Duty of Good Faith Contractual Discretion: Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District
March 2022 - 3 min read
In 2020 and 2021, C.M. Callow Inc. v. Zollinger, 2020 SCC 45 and Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, two significant Supreme Court of Canada cases, clarified and confirmed the duty of good faith and honest contract performance. These cases have since been followed several times in Alberta and Canada to confirm, clarify, or extend the duty of good faith and honest performance. Understanding the evolution of the law following Callow and Wastech is essential for all individuals and entities with contractual duties and rights.
This article aims to provide an update on how appellate courts have applied the concepts of good faith and honest contractual performance, following Callow and Wastech.
Wastech was a company that moved and disposed of waste. The Greater Vancouver Sewerage and Drainage District (Metro) was responsible for administrating waste disposal in the district. Wastech and Metro had a long-term contract that said that Metro could choose to send waste to any of three different disposal sites. Wastech would be paid a different rate depending on which site they chose. The rates were higher for sites that were farther away. The contract aimed to pay Wastech a "target operating ratio" of .89, meaning costs were 89% of revenue, and it did not guarantee a specific operating ratio in any given year. The contract also gave Metro discretion to send the waste to the site of its choice.
In 2011, Metro decided to send more waste to a closer location which meant that Wastech did not reach the target operating ratio. As a result, Wastech said Metro violated the contract.
In Wastech, the SCC said that good faith does not allow a contracting party to unreasonably use its discretion. The duty to exercise contractual discretion is only breached when the discretion is exercised in a manner unconnected to the purposes underlying the discretion. Where discretion is exercised in accordance with the purpose, that exercise may be considered reasonable according to the bargain the parties had chosen to put in place. But where the exercise stands outside the compass set by contractual purpose, the exercise is unreasonable in light of the agreement for which the parties bargained and may be thought of as unfair and contrary to the requirements of good faith.
What a Court considers unreasonable is highly context‑specific and ultimately depends upon the parties' intention as disclosed by their contract:
- For contracts that grant discretionary power, the matter to be decided is readily susceptible of objective measurement, the range of reasonable outcomes will be relatively smaller.
- For contracts that grant discretionary power in which the matter to be decided or approved is not readily susceptible to objective measurement, the range of reasonable outcomes will be relatively larger.
In properly interpreting the contract for the purposes for which discretion was granted, the range of good faith behaviour comes into focus and breaches can be identified. Requiring substantial nullification — that is, the evisceration by one party of the better part of the benefit of the contract of the other — is not the appropriate standard for concluding a breach of the duty to exercise discretionary power in good faith.
The Supreme Court considers the use of discretion unreasonable when used in a way that is unconnected to the purpose for which the parties agreed to in the first place. In this case, the contract showed that the parties agreed to give Metro discretion. Wastech's case did not rely on allegations that Metro lied or exercised its discretion suddenly or arbitrarily. It also does not point to any identifiable wrong committed by Metro beyond seeking its own best interest within the bounds set for the exercise of discretion by the contract. The contract gave Metro discretion to determine how the waste was to be allocated. The purpose of the agreement was to allow Metro the flexibility necessary to maximize efficiency and minimize operating costs, it did not require Metro to ensure Wastech reached its target operating ratio in any given year. For this reason, the Court found that Metro exercised its discretion for the right purposes and did not violate the duty to act in good faith.