is well established, however, that the courts have sought to influence the operation of discretionary provisions by imposing obligations of good faith on commercial players in certain situations. The key questions to be considered are: when will courts impose an obligation of good faith, what does ‘good faith’ mean, and how can parties create commercial certainty.
This update looks at the landscape of good faith in the context of discretionary provisions as a matter of contract law in an attempt to provide readers with the necessary background to approach this area of law. The law is unsettled and can change from state to state — an understanding of the state of play will enable parties to be fully informed when entering into contractual arrangements…
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