Most businesses have long-standing contractual relationships with suppliers, service providers, or other essential counterparties. Many of those contracts will allow for some amount of choice, or “discretion”, in how they will be performed. In such circumstances, one might ask: are there any limits on how that discretion can be exercised? And if so, what are they?
The Supreme Court of Canada recently provided guidance on these issues in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (Metro), 2021 SCC 7.
Wastech, a waste transportation and disposal company, and Metro, the statutory corporation responsible for the administration of waste disposal for the Metro Vancouver Regional district, had a long-standing contractual relationship regarding the removal and transportation of waste by Wastech to three disposal facilities. Wastech was paid differing rates depending on which disposal facility the waste was directed to. The contract provided Metro with discretion to allocate waste to the site of their choice. The contract aimed to pay Wastech a “target operating ratio” of 0.89. The contract also provided for adjustments based on the actual operating ratio to ensure the parties shared the financial consequences of deviating from the target.
In 2011, Metro reallocated waste from a disposal facility further away to one that was closer, which meant Wastech did not meet the target. Wastech alleged that Metro breached the contract by allocating waste in a manner that deprived Wastech of the possibility of achieving the target, contrary to Metro’s duty of good faith.
The case was heard by way of a private arbitration. The arbitrator found that Metro’s exercise of its discretion breached its duty of good faith. The arbitrator’s finding was reversed by the BC Supreme Court, and the BC Court of Appeal upheld the BCSC’s decision.
The SCC considered the content of the duty to exercise contractual discretion in good faith and whether Metro breached this duty.
The majority of the Court held that the duty to exercise contractual discretion in good faith is a general doctrine of contract law that operates regardless of the intentions of the parties, similar to the duty of honest performance.
This duty requires the parties to exercise discretion in a manner that is consistent with the purposes for which it was granted in the contract and will be breached if the power is exercised in a manner that is arbitrary, capricious, ulterior or extraneous to that purpose.
Applied to the situation before the court, the majority held that Metro exercised its contractual discretion in good faith. The contract provided Metro with discretion to allocate waste and provided a framework to adjust payments to a negotiated level of profits. The fact that Metro’s exercise of discretion caused Wastech to lose an anticipated benefit was not sufficient to conclude that its discretion was not exercised in good faith. Read as a whole, the contract demonstrated the parties’ intention to maximize efficiency and minimize costs. The duty to exercise contractual discretion in good faith did not require Metro to subordinate its interests to those of Wastech.
In the context of an existing contractual relationship, it must be kept in mind that there is a mandatory, if modest, duty to exercise contractual discretion in good faith.
To avoid potential litigation, whenever a business is considering exercising a contractual discretion it should ask (1) is this action permissible under the terms of our agreement? and (2) even if permitted by the contract, is this action not in good faith, as per the test in Wastech?
If you have any questions regarding Wastech or the application of the duty of good faith to your business, please contact our Commercial Litigation team.
Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District (Metro), 2021 SCC 7 Most businesses have long-standing contractual relationships with suppliers, service providers, or other essential counterparties. Many of those contracts will allow for some amount of choice, or “discretion”, in how they will be performed. In such circumstances, one might ask: are there … Continued