Commercial contracts frequently give one party the right to determine in its sole and absolute discretion whether the performance of the other contracting party, or perhaps of a third party, satisfies the contractual requirements. For example, a contract may require party A to provide a letter of credit or some other document to party B that must in form and substance be satisfactory to party B in its sole and absolute discretion. But even where the contract places no express limits on the exercise of that discretion, does New York law do so?
Several Commercial Division justices recently have interpreted the exercise of such discretion in light of the implied duty of good faith and fair dealing, which the courts have found imposes an obligation to exercise such discretion in good faith. Where the application of this principle frequently diverges, however, is when dealing with contract termination issues and the right of one party, in its discretion, to terminate a contract.
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