If your contracts include “sole discretion” clauses, a recent New York Court of Appeals decision could significantly affect your rights and exposure.

On May 28, 2026, the Court of Appeals issued 111 West 57th Investment LLC v. 111 W57 Mezz Investor LLC, affirming that a party exercising “sole discretion” under a contract can still breach the implied covenant of good faith and fair dealing if it acts in bad faith.

In an article for the New York Law Journal, Glenn Agre partner and chair of the litigation department, Jed I. Bergman, and associate Sam Bieler analyze the Court of Appeals’ decision and outline the practical implications for plaintiffs, defendants, and drafters.

A Higher Bar for Exercising Sole Discretion

Every New York contract has an implied covenant of good faith and fair dealing.  It generally prevents a party from acting in a way that stops the other party from enjoying the benefits of a contract.  But for years, some New York courts put sole discretion clauses outside the implied covenant.  Even if a party used their discretion to act in bad faith, the counterparty often could not sue.

No longer. The Court of Appeals has confirmed that the implied covenant applies to sole discretion clauses.  In fact, counterintuitively, it now appears that the greater the explicit delegation of discretion in a contract, the more carefully courts will police how that discretion is exercised. Jed and Sam point out that this development essentially inverts the prior framework: broader discretion now triggers more judicial scrutiny, not less. Going forward, an injured party will have more latitude to claim that a discretionary exercise of authority was still a bad faith violation of the implied covenant.

While the majority cast this outcome as “rote application of settled law” and the dissent warned that it would cause drafters to “abandon New York law en masse,” the practical reality lies somewhere in between. The decision has not upended contract doctrine — but it has meaningfully changed how implied covenant claims will be litigated on both sides.

Practical Implications for Litigants and Drafters

If you’re evaluating whether to bring a claim: You may now have stronger tools to challenge a counterparty that exercised discretion in a way that undercut your deal. The Court of Appeals made clear that sole discretion is not a license to act in bad faith or to destroy the value of what you bargained for. If a counterparty used its discretionary authority to benefit itself at your expense, you may have a viable claim.

If you’re defending against a claim: A sole discretion clause alone will no longer end the argument. Courts will examine the purpose of the contract as a whole and evaluate whether your actions were consistent with that purpose. Your defense needs to be grounded in a narrative that connects your conduct to what the contract was designed to achieve, not just that the text technically permitted it.

If you’re negotiating or drafting contracts: Sole discretion clauses still have value. They provide flexibility and reduce transaction costs. But they now carry greater litigation risk. Drafters should consider:

  • Using recitals to clearly articulate the contract’s purpose
  • Specifying the purpose for which discretion is granted (e.g., “at its sole discretion, including for the purpose of…”)
  • Identifying foreseeable actions a party may take under its discretion

Jed and Sam note that there are limits to this approach. Layering in too many qualifiers can also backfire, trading a lower risk of an implied covenant claim for a higher risk of an ordinary breach of contract claim. Striking that balance will be an early test for drafters working under this new standard.

Read the full article, published in the New York Law Journal, here.