Supreme Court of Canada Bulletin, Feb. 5, 2021

Bizar Male

Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 — Contracts — Breach — Performance

On appeal from a judgment of the British Columbia Court of Appeal (2019 BCCA 66) affirming a decision of McEwan J. (2018 BCSC 605).

Wastech, a waste transportation and disposal company, and Metro, a statutory corporation responsible for the administration of waste disposal for the Metro Vancouver Regional District, had a long‑standing contractual relationship which contemplated the removal and transportation of waste by Wastech to three disposal facilities. Wastech was to be paid at a differing rate depending on which disposal facility the waste was directed to and how far away the facility was located. The contract did not guarantee that Wastech would achieve a certain profit in any given year and it gave Metro absolute discretion to allocate waste as it so chose.

In 2011, Metro reallocated waste from a disposal facility further away to one that was closer, resulting in Wastech recording an operating profit well shy of its target. Wastech alleged that Metro breached the contract by allocating waste among the facilities in a manner that deprived Wastech of the possibility of achieving the target profit for 2011. Wastech referred the dispute to arbitration and sought compensatory damages. The arbitrator found that a duty of good faith applied, that Metro had breached that duty, and that Wastech was therefore entitled to compensation. The Supreme Court of British Columbia allowed Metro’s appeal, and set aside the arbitrator’s award on the basis 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 in this case the parties had deliberately rejected a term constraining the exercise of discretionary power to allocate waste. The Court of Appeal dismissed Wastech’s appeal.

Held (9-0): The appeal should be dismissed.

Per Wagner C.J. and Abella, Moldaver, Karakatsanis, Martin and Kasirer JJ.:

Where a party to a contract exercises its discretion unreasonably, that is, in a manner not connected to the underlying purposes of the discretion granted by the contract, its conduct amounts to a breach of the duty to exercise contractual discretionary powers in good faith. Metro’s exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted and was therefore not a breach of the duty. Accordingly, the arbitrator’s award cannot stand, whether the standard of review is correctness or reasonableness.

The duty to exercise contractual discretion in good faith is well‑established in the common law. It was expressly recognized by the Court in its account of the organizing principle of good faith in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494. However, it was not necessary in Bhasin to spell out the contours of this duty. In order to answer Wastech’s claim then, the Court must determine what constraints the duty to exercise contractual discretion in good faith imposes on the holder of that discretion.

The duty to exercise contractual discretion in good faith requires the parties to exercise their discretion in a manner consistent with the purposes for which it was granted in the contract, or, in the terminology of the organizing principle in Bhasin, to exercise their discretion reasonably. The duty to exercise contractual discretion is breached only where the discretion is exercised unreasonably, in a manner unconnected to the purposes underlying the discretion. Where discretion is exercised in a manner consonant with the purpose, that exercise may be characterized as 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.

The measure of fairness is what is reasonable according to the parties’ own bargain. It is not what a court sees as fair according to its own view of the proper exercise of the discretion. Where the exercise of discretionary power falls outside of the range of choices connected to its underlying purpose — outside the purpose for which the agreement the parties themselves crafted provides discretion — it is thus contrary to the requirements of good faith. Courts can intervene where the exercise of the power is arbitrary or capricious in light of its purpose as set by the parties; however, their role is not to ask whether the discretion was exercised in a morally opportune or wise fashion from a business perspective. Courts must only ensure parties have not exercised their discretion in ways unconnected to the purposes for which the parties themselves grant that power. In a contractual context, these choices are ascertained principally by reference to the contract, interpreted as a whole — the first source of justice between the parties.

What a court considers unreasonable is highly context‑specific, and ultimately depends upon the intention of the parties as disclosed by their contract. Generally, however, for contracts that grant discretionary power in which 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. It is in properly interpreting the contract for the purposes for which discretion was granted that 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 fact that a party’s exercise of discretion causes its contracting partner to lose some or even all of its anticipated benefit under the contract is not dispositive, in itself, as to whether the discretion was exercised in good faith. However, it could well be relevant to show that discretion had been exercised in a manner unconnected to the relevant contractual purposes.

Finally, the duty to exercise discretion in good faith is a general doctrine of contract law. It need not find its source in an implied term in the contract, but rather it operates in every contract irrespective of the intentions of the parties. Recognizing this general duty interferes very little with freedom of contract for two reasons. First, just as parties will rarely expect that their contract permits dishonest performance, contracting parties rarely if ever expect discretion granted by the contract to be exercised in a manner unconnected to the purposes for which it was conferred. Second, the content of the duty is guided by the will of the parties as expressed in their contract. Rather than interfering with the objectives of the contracting parties or imposing duties on them beyond their reasonable contemplation, this duty merely requires that parties operate within the scope of discretion defined by their own purposes for which they freely negotiated its grant. Parties who provide for discretionary power cannot contract out of the implied undertaking that the power will be exercised in good faith, in light of the purposes for which it was conferred.

Metro’s exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted. Wastech’s case does not rest on allegations that it fell prey to lies or deception or that Metro exercised its discretion capriciously or arbitrarily, and it 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 gives Metro the absolute discretion to determine how the waste is to be allocated. There is no guaranteed minimum volume of waste allocated in a given year. Reading the contract as a whole, the purposes become clear: to allow Metro the flexibility necessary to maximize efficiency and minimize costs of the operation. The fact that this discretion exists alongside a detailed framework to adjust payments towards the goal of a negotiated level of profitability, belies the idea that the parties intended this discretion be exercised so as to provide Wastech with a certain level of profit.Those incentives are already carefully created elsewhere in the contract.

Based on these purposes, Metro did not act unreasonably. Metro’s exercise of discretion was guided by the objectives of maximizing efficiency, preserving remaining site capacity, and operating the system in the most cost-effective manner, and was made in furtherance of its own business objectives. Wastech is asking for an advantage for which it did not bargain: it asks that Metro confer a benefit upon it that was not contemplated, expressly or impliedly, under the contract. Although Wastech emphasized that the contract was a long‑term relational agreement dependent upon an element of trust and cooperation between Wastech and Metro, this is not dispositive of the case in favour of Wastech. This is not an example of an unforeseen or unregulated matter that, by reason of the relational character of the contract, was left to the trust and cooperation said to be inherent in the long-term arrangement. The parties foresaw this risk — and chose to leave the discretion in place.

Wastech asks the Court to have Metro subvert its own interest in name of accommodating Wastech’s interest. However, Metro is Wastech’s contracting partner, not its fiduciary. The loyalty required of it in the exercise of this discretion was loyalty to the bargain, not loyalty to Wastech. Wastech cannot rely on an understanding of good faith that sits uncomfortably with the foundation of contractual justice. When the contours of good faith performance in this context are properly identified, it is plain that Metro did not exercise its power to reallocate waste in breach of a good faith duty. An analogy to the standard of reasonable conduct in the law of abuse of contractual rights in Quebec does not assist Wastech in this case.

Per Côté, Brown and Rowe JJ.:

There is agreement that the appeal should be dismissed. Answering the question posed is a matter of straightforwardly applying Bhasin, and confirming that, while Bhasin organized several established common law doctrines under the rubric of good faith, it did not represent an abandonment of commercial certainty by requiring contracting parties to place their counterparty’s interests ahead of their own.

While the majority refrains from identifying the standard of review, clear guidance on this point ought to be provided. Although there are important differences between commercial arbitration and administrative decision-making, those differences do not affect the standard of review where the legislature has provided for a statutory right of appeal. Appellate standards of review apply as a matter of statutory interpretation. The appeal in this case was brought pursuant to s. 31 of British Columbia’s Arbitration Act, which provides that, either by consent of the parties or with leave of the Supreme Court of British Columbia, a party to an arbitration may appeal to the court on a question of law arising out of the award. In light of Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, it follows that the standard of review to be applied by the Court in this case is correctness.

The purpose of good faith is to secure the performance and enforcement of the contract made by the parties. It cannot be used as a device to create new, unbargained‑for rights and obligations or to alter the express terms of the contract. Where an agreement reflects a shared, reasonable expectation as to the manner in which a discretion may be exercised, that expectation will be enforced. While parties will usually expect that a discretion will be exercised in accordance with the purposes for which it was conferred, this is so only where the purpose of a discretionary power arises from the terms of the contract, construed objectively, and having regard to the factual matrix. The obligation to exercise discretion reasonably does not reflect the imposition of external standards on the exercise of discretion, but rather giving effect to the standards inherent in the parties’ own bargain. Accordingly, there is disagreement with the majority that where a discretion is unfettered on its face, a court must form a broad view of the purposes of the venture to which the contract gives effect, and of what loyalty to that venture might involve for a party to it, and to take those broad purposes as providing the inherent limits for the exercise of the power. The majority’s invocation of loyalty to the venture suggests that parties must use their discretion, even where it is chosen by the parties to be unfettered, in a way that advances the objectives of the contract. Approaching the interpretive task from such a starting point risks, even invites, undermining freedom of contract and distorting the parties’ bargain by imposing constraints to which they did not agree.

Additionally, the purpose of a discretion is always defined by the parties’ intentions, as revealed by the contract. Therefore, where a contract discloses a clear intention to grant a discretion that can be exercised for any purpose, courts, operating within their proper role, must give effect to that intention. With careful drafting, parties can largely immunize the exercise of discretion from review on this basis, or choose to specify the purpose for which a discretion has been granted in order to provide a clear standard against which the exercise of discretion is to be assessed. In either instance, their intention should be given effect and not subverted.

The duty of honest performance and the duty to exercise discretionary powers in good faith should remain distinct. Any suggestion that the duty of honest performance is a preliminary step in assessing whether there is a breach of the duty to exercise discretionary powers in good faith fails to comprehend or have regard for how the common law has distinguished between these duties. Further, rather than assisting in the development of the common law of good faith in contractual performance, the majority’s digression into the civil law of Quebec gives rise to complication, uncertainty and confusion. It has no relevance in the present case, and it confuses matters for no useful purpose. The common law of British Columbia applies to the contract at issue and readily answers the questions of law posed in the appeal.

Reasons for judgment: Kasirer J. (Wagner C.J. and Abella, Moldaver, Karakatsanis and Martin JJ. concurring)

Joint Concurring Reasons: Brown and Rowe JJ. (Côté J. concurring)

Neutral Citation: 2021 SCC 7

Docket Number: 38601

https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/18680/index.do

 

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