Define: Arbitrary

What Arbitrary Means in a Contract

An arbitrary act is one taken without rational justification, consistent criteria, or evidence to support it. In contractual language, calling a decision arbitrary is a way of flagging that it was made on a whim, out of personal preference, or for reasons unconnected to the legitimate purpose of the discretion being exercised. This matters because many contracts hand one party the power to approve, reject, terminate, or vary something, and the counterparty needs assurance that this power will not be abused.

Contracts frequently address arbitrariness directly by imposing a standard that discretion must be exercised reasonably, in good faith, or not unreasonably withheld. These standards exist precisely to prevent arbitrary behaviour, since a party acting arbitrarily is, by definition, not applying any principled or reasonable test. The concept therefore sits in contrast to obligations of reasonableness, proportionality, and good faith that appear throughout commercial agreements.

Understanding arbitrary conduct is also useful when assessing risk. A party granted unchecked discretion, without any requirement to act reasonably, may in effect be permitted to behave arbitrarily, and the other party has little recourse unless the contract or the law governing the contract implies some constraint.

How Arbitrary Is Defined or Measured

There is no single fixed test for what counts as arbitrary, but courts and drafters generally look at whether a decision was connected to any legitimate, ascertainable reason. A decision is more likely to be viewed as arbitrary if it is inconsistent with past practice, unsupported by any evidence, made without considering relevant factors, or influenced by considerations that have nothing to do with the contract's purpose.

Measuring arbitrariness often involves comparing the decision-maker's actual process against what a reasonable party in the same position would have done. If a process existed, criteria were applied, and the outcome can be explained by reference to those criteria, the decision is unlikely to be arbitrary even if the other party disagrees with it. Conversely, a decision made suddenly, inconsistently, or without any explanation is more vulnerable to that label.

• Absence of any stated or discoverable reason
• Inconsistency with prior conduct or precedent under the same contract
• Failure to consider relevant information before deciding
• Decisions driven by irrelevant, personal, or improper motives

Where Arbitrary Appears in Agreements

The term or its underlying concept appears in clauses governing discretionary approvals, such as assignment or subletting consent, budget sign-off, or eligibility decisions. It also surfaces in termination provisions, where a party may be prevented from terminating arbitrarily and instead must show cause or follow a defined process. Disciplinary and workplace-related documents, including a Disciplinary Action Notice, often need to demonstrate that action taken against an employee was not arbitrary but grounded in specific, documented conduct.

Dispute-related correspondence can also raise the issue. A Letter Before Action may allege that a counterparty's refusal or termination was arbitrary, as a way of framing the dispute as a breach of an implied or express reasonableness obligation.

Industries with heavily regulated or safety-sensitive decision-making, such as healthcare and construction, are particularly attentive to avoiding arbitrary decisions, since discretionary calls in these sectors can carry safety, licensing, or compliance consequences that demand a documented, principled basis.

Why the Exact Wording Matters

Whether a contract prohibits arbitrary action explicitly, or simply requires reasonableness or good faith, has real consequences for how much protection a party actually has. A clause that gives one party.