By Jesse Stanich, Lawyer
One might imagine the more established a legal principle is, the more likely the rules of application are understood. Yet, the opposite is true of good faith. Even more confusing is how a general organizing principle, such as good faith, affects discretionary clauses in contracts.
After the Supreme Court of Canada released its decision in Bhasin v. Hrynew, good faith has become a topic of much discussion that permeates all contract law. In Bhasin, the court defined good faith as a general organizing principle in contractual performance, meaning it is a “standard that underpins and is manifested in more specific legal doctrines,” rather than a free-standing rule. The duty calls for parties to have “appropriate regard” for the interests of other parties. This does not mean parties must serve the interests of the other parties; it only requires a party not undermine those interests in bad faith.
Contemplating how good faith applies to discretionary clauses is daunting considering the manners are contextually driven. Fortunately, the Supreme Court of Canada clarified some of these issues in the case Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District.
The Greater Vancouver Sewerage and Drainage District (“GVS”) had a long-standing contract for waste disposal with Wastech Services Ltd. (“Wastech”). The contract contemplated the removal and transportation of waste in three landfills but did not guarantee Wastech a certain amount of profit per year. Two of these landfills were closer, and one of them was farther away. Wastech was paid higher for longer hauls.
Part of the contract involved a discretionary clause stating GVS had absolute discretion for allocating the quantum of waste directed to each landfill site. GVS invoked the discretionary clause in 2011 to maximize efficiency. This caused Wastech to receive less compensation due to increased operation costs. Wastech argued GVS breached its duty of good faith since reorganizing the allocation of waste resulted in lost profits.
The court found in favor of GVS and said while GVS’s decision to use their discretion prejudiced Wastech, GVS’s conduct did not constitute bad faith because the discretionary clause existed to remedy the variability of waste disposal work. This variability and discretion was contemplated, and the Court found it was deemed necessary, by both parties.
The main takeaways from the reasoning in Wastetech v. GVS are as follows:
- Good faith is only breached where discretion is exercised unreasonably;
- “Unreasonable” is exercising discretion that departs from the purpose of the discretion; and
- When objective measures can determine the reasonableness of a decision, the range of accepted outcomes is smaller; the opposite is true when there are few or no objective reasons of acceptable outcomes.
The implications of this decision are twofold:
- Parties seeking to avoid an allegation of bad faith by invoking a discretionary clause must ensure their exercise of discretion does not depart from the purpose of that clause – conversely, parties alleging bad faith must prove this deviation; and
- Parties seeking to act on a discretionary clause should tailor their expectations in a dispute based on access to objective measurements – if there are no objective measures, a court’s review may yield an unfavorable outcome.
- 2014 SCC 71. [Bhasin].
- Ibid, at para 64.
- Ibid, at para 65.
- 2021 SCC 7 [Wastech v. GVS].
- Note: GVS was operating under the statutory corporation “Metro”.
- Wastetech v. GVS at paras 71, 74.
- Ibid, at para 77.