The Supreme Court Of Canada Examines The Doctrine Of “Good Faith” In The Exercise Of Contractual Discretion – Corporate/Commercial Law

Bizar Male


Canada:

The Supreme Court Of Canada Examines The Doctrine Of “Good Faith” In The Exercise Of Contractual Discretion


To print this article, all you need is to be registered or login on Mondaq.com.

In the recent decision of C.M. Callow Inc. v.
Zollinger
, the Supreme Court of Canada expanded the duty of
honesty in contractual performance (please see our recent blog post and newsletter for more information). In a more
recent ruling, the Supreme Court has again looked at the doctrine
of good faith performance in contracts, this time to do with the
exercise of discretion in the performance of a contract.

In Wastech Services Ltd. v. Greater Vancouver Sewerage and
Drainage District
2021 SCC 7, Wastech Services
(“Wastech”), a waste disposal company, entered into a
contract with the Greater Vancouver Sewerage and Drainage District
(the “District”), which was responsible to administer
waste disposal in a region of Vancouver.

Pursuant to the contract, the District was given “absolute
discretion” to choose any of three disposal sites for Wastech
to dispose of waste. Wastech was compensated at varying rates,
depending on which disposal site was chosen. Wastech was paid the
most for the site that was farthest away. Although the contract
identified a cost/revenue target for Wastech’s compensation,
the contract did not guarantee that the target would be achieved by
Wastech.

In 2011, the District opted to send a greater amount of waste to
a closer location. This resulted in Wastech suffering decreased
profits and failing to meet its target.

Wastech commenced an arbitration seeking damages against the
District. Wastech argued that the District failed to act in good
faith and violated the contract by allocating the waste to
locations which made it impossible for Wastech to reach its
cost/revenue target. Wastech won the arbitration as it was held
that the District did indeed act in bad faith by exercising its
discretion in the contract in a manner that adversely affected
Wastech’s profits.

The District appealed the arbitrator’s decision, a series of
appeals ensued and the matter eventually reached the Supreme
Court.

The Supreme Court ruled in the District’s favour and held
that it did not breach its duty of good faith to Wastech. It was
explained that the parties specifically agreed, in the contract,
that the District was given “absolute discretion” to
choose which waste disposal sites to use in order to run its
operation efficiently and minimize costs. The contract did not
obligate the District to use that discretion to ensure that Wastech
would meet its cost/revenue target. The court also noted that, when
entering into the contract, both sides had full knowledge of the
risk that was posed by “the exercise of discretion.”

The Wastech decision is important insofar as it
demonstrates the limits of the duty of good faith when it comes to
contractual discretion. The decision shows that if a party is given
discretion in a contract, they will not be held to have breached
their duty of good faith if they exercise that discretion in
accordance with its purpose. The duty will only be breached when
the party exercises its discretion in a manner that is disconnected
from the underlying purpose provided for in the contract.

This decision marks another recent milestone in the development
of contract law and the highly debated duties of “good
faith” in performing contracts. It will be interesting to see
how these recent decisions will be applied as the fundamentals of
contract law continue to evolve.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Corporate/Commercial Law from Canada

Next Post

Judges With Corporate Backgrounds Side With Workers Less, Study Finds : NPR

A U.S. federal courtroom sits empty in 2017 in Honolulu. A new study finds that judges with backgrounds as prosecutors or corporate lawyers are more likely to rule in favor of employers. Jennifer Sinco Kelleher/AP hide caption toggle caption Jennifer Sinco Kelleher/AP A U.S. federal courtroom sits empty in 2017 […]