On February 5, 2021, the Supreme Court of Canada released its judgment in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District.1 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. Zollinger2 (see our earlier blog post), which clarified the duty of honest performance established in Bhasin v. Hrynew3 (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.4 This duty "operates
in every contract irrespective of the intentions of the
parties".5
- 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".6 This duty can be breached
even if the duty of honest performance is not.7
- A party breaches the duty when it
exercises its contractual discretion "unreasonably",
meaning "in a manner unconnected to the purposes underlying
the discretion".8 This will occur, for example, where the
exercise of discretion is "arbitrary or
capricious".9
- 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".10
- The duty does not require a party to
"subvert" or "subordinate" its interests to
those of the other party,11 even when a contract is "a
long-term, relational agreement dependent upon an element of trust
and cooperation".12 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".13 Rather, "it
simply limits the range of legitimate ways in which a discretionary
power may be exercised in light of the relevant purposes".14
- 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.15 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".16
- 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.
Key takeaways
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."17
- 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".18
- 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.19 and Teal Cedar Products Ltd. v. British Columbia,20 the Court held that the standard of review applicable on an appeal from an arbitral award under s. 31 of the B.C. Arbitration Act21 is generally the deferential "reasonableness" standard, as opposed to the more exacting "correctness" standard. In Canada (Minister of Citizenship and Immigration) v. Vavilov,22 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.23 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.
Footnotes
1. Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [Wastech].
2. C.M. Callow Inc. v. Zollinger, 2020 SCC 45 [Callow].
3. Bhasin v. Hrynew, 2014 SCC 71 [Bhasin].
11. Wastech, at paras. 6, 107.
12. Wastech, at paras. 6, 102.
19. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, at paras. 102-06 [Sattva].
20. Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, at paras. 74-76 [Teal Cedar].
21. Arbitration Act, R.S.B.C. 1996, c. 55.
22. Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65.
23. Wastech, at para. 121, per Côté, Brown, and Rowe JJ. (concurring).
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