The Supreme Court of Canada (“SCC”) in two decisions has continued to clarify and explain the scope of the principle of good faith, which was recognized by the SCC in 2014 as an organizing principle of contract law. The first of these decisions, Callow v. Zollinger, 2020 SCC 45 (“Callow”), dealt with one aspect of good faith in contracts: the duty to perform contracts honestly (commonly referred to as the duty of honest contractual performance). More recently, the Court released its ruling in the companion case of Wastech Services Ltd v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 (“Wastech”), which clarifies a second aspect of good faith in contracting: the duty to exercise contractual discretion reasonably.
The Facts of the Case
The parties in this case were Wastech Services Ltd. (“Wastech”), a waste transportation and disposal company, and the Greater Vancouver Sewerage and Drainage District (“Metro”), a statutory body responsible for the administration of waste disposal from the Greater Vancouver region (together, the “Parties”).
The Parties had a long-standing contract which governed the removal and transportation of waste by Wastech to three disposal facilities: one in Vancouver, one in Burnaby, and one in Cache Creek (the “Contract”). Wastech was to be paid a differing rate depending on which disposal facility the waste was directed to and how far away the facility was located (i.e., Metro paid Wastech a different rate for waste disposed at the Cache Creek facility relative to the other two, mainly because Cache Creek is farther away). Pursuant to the Contract, Metro had absolute discretion to allocate waste to each facility.
Wastech had a target operating profit of 11% under the Contract. If in a given year Wastech’s actual operating profit varied significantly from this target, the Contract had mechanisms that would bring the numbers closer together. For example, if Wastech’s operating costs exceeded the target operating costs by a certain amount, Metro had to pay Wastech half the difference. If Wastech’s operating costs were less than the target operating costs, then Wastech would similarly compensate Metro. While these mechanisms were designed to bring Wastech’s actual profit closer to its target profit, the Contract did not guarantee that Wastech would achieve the target profit in any given year.
In late 2010, facing budget constraints, and seeking to maximize the remaining life of the Cache Creek facility, Metro exercised its contractual discretion and changed the allocation of waste so that less waste went to Cache Creek and more went to the Vancouver and Burnaby landfills. The decrease of the Cache Creek allocation – roughly 31% in 2011 relative to 2010 – caused Wastech’s operating profit for the 2011 year to sink to 4%, 7 points below target, even after the adjustment payment described above was taken into account.
Wastech launched an action against Metro, claiming damages of roughly $2.9M –the additional amount it says it would have made in 2011 but for Metro’s reallocation. Wastech alleged that Metro breached the Contract by preventing it from hitting its target profit.
First, the dispute proceeded to arbitration. The arbitrator found for Wastech, holding that Metro breached its duty of good faith by using its discretion in a way that prevented Wastech from achieving its target profits, and accordingly, awarded Wastech compensation. Metro appealed the arbitrator’s decision. The judge overturned the arbitrator’s award, holding that the arbitrator erred by characterizing Metro’s duty of good faith in a way that contradicted the words of the contract itself. In turn, Wastech appealed the judge’s decision. The Court of Appeal upheld the judge’s decision on the grounds that, among other things, the arbitrator had over-extended the duty of good faith. Wastech again appealed, this time to the SCC.
What Did the Supreme Court of Canada Decide?
While in Callow, the SCC had dealt with the duty of honest contractual performance, the question in Wastech was different because it turned on whether Metro had breached its duty under another branch of good faith, namely, the duty to act reasonably in the exercise of contractual discretionary powers.
The Court unanimously dismissed Wastech’s appeal and clarified the duty on contracting parties to exercise discretionary powers under a contract “reasonably”. The Court found that the question of whether a party has exercised its powers or discretion under a contract reasonably is measured by reference to the purpose of the contract, and in particular the purpose for which that party was granted the discretionary power at issue.
Read more about the Supreme Court of Canada’s ruling on good faith in contracts on the Stikeman Elliott LLP website.
Michael Mestinsek is Head of the Advocacy Group in the Calgary office. He is a member of the Partnership Board. He represents numerous domestic and international clients in all major areas of commercial litigation, arbitration and alternative dispute resolution.
Joseph Wenig is an associate in the Advocacy Group.
Ben Muller is an associate in the Litigation & Dispute Resolution Group. His practice focuses on restructuring and insolvency matters. He has experience representing debtors and court-appointed officers.