A party’s express right to exercise “sole discretion” in exercising a contractual right would appear, on its face, to insulate that party from liability for any and all exercises of that discretion. In practice, however, the grant of “sole discretion” to a contracting party has not been given such a wide berth by Delaware and New York courts. These courts have routinely held that it is not a violation of the implied covenant of good faith and fair dealing for a party to exercise a contractual, discretionary right out of economic self-interest, even to the detriment of a counterparty, provided that the decision made is not arbitrary or irrational.
But that is not the end of the inquiry. Courts in both Delaware and New York have delved further, to more closely evaluate business managers’ underlying motivations for discretionary decisions, even ones with perfectly rational business justifications. In these “mixed motive” cases—where both valid business reasons and ulterior motives form the basis for an exercise of discretion—at least some courts have sustained implied covenant claims against business managers for exercising discretion in a manner that is neither irrational nor prohibited by the express terms of the contract.
