On February 5, 2021, the Supreme Court of Canada released its much-anticipated decision in Wastech Services v. Greater Vancouver Sewerage and Drainage District ("Wastech")1.  Wastech  builds upon the doctrine of good faith contractual performance from the Court's landmark judgment in Bhasin v. Hyrnew  ("Bhasin")2 by clarifying the source and content of the duty to exercise contractual discretion in good faith.

In Wastech, the Supreme Court held that the duty to exercise contractual discretion in good faith requires the contracting parties to exercise their discretion reasonably, meaning in a manner consistent with the purposes for which it was granted in the contract.

Wastech  joins two other recent decisions of the Supreme Court addressing the doctrine of good faith contractual performance: C.M. Callow Inc. v. Zollinger  ("Callow")3 and David Matthews v. Ocean Nutrition Canada Limited (NS)  ("Matthews").4 We previously blogged about Callow  here.

Background: Wastech Services Ltd. ("Wastech") is a waste transportation and disposal company in British Columbia. It had a long-standing commercial relationship with Greater Vancouver Sewerage and Drainage District ("Metro"). In 1996, Wastech and Metro entered into a waste disposal agreement (the "Agreement"), which contemplated the removal and transportation of waste by Wastech on behalf of the district represented by Metro to three disposal facilities.

One of the disposal facilities, the Cache Creek Landfill, was further away than the other two. Metro agreed to pay Wastech at a higher rate to transport waste to the Cache Creek Landfill. However, pursuant to the Agreement, Metro had "absolute discretion" to determine the allocation of waste transported to each disposal facility.

In 2011, Metro made the decision to reallocate waste from the Cache Creek Landfill to one of the other closer disposal facilities. As a result, Wastech's revenues and profitability declined for that year.

Pursuant to the Agreement, Wastech referred the dispute to arbitration, alleging Metro breached the Agreement by allocating waste among the three disposal facilities in a manner that deprived Wastech of achieving a measure of financial performance defined in the Agreement as the Target Operating Ratio ("Target OR").

The Arbitral Award:   The arbitrator ruled in favour of Wastech, finding that Metro's conduct showed a lack of "appropriate regard" for the legitimate contractual expectations of Wastech, and that Metro had therefore failed to exercise its discretionary power under the Agreement in good faith. Metro sought and was granted leave to appeal the arbitrator's award to the Supreme Court of British Columbia.

The Lower Court Decision:   The chambers judge, hearing the merits of Metro's appeal, set aside the arbitrator's award. The chambers judge held that the terms of the Agreement must be the basis for the imposition of duty to have "appropriate regard" for the interests of another contracting party.5 In this case, the parties considered including, but ultimately rejected, a term in the Agreement constraining Metro's discretionary power to allocate waste. Wastech appealed the chamber's judge's order to the Court of Appeal for British Columbia.

The Appellate Court Decision:   A panel of three judges unanimously dismissed Wastech's appeal.  Wastech appealed to the Supreme Court of Canada.

The Supreme Court Decision:  The Supreme Court dismissed Wastech's appeal. The Court held that contracting parties must exercise their discretion in good faith not only by acting honestly, but also "reasonably". In the Court's view, this requires parties to exercise their discretion in a manner consistent with the purposes for which it was granted in the contract. Where the exercise of discretionary power falls outside of the range of choices connected to its underlying purpose (as contemplated by the agreement the parties themselves crafted) it is contrary to the requirements of good faith.

Applying this framework to the facts, the Supreme Court found that Metro's exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted. In the Court's view, the purpose of giving Metro "absolute discretion" to allocate waste was clearly to allow it the flexibility to maximize efficiency and minimize the costs of the operation. Based on this purpose, Metro did not act unreasonably.

Importantly, the Court held that Metro was not required to confer a benefit or subordinate its own interests to Wastech in exercising its discretionary power, or to ensure that Wastech could meet the Target OR (as this was not guaranteed by the Agreement).6 Metro did not act unreasonably in maximizing efficiency and cost-effectiveness, and by furthering its own business objectives.7 Unlike fiduciaries, the good faith doctrine does not require contractual parties to serve each other's interests.8

The Court also clarified the source of the duty to exercise contractual discretion in good faith: it is a general doctrine of contract law, irrespective of the parties' intentions or any implied term of a contract.9 The duty to exercise contractual discretion in good faith is obligatory in all contracts and cannot be contracted out of.10

The Takeaway:  The Supreme Court's decision in Wastech contains the following significant findings:

  • the duty of good faith contractual performance applies to discretionary rights contained in a contract;
  • this duty is doctrinal, meaning it is independent of the implied terms of a contract and the parties' intentions, and cannot be contracted out of;
  • parties must exercise discretionary powers honestly and reasonably, in a way that is connected to the purposes for which such discretion was granted; and
  • the duty to exercise contractual discretion in good faith does not mean that parties are required to subordinate their own interests or confer unagreed upon benefits.

Going forward, parties should carefully consider the "purpose" of any contractual discretion; first, during the negotiation process (in Wastech  the purpose of the discretion was informed by the recitals); and later, when considering whether the exercise of the discretion is consistent with the purposes for which it was granted. Even where the discretion in the contract is open ended or "absolute" (as in Wastech), the unreasonable exercise of such discretion could still constitute a breach, if it is outside of the range of choices connected to its underlying purpose.

Footnotes

1. 2021 SCC 7 [Wastech].

2. 2014 SCC 71 [Bhasin].

3. 2020 SCC 45 [Callow].

4. 2020 SCC 26 [Matthews].

5. Wastech, supra  note 1 at para 33.

6. Ibid  at para 101.

7. Ibid  at para 99.

8. Ibid  at para 52.

9. Ibid  at para 91.

10. Ibid  at para 94.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.