Sole and Absolute Discretion
By Bryan Caplan
I’ve signed some bizarre contracts in my day. When I bought my house, for example, the terms “sole and absolute discretion” frequently appeared in the builder’s contract. Taken literally, my contract basically said, “I give you a pile of money, and you give me whatever you want in exchange.” Rod Long would not have been pleased.
Nevertheless, I got what I paid for. The builder did a fine job, finished early, and fixed scores of minor problems free of charge. So why did they offer such a one-sided contract? You’d think that an honest, competent firm would want to give its customers plenty of recourse to put their minds at ease.
Since firms are free to offer more generous terms in exchange for higher prices, though, a charitable view is in order. Firms don’t offer better terms because they raise firms’ costs more than they raise customers’ benefits. Or from a slightly different perspective, the point of “sole and absolute discretion clauses” is to avoid inefficient lawsuits.
The most obvious version of the story: Firms have deep pockets, which exposes them to legal extortion by parasitic and unreasonable customers. It’s not legally practical to contractually forbid “parasitic and unreasonable” lawsuits, so firms do the next best thing: Try to contractually forbid all lawsuits.
Sure, the absence of legal protection makes regular customers nervous, too, but it’s cheaper to reassure them using reputation. I’d rather deal with a reputable firm I couldn’t sue than a crooked firm I could. Plus, since the courts won’t literally enforce “sole and absolute discretion” clauses, customers always have some legal recourse.
The main question in my mind: If all contract disputes were handled by private arbitration, would “sole and absolute discretion” clauses remain? Or would private legal systems evolve to explicitly quash “parasitic and unreasonable” lawsuits, while protecting legal recourse for claims with merit?