Good faith does not allow a contracting party to use its discretion unreasonably, court affirms
In dismissing the appeal of a British Columbia waste management company which claimed a breach of contract against a statutory corporation, the Supreme Court of Canada has affirmed that contractual discretion duty is breached only where discretion is exercised unreasonably.
In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, a unanimous Supreme Court of Canada clarified the organizing principle of good faith in contract law for the first time since its 2014 decision in Bhasin v. Hrynew.
The decision “clarifies that the duty not to abuse discretionary contractual powers applies to all contractual agreements,” says Brandon Kain, a partner in McCarthy Tétrault LLP’s Litigation Group in Toronto. Kain and his co-counsel Adam Goldenberg argued for the successful appellant in C.M. Callow Inc. v. Zollinger, which was heard at the same time as Wastech and established a revised framework for the duty of honest contractual performance that arises under the principle of good faith.
“The biggest similarity in both cases is that the Supreme Court has said that [the duty of honest contractual performance and the duty not to abuse discretionary contractual powers] are both general doctrines of contract law, not implied contractual terms, which apply to all contracts in common law Canada and cannot be excluded by the parties,” says Kain.
“Wastech has now extended that same framework [established in Callow] to the duty not to abuse discretionary powers.”
Wastech, a waste transportation and disposal company, alleged that the Greater Vancouver Sewerage and Drainage District, or “Metro,” which is responsible for the administration of waste disposal for the Metro Vancouver Regional District, had breached its longstanding contract by allocating waste among its dumping facilities in a manner that deprived Wastech of the possibility of achieving its target profit for 2011, since Wastech was paid more to remove waste to a further location.
An arbitrator agreed that Metro had breached its duty of good faith. However, the British Columbia Supreme Court allowed Metro’s appeal, finding that the imposition of a contractual duty to have appropriate regard for the interests of another contracting party must be based on the terms of the contract itself, and that the parties had deliberately rejected a term that constrained the exercise of discretionary power to allocate waste. The Court of Appeal for British Columbia dismissed Wastech’s appeal.
The majority of the Supreme Court found that Metro exercised its discretion for the right purposes, including to operate efficiently and manage its costs well, and therefore its exercise of discretion in choosing another dumping site did not constitute a breach of its good faith duties, and in particular the duty to exercise discretion in good faith.
Writing for the majority, Justice Nicholas Kasirer found that the arbitrator’s award could not stand, whether the arbitrators award was assessed against the standard of correctness, the lower level of deference, or against a standard of the higher deference of reasonableness.
“Together with Callow, which applies where parties perform contracts in a way that is dishonest, [the Wastech decision] really adds a second standard of performance that limits the way in which parties can exercise certain types of rights under contracts,” says Kain.
“It clarifies that what unreasonableness means in this context is exercising a power … that is outside the purpose for which the discretion is granted under the contract. … That is a fairly significant clarification of Bhasin.”
In Bhasin, Supreme Court Justice Thomas Cromwell had recognized a general organizing principle of good faith, meaning parties generally must perform their contractual duties honestly and reasonably, not capriciously or arbitrarily.
“I think that at the end of the day, commercial certainty won out” in both the majority’s and minority’s reasons says Jeremy Opolsky of Torys LLP in Toronto, who with Winston Gee represented the intervener Canadian Chamber of Commerce in Wastech. The Chamber had argued that limits must be defined on the principle of good faith in the interests of commercial certainty and freedom of contract.
As well, “the majority, at least, confirms that the doctrine of good faith and contractual discretion is a general doctrine of contract, which means that going forward there’s really no such thing as absolute discretion in a contract; it will always be restricted by the purpose of the discretion in the contract.”
As well, “the Supreme Court acknowledges it has never clarified the standard for what good faith in contractual performance means,” says Opolsky.
“There was uncertainty in the wake of Bhasin as to how it constrains parties’ abilities to make decisions and exercise rights under their contract. This decision clarifies that the common law tradition of being able to act in your own economic self-interest, or … having “some elbow room,” the aggressive pursuit of self-interest is maintained.
Standard of review
In concurring reasons, Justices Russell Brown and Malcolm Rowe, also writing for Justice Suzanne Côté, agreed that the arbitration award had been properly set aside by the courts below, but found a need for “clear guidance” on the appropriate standard of review.
The appeal in Wastech was brought pursuant to s. 31 of British Columbia’s Arbitration Act, which provides that a party to an arbitration may appeal to the court on a question of law arising out of the award. In light of the Supreme Court’s landmark decision in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, the minority found that the standard of review to be applied in Wastech was correctness. Vavilov established a presumption that reasonableness is the applicable standard of review in most cases.
The minority “wanted to clarify that the extension of the law, or change in the law resulting from the Vavilov decision, applied to commercial arbitration decisions, not simply administrative tribunals,” says Kain.
“The majority today declined to say whether they agreed with the minority or not; … they may have simply wanted to wait until they had further submissions in a case where the issue was more squarely raised, but it does leave that issue open for future litigation.”
Quebec civil law in common law cases
The minority also took issue with the majority’s discussion of Quebec’s Civil Code. In its appeal, Metro had argued that Wastech’s position would not be treated more favourably under Quebec law.
“There is, of course, no question of applying Quebec law to this dispute,” wrote Justice Kasirer for the majority, “but, says Metro, even by analogy or comparison, the standard of reasonable conduct in the law of abuse of contractual rights in Quebec would not provide Wastech with the redress it seeks here.”
For the minority, the majority’s “digression into the civil law gives rise to complication, uncertainty and confusion,” Justices Brown and Rowe wrote. “The Civil Code of Québec has no relevance here, and our colleague (yet further) confuses matters for no useful purpose by incorporating an analysis thereunder. This is particularly undesirable where the common law of British Columbia, which is the law that applies to the Agreement, readily answers the questions of law posed by this appeal.”
Justice Kasirer also wrote the majority reasons in Callow, using Quebec civil law by analogy in deciding a common law case.
Indeed, the Supreme Court “has been consistent in using the Quebec civil law not just to inform the content of common law contract law,” says McCarthy’s Goldenberg, but “has also looked at Quebec to provide reassurance to contracting parties and their lawyers in common law Canada, [since] the good faith obligations that the court is recognizing and fleshing out in these decisions have in most cases been better articulated for a longer period of time under the civil code in Quebec, and they have not impeded commercial certainty or commerce as between contracting parties in that province.“
Goldenberg notes that Chief Justice Richard Wagner, a civilian lawyer himself though trained at the University of Ottawa in a common law jurisdiction, has been “among the more receptive judges that we've seen in recent years to arguments that support the harmonization of certain analogous doctrines as between Quebec civil law and common law. …
“The need to understand where analogous doctrines support or don't support the positions that you're advocating is important and has become more important since Chief Justice Wagner was elevated to his position. … I think we've seen that as a theme in the good faith cases since 2014, but quite markedly in Callow in particular.”