SCC ruling clarifies the duty of good faith in contracts

The Supreme Court of Canada has ruled that contractual duty of good faith is only breached when a discretionary power is exercised in a manner unconnected to the purpose for which it was granted.

The decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District provided clarity on the duty to exercise contractual discretion in good faith.

The case involved Greater Vancouver Sewerage and Drainage District (Metro) and Wastech Services Ltd., who entered into a 20-year agreement for moving waste from Vancouver to locations in British Columbia. The contract included a “target operating ratio” which—if met—would give Wastech an 11% operating profit. However, Metro did not reach this target after reducing its waste allocation to one landfill. Wastech then commenced legal proceedings against Metro by claiming it had breached its contractual duty of good faith.

Canadian Lawyer, Canadian Underwriter, The Lawyer’s Daily, and The Globe and Mail sought comment on the decision from Torys litigators Jeremy Opolsky and Winston Gee, who represented the intervener, Canadian Chamber of Commerce, in the case.

Jeremy told Canadian Lawyer “I think that at the end of the day, commercial certainty won out” in both the majority’s and minority’s reasons.

Jeremy commented about the impact the decision would have on future cases, noting that to date, the definition of good faith has been unclear in commercial contracts.

“The Supreme Court acknowledges it has never clarified the standard for what good faith in contractual performance means,” he said.

“The majority, at least, confirms that the doctrine of good faith and contractual discretion is a general doctrine of contract, which means that going forward there’s really no such thing as absolute discretion in a contract; it will always be restricted by the purpose of the discretion in the contract.

“There was uncertainty in the wake of Bhasin as to how it constrains parties’ abilities to make decisions and exercise rights under their contract. This decision clarifies that the common law tradition of being able to act in your own economic self-interest, or… having ‘some elbow room,’ the aggressive pursuit of self-interest is maintained.”

READ: Supreme trash talk: The duty of good faith in contractual discretion clarified in Wastech.

Associate Winston Gee told The Lawyer’s Daily that the ruling clarified “the limits on the duty of good faith in contractual discretion.”

He added that the decision has given contracting parties more confidence when making business decisions. 

“The duty is only breached when a discretion is exercised in a manner not connected to the underlying purposes of the discretion,” Winston said.

“And this is determined by the words of the contract and the purpose of the transaction, not by general notions of fairness or reasonableness. This gives contracting parties some leeway to define the scope of discretion for themselves. This clarity promotes the interests of commercial certainty and freedom of contract.”

Winston discussed the importance of contract clarity further with Canadian Underwriter and said that less transparency in contacts leaves more scope for interpretation.

“If it is not clear about those things, it just leaves more room for a court to interpret the purpose based on the arguments put forth by the parties in litigation,” Winston said.

He added that it was critical for both parties to carefully review all contracts before proceeding with a transaction.

“From a risk management perspective, you want to be making sure that when you enter into contracts, and when you are reviewing your contracts, you are paying close attention to how discretionary rights under the contract are drafted and crafted,” he said.

Jeremy also discussed with The Globe and Mail the complex nature of making sound business decisions while having contractual obligations.

“What is reasonable and fair is defined foremost by the contract itself and, within that framework, they can make business decisions in their interest,” he said.

Torys’ Appellate Group will provide further analysis on Wastech and other important cases from the appellate courts at their March 23 Breakfast With Appeal webinar.