“Absolute discretion” not absolute

In the recent decision of Eastbound Estate Pty Ltd v DC Consolidated Investments Pty Ltd [2024] VSC 40, the Victorian Supreme Court considered whether the purported termination of an agreement in a party’s “absolute discretion” was valid.

Eastbound Estate Pty Ltd (the Plaintiff) entered a contract to purchase land from DC Consolidated Investments Pty Ltd (the Defendant). The agreement was contingent on the registration of a plan of subdivision, which was approved by the local Council subject to several conditions. The Defendant purported to terminate the agreement in its discretion on the basis that the conditions imposed by the Council were too onerous. The Plaintiff rejected the validity of the termination and brought proceedings to enforce the agreement.

The termination clause relevantly provided:

[I]f the responsible Authority … imposes a Requirement that in the opinion of the Vendor (in its absolute discretion) is too onerous for the Vendor to perform … the Vendor may terminate this Contract.

The Court found that the Defendant’s purported termination was invalid.  The primary issue for determination was the proper construction of the termination clause providing the discretion.

The Court held that phrases such as “in its absolute discretion” do not exclude the operation of ordinary principles of contractual interpretation, including that a contract must be construed as a whole having regard to the language chosen and objectively ascertained intention of the parties and that all words must be given effect to.  Any discretion conferred on a contractual party’s opinion must be informed by the proper interpretation of the contract.

The Court also held that, in construing a clause conferring an “absolute discretion”, the context and commercial purpose of a contract cannot be disregarded, including in determining the parties’ intentions regarding limitations on the exercise of the discretion (such as a requirement to act reasonably).

The Court considered the proper interpretation of the termination clause was one that furthered the commercial purpose of the contract (an arms-length sale of property on agreed terms between independent business entities) and constrained the exercise of the Defendant’s discretion to form the opinion required to enliven the termination power.  This required the Defendant to:

•    form an opinion as to whether the performance of the Council’s conditions was too onerous; and
•    exercise it within the parameters of the contract.

The formation of such an opinion was an essential prerequisite to the exercise of the termination power.

As the Defendant had not formed that opinion, the purported termination was invalid. The Court held that an opinion based on undesirable commercial consequences of the conditions once performed was not sufficient or relevant.

The decision demonstrates that:

•   contractual provisions providing rights based on an opinion or “absolute discretion” will be interpreted in accordance with ordinary principles of contractual interpretation and are not truly “absolute”; and
•    a party seeking to exercise such rights should ensure the necessary preconditions are satisfied (and able to be demonstrated) including that any opinion required to exercise a discretion is formed and relates to the required subject matter.

The full judgment is available here.