The Supreme Court of Canada Clarifies the Duty to Exercise Contractual Discretion in Good Faith
On February 5, 2021, the Supreme Court of Canada released its judgment in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District. Wastech clarifies the nature and scope of the duty to exercise discretionary contractual powers in good faith. The appeal was heard together with C.M. Callow Inc. v. Zollinger (see our earlier blog post), which clarified the duty of honest performance established in Bhasin v. Hrynew (see our earlier blog post).
What you need to know
Wastech holds that:
- Contracting parties have a duty to exercise contractual discretion in good faith. This duty “operates in every contract irrespective of the intentions of the parties”.
- The duty requires parties to exercise their contractual discretion “in a manner consistent with the purposes for which it was granted in the contract” — i.e., “reasonably”. This duty can be breached even if the duty of honest performance is not.
- A party breaches the duty when it exercises its contractual discretion “unreasonably”, meaning “in a manner unconnected to the purposes underlying the discretion”. This will occur, for example, where the exercise of discretion is “arbitrary or capricious”.
- While the intentions of the parties are not relevant to whether the duty applies, they remain critical to whether a particular exercise of contractual discretion was actually unreasonable, because the range of outcomes that are reasonable in light of the purposes of the contract “are ascertained principally by reference to the contract, interpreted as a whole — the first source of justice between the parties”.
- The duty does not require a party to “subvert” or “subordinate” its interests to those of the other party, even when a contract is “a long-term, relational agreement dependent upon an element of trust and cooperation”. Nor does it require a party to confer a benefit on the other party that “was not contemplated under the contract” or that “stands beyond the purposes for which the discretion was agreed”. Rather, “it simply limits the range of legitimate ways in which a discretionary power may be exercised in light of the relevant purposes”.
- That a party’s exercise of discretion caused its contracting partner “to lose some or even all of its anticipated benefit under the contract” is not dispositive. However, where the exercise of discretion “substantially nullifies or eviscerates the benefit of the contract”, this “could well be relevant to show that discretion had been exercised in a manner unconnected to the relevant contractual purposes”.
- In this case, the duty was not breached. The Greater Vancouver Sewerage and Drainage District (“Metro”) and Wastech Services Ltd. (“Wastech”) entered into a long-term contract for the removal and transportation of waste to three disposal sites. The contract gave Metro “absolute discretion” to allocate waste between the sites and provided that Wastech would be paid a different rate depending on the site. In 2011, Metro reallocated waste in a way that resulted in Wastech’s not achieving a cost/revenue target identified in the contract. The Court held that this reallocation did not breach Metro’s duty to exercise its contractual discretion in good faith because it was consistent with the purposes for which the discretion was created — namely, operating efficiently and minimizing costs — and the contract did not guarantee that Wastech would achieve the target.
Here are our top four takeaways from Wastech:
- Contracting parties have a mandatory duty to exercise contractual discretion in good faith. Wastech reaffirms the longstanding principle that contracting parties have a duty to exercise contractual discretion in good faith. This duty is distinct from the duty of honest performance discussed in Bhasin and Callow. However, like the duty of honest performance, it is a manifestation of the organizing principle of good faith and applies to all contracts regardless of the intentions of the parties. As a result, “[p]arties who provide for discretionary power cannot contract out of the implied undertaking that the power will be exercised in good faith, i.e., in light of the purposes for which it was conferred.”
- The duty is modest and case-specific. The duty does not require a contracting party to subordinate its interests to those of the other party or to confer benefits on the other party gratuitously. Rather, it imposes a modest requirement that parties exercise their contractual discretion reasonably, in a manner consistent with the purposes for which it was granted. Whether a party has satisfied this duty in any particular case will depend on the text and context of the contract.
- Parties may influence how the duty applies through their contractual terms. While the duty to exercise contractual discretion in good faith cannot be excluded by the parties, the parties may still include provisions in their contract that help identify the purposes for which a discretion is granted. In Wastech, for instance, the majority relied on the recitals to the agreement in concluding that the allocation discretion was not exercised by Metro in a manner that was unconnected to the purposes for which the discretion was granted. This reflects the Court’s statement that “[d]emonstrating a breach will necessarily centre on an exercise of contractual interpretation”, since “[i]t is in properly interpreting the contract and the purposes for which discretion was granted that the range of good faith behaviour comes into focus and breaches can be identified”.
- The standard of review on an appeal under s. 31 of the B.C. Arbitration Act remains uncertain. The “standard of review” is the degree of scrutiny appellate courts apply in examining a decision on appeal. In Sattva Capital Corp. v. Creston Moly Corp. and Teal Cedar Products Ltd. v. British Columbia, the Court held that the standard of review applicable on an appeal from an arbitral award under s. 31 of the B.C. Arbitration Act is generally the deferential “reasonableness” standard, as opposed to the more exacting “correctness” standard. In Canada (Minister of Citizenship and Immigration) v. Vavilov, however, the Court set out a revised framework for determining the standard of review in the context of administrative (as opposed to arbitral) decisions, without referring to Sattva or Teal Cedar. The majority in Wastech concluded that it was unnecessary to decide whether Vavilov changes the standard of review principles for arbitral awards, as set out in Sattva and Teal Cedar, since the outcome in Wastech would be the same on either standard. The three concurring justices, by contrast, held that the correctness standard applied because s. 31 provides a statutory appeal mechanism. While the concurring reasons will likely be persuasive in future cases, the impact of Vavilov on Sattva and Teal Cedar — and therefore on appellate review of arbitral awards made under the B.C. Arbitration Act or under comparable legislation elsewhere in Canada — has yet to be conclusively resolved by a majority of the Court.
We can help
McCarthy Tétrault’s National Appellate Litigation Group successfully represented the appellants in both Bhasin and Callow before the Supreme Court of Canada. If you have questions about Wastech, Callow, good faith, or our appellate litigation practice, please contact Brandon Kain or Adam Goldenberg.