Self-Interested Exercise Of Contractual Discretion: SCC Issues New Decision On The Duty To Exercise Discretion In Good Faith (Part 2/2) – Corporate/Commercial Law Leave a comment


Part 2 – Self-Interested Exercise of Contractual Discretion:
SCC Issues New Decision on the Duty to Exercise Discretion in Good
Faith

Wastech Overview

On February 5, 2021, the SCC issued its decision in Wastech on the duty to
exercise contractual discretion in good faith. This is the second
decision out of the SCC on good faith since the SCC first
confirmed, and then clarified, the existence of the organizing
principle of good faith and duty of honest performance in Bhasin and C.M. Callow,
respectively.

In Wastech, the SCC clarified that discretionary
decision-making under a contract will not constitute bad faith,
even if the decision is made out self-interest, unless the
discretion is exercised unreasonably, such as when decisions are
made arbitrarily, capriciously or in a manner unconnected to the
purposes underlying the discretion. In other words, parties are
free to exercise their discretion to make decisions that ensure
their own best interests are met, as long as the decision is made
within the bounds set for the exercise of discretion by the
agreement. Ultimately, whether a discretionary decision had been
made in bad faith will be a highly contextual analysis requiring
careful examination of the circumstances and contract at issue.

Facts

Greater Vancouver Sewerage and Drainage District
(“Metro“) is a statutory corporation
responsible for waste disposal for the Metro Vancouver Regional
District. To carry out this duty, Metro entered into a contract
with Wastech Services Ltd. (“Wastech“)
whereby Wastech would remove and transport waste from the area to
three disposal facilities. Under the contract, Metro had absolute
discretion to decide which facility the waste would be moved to,
but Wastech would be paid a higher rate for waste transported to
the facilities that required the furthest travel. Wastech was not
guaranteed a minimum amount that it would earn each year for
services provided under the contract.

Problems arose between the parties when Metro decided to send
waste to a closer facility rather than those located further away.
This discretionary decision saved Metro unnecessary additional
costs associated with waste transportation while depriving Wastech
of the higher revenue it could have earned from transporting waste
to the more distant facility. Wastech claimed that Metro’s
allocation decision caused Wastech to fail to reach its target
profit for the year and amounted to a breach of the duty of good
faith. The matter was brought before an arbitrator who decided that
Metro had breached its duty of good faith and awarded damages to
Wastech.

Lower Court Decisions

Subsequent decisions by the BC Supreme Court
(“BCSC“) and the Court of Appeal struck
down the arbitrator’s award.

The BCSC did not agree with the arbitrator that Metro failed to
have the “appropriate regard” for Wastech’s
interests, thereby breaching its duty of good faith. In his reasons
for judgment, the trial judge pointed out that having an
“appropriate regard” simply requires parties to not
undermine each other’s interests in bad faith and did not
“require Metro to serve Wastech’s interest or disregard
its own self-interest.”1 The trial judge explained that the
duty to exercise contractual discretion in good faith had to be
considered in light of the negotiated terms of the contract, and
identified that Metro and Wastech had deliberately chosen not to
constrain Metro’s discretion.2 As such, Metro’s exercise of
discretion in allocating waste to the closer facility did not
breach the duty of good faith.

Following suit, the Court of Appeal dismissed Wastech’s
appeal, upholding the BCSC’s decision and emphasizing that to
find a breach of a duty of good faith, a measure of
“dishonesty, untruthfulness, improper motive, or ‘bad
faith'” must be present.3

SCC’s Decision

On February 5, 2021, the SCC dismissed Wastech’s appeal,
upholding the decision of both the BCSC and the Court of Appeal to
set aside the arbitrator’s award.

The SCC firmly stated that there is a well-established duty to
exercise contractual discretionary powers in good faith. Therefore,
the question before the SCC was: what constraints does the duty of
good faith place on a party exercising contractual discretion? In
response, the Court put it simply:

“. 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.”4

Although one party’s exercise of discretion may result in
the loss of an expected benefit for the other, this alone is not
enough to establish a breach of contract.5 To establish a
breach in the duty to exercise discretion in good faith, the
alleging party must show that the exercise was disconnected from
the purpose for which it was granted and as a result was
unreasonable.6

When applying these principles to Metro’s waste allocation
decision, the SCC found that Metro had not breached its duty to
exercise its discretion in good faith. The SCC stated that Metro
acted reasonably and was given “absolute discretion”,
which was meant to allow Metro to administer waste disposal in the
most efficient and cost-effective manner.7 Although the parties
agreed to try and reach a target level of profitability, the
contract did not guarantee that the target would be reached, and
the parties were aware of the risks associated with the exercise of
discretion and the potential variance in annual revenues.8
Ultimately, the SCC held that Wastech failed to bargain for the
advantage it was seeking and since Metro was not in a fiduciary
relationship with Wastech, Metro’s exercise of discretion only
had to show “loyalty to the bargain, not loyalty to
Wastech.”9

Practical Implications for Contracting Parties

Wastech demonstrates that contractual exercises of
discretion may negatively impact one party’s anticipated
benefits under a contract without constituting bad faith as long as
the discretion was exercised within the confines of the contractual
arrangement. Accordingly, Wastech should be a warning to
contracting parties that when negotiating a contract with rights to
discretionary decision-making, the contract must clearly outline
what discretionary powers will be given to which party and whether
there are any restrictions on such.

During contractual negotiations, parties should consider all the
ways in which discretionary decision-making under a contemplated
contract could impact their respective interests. If your
counterparty is given absolute discretion to make a decision under
a contract, you must be aware that the duty of good faith will not
require your counterparty to subordinate its interests to yours
when making discretionary decisions. The best approach is to
negotiate carefully and draft your contracts with precision as to
the benefit that you expect to receive thereunder.

Want More?

If you missed Part 1 of this blog series, you can read it
here
.

Footnotes

1.
Greater Vancouver Sewerage and Drainage District v. Wastech
Services Ltd
., 2016 BCSC 68, at paras 88-89.

2.
Wastech Services Ltd. v. Greater Vancouver Sewerage and
Drainage District
, 2021 SCC 7 (“Wastech“),
at para 33.

3.
Wastech at para 40.

4.
Wastech at para 63.

5.
Wastech at para 83.

6.
Wastech at para 88.

7.
Wastech at paras 99-100.

8.
Wastech at para 105.

9.
Wastech at para 107.

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.



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