3 Tips to Exercise Contractual Discretion in Good Faith
Published:
March 1, 2021
Author(s):
The Supreme Court of Canada continues to develop and clarify the organizing principle of good faith performance in contract law. In its 2014 decision in Bhasin v. Hrynew, the Court recognized the general principle applicable to all contracts, requiring contracting parties to, among other things, perform their contractual duties honestly, reasonably and not capriciously or arbitrarily. In its January 2021 decision in C.M. Callow Inc. v. Zollinger, the Court built on this principle, applying its reasoning to how contracting parties exercise their contractual rights and perform their contractual obligations in an honest manner. In its February 2021 decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, the Court further added to this jurisprudence by addressing the contours of the duty to exercise discretion under a contract in good faith.
The Case
Wastech Services Ltd. and the Greater Vancouver Sewerage and Drainage District (Metro) had entered into a long-term contract. Under the contract, Wastech agreed to remove and transport waste to three different disposal facilities. Metro was to pay Wastech at different rates depending on the facility at which it dropped the waste. The contract contemplated that Wastech’s operating costs would comprise a certain percentage of its total revenues, and that any deviation from that target would be the subject of an adjustment. Metro had the discretion to allocate the waste as it decided. This allocation impacted both the amount of waste Wastech transported and the amount of its compensation under the contract. During the term of the contract, Metro decided to send more waste to a particular disposal facility. This resulted in Wastech making less money under the contract, which led to higher than targeted percentage of operating costs. Wastech alleged Metro breached the contract and referred the dispute to arbitration. The arbitrator decided that Metro had a duty to exercise its contractual discretion in good faith, and breached this duty by preventing Wastech from meeting its target percentage of operating costs. Metro successfully appealed to the Supreme Court of British Columbia; the British Columbia Court of Appeal upheld that outcome. The Supreme Court of Canada ultimately decided that the duty to exercise discretion in good faith is breached only where such exercise is done in in a manner unconnected to the purposes underlying it. Metro didn’t breach its duty because it was merely acting in its own self-interest and within the bounds of discretion for which the contract provided.
3 Tips
These three tips will help a contracting party exercise its discretion under a contract in good faith – and minimize its liability risks for failing to do so:
1. Discretion is not absolute
The duty to exercise contractual discretion in good faith is a general doctrine of contract law applicable to all contracts in which the parties have provided each other with discretion under the contract. The duty places limits on how contracting parties can exercise discretion under a contract – and it’s not possible to contract out of this duty.
2. Connect discretion to its purpose
The duty to exercise contractual discretion in good faith will be breached where the exercise of discretion is unreasonable: where it is unconnected to the purposes for which the discretion was granted. An exercise of discretion will be unreasonable when it falls outside the range of behaviour the parties contemplated in their contract.
3. Act in self-interest, but reasonably
The duty to exercise contractual discretion in good faith doesn’t require a party to subordinate its interests to those of the other party. Under a contract, a party can cause loss to the other party in pursuit of its own economic interests. Acting in this manner isn’t necessarily exercising discretion wrongfully or in “bad faith”; the key is to exercise discretion reasonably and in a manner connected to the purpose for which the discretion was granted.
Please contact your McInnes Cooper lawyer or any member of our Corporate & Business Law Team @ McInnes Cooper to discuss this topic or any other legal issue.
Related Lawyers
Related Services
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
© McInnes Cooper, 2021. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
