The Following is a Legal Update Related to the Duty of Good Faith. Contractual Parties’ Discretion is Advised

On February 5, 2021, the Supreme Court of Canada (the “SCC”) released its much anticipated judgement in the case of Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (“Wastech”). Wastech provides further guidance on the principle of good faith in contractual performance, which the SCC expanded in December 2020 in its decision in the case of Callow Inc. v. Zollinger (“Callow”). Please refer to our previous update for a summary of Callow.

What You Need to Know About Wastech

1. Wastech imposes the duty to exercise contractual discretion in good faith. The duty requires parties to exercise contractual discretion reasonably and in a manner consistent with the purposes for which the discretion was granted. 
2. The duty of good faith is breached where contractual discretion is exercised “unreasonably.” An unreasonable exercise of discretion is one unconnected to the purpose underlying the grant of discretion.

Summary of Wastech

In 1996, Wastech Services Ltd. (“Wastech Services”) entered into a long-term contract with Greater Vancouver Sewage Drainage District (“Metro”) for the removal and transportation of solid waste. The contract contemplated waste disposal at multiple locations, whereby Wastech Services earned different haulage rates depending on the location where waste was transported. The greater the distance of transportation, the greater the rate paid to Wastech Services. The contract granted Metro an “absolute discretion” to allocate waste among the facilities.

In 2011, Metro substantially re-allocated waste removal to locations closer in proximity to Vancouver. Consequently, Wastech Services charged lower haulage fees which significantly reduced its operating profit well below a cost/revenue target that was identified in the contract. However, the contract did not provide Wastech Services with a guarantee that it would achieve any target operating profits.

Wastech Services initiated an arbitration, arguing that Metro breached the duty of good faith when exercising its contractual discretion. The arbitrator reasoned that Metro’s conduct had been honest and reasonable, however, it failed to give appropriate regard to Wastech Services’ interests and expectations, thereby breaching the duty of good faith. The Supreme Court of British Columbia reversed the arbitrator’s decision and found that Metro had not breached the duty to exercise contractual discretion in good faith. The case was subsequently dismissed by the British Columbia Court of Appeal and further appealed to the SCC.

The SCC held that the reallocation of waste removal to closer locations did not breach Metro’s duty to exercise contractual discretion in good faith. The SCC pointed to the contract, which did not guarantee Wastech Services would achieve targets. In addition, Metro’s exercise of its absolute discretion to reallocate waste removal was consistent with the purpose of the creation of the discretion namely, to operate efficiently and minimize costs. The SCC was unwilling to impose on Metro a non-negotiated obligation to protect Wastech Services’ margins. Both parties made a deliberate decision not to include such an explicit term in the contract.

Key Takeaways

1. You cannot contract out of the duty of good faith.
2. The duty is modest and context specific. It is not equivalent to a fiduciary duty since each contracting party is not required to subordinate its interests to other parties when exercising its discretionary power.
3. Clarifying the purpose of discretionary provisions is important. The purpose determines the scope of reasonableness.

If you have any questions with respect to the matters discussed above, please contact Sanjeev Patel ([email protected]), Nick Robelek ([email protected]) or any other member of Wildeboer Dellelce LLP.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.