The Supreme Court of Canada Examines the Doctrine of “Good Faith” in the Exercise of Contractual Discretion

Published on: February 2021 | What's Trending

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In the recent decision of C.M. Callow Inc. v. Zollinger, the Supreme Court of Canada expanded the duty of honesty in contractual performance (please see our recent blog post and newsletter for more information). In a more recent ruling, the Supreme Court has again looked at the doctrine of good faith performance in contracts, this time to do with the exercise of discretion in the performance of a contract.

In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District 2021 SCC 7, Wastech Services (“Wastech”), a waste disposal company, entered into a contract with the Greater Vancouver Sewerage and Drainage District (the “District”), which was responsible to administer waste disposal in a region of Vancouver.

Pursuant to the contract, the District was given “absolute discretion” to choose any of three disposal sites for Wastech to dispose of waste. Wastech was compensated at varying rates, depending on which disposal site was chosen. Wastech was paid the most for the site that was farthest away. Although the contract identified a cost/revenue target for Wastech’s compensation, the contract did not guarantee that the target would be achieved by Wastech.

In 2011, the District opted to send a greater amount of waste to a closer location. This resulted in Wastech suffering decreased profits and failing to meet its target.

Wastech commenced an arbitration seeking damages against the District. Wastech argued that the District failed to act in good faith and violated the contract by allocating the waste to locations which made it impossible for Wastech to reach its cost/revenue target. Wastech won the arbitration as it was held that the District did indeed act in bad faith by exercising its discretion in the contract in a manner that adversely affected Wastech’s profits.

The District appealed the arbitrator’s decision, a series of appeals ensued and the matter eventually reached the Supreme Court.

The Supreme Court ruled in the District’s favour and held that it did not breach its duty of good faith to Wastech. It was explained that the parties specifically agreed, in the contract, that the District was given “absolute discretion” to choose which waste disposal sites to use in order to run its operation efficiently and minimize costs. The contract did not obligate the District to use that discretion to ensure that Wastech would meet its cost/revenue target. The court also noted that, when entering into the contract, both sides had full knowledge of the risk that was posed by “the exercise of discretion.”

The Wastech decision is important insofar as it demonstrates the limits of the duty of good faith when it comes to contractual discretion. The decision shows that if a party is given discretion in a contract, they will not be held to have breached their duty of good faith if they exercise that discretion in accordance with its purpose. The duty will only be breached when the party exercises its discretion in a manner that is disconnected from the underlying purpose provided for in the contract.

This decision marks another recent milestone in the development of contract law and the highly debated duties of “good faith” in performing contracts. It will be interesting to see how these recent decisions will be applied as the fundamentals of contract law continue to evolve.

Author: Daniel Waldman, Lawyer