“Implied Obligations”; Canada SC evaluates contours of duty to exercise contractual discretion in good faith

Canada SC

Supreme Court of Canada: In an interesting case regarding interpretation of implied contractual obligations the 9-Judge Bench comprising of Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ., held that,

 “The purpose of good faith is to secure the performance and enforcement of the contract made by the parties. It cannot be used as a device to create new, unbargained rights and obligations or to alter the express terms of the contract.”

Background

Wastech, a waste transportation and disposal company, had a long‑standing contractual relationship with (Greater Vancouver Sewerage and Drainage District) Metro, a statutory corporation responsible for the administration of waste disposal for the Metro Vancouver Regional. The said contract contemplated removal and transportation of waste by Wastech to three disposal facilities for which Wastech was to be paid at a differing rate depending on which disposal facility the waste was directed to and how far away the facility was located.

Also, the contract stipulated Wastech’s compensation to be structured around a “Target Operating Ratio” (Target OR) as a ratio of 0.890, where Wastech’s operating costs were 89 percent of its total revenues, resulting in an operating profit of 11 percent.

The contract did not guarantee that Wastech would achieve a certain profit in any given year and it gave Metro absolute discretion to allocate waste as it so chose.

In 2011, Metro, while exercising discretion re-allocated waste to a closer disposal facility, resulting in Wastech failing to reach the target operating ratio. Wastech alleged that Metro breached the contract by allocating waste among the facilities in a manner that deprived Wastech of the possibility of achieving the target profit.

Wastech referred the dispute to arbitration and sought compensatory damages. The arbitrator found that a duty of good faith applied, that Metro had breached that duty, and that Wastech was therefore entitled to compensation. The Court allowed Metro’s appeal and set aside the arbitrator’s award.

Analysis by the Court

The majority opined that where a party to a contract exercise its discretion unreasonably, in a manner not connected to the underlying purposes of the discretion granted by the contract, its conduct would amount to a breach of the duty to exercise contractual discretionary powers in good faith. The Bench observed Wastech asked the Court to had Metro subvert its own interest in name of accommodating Wastech’s interest. However,

“Metro was Wastech’s contracting partner, not it’s fiduciary. The loyalty required of it in the exercise of this discretion was loyalty to the bargain, not loyalty to Wastech.”

The Bench stated 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. But where the exercise stand outside the compass set by contractual purpose, the exercise becomes unreasonable in light of the agreement for which the parties bargained.

While analysing the case of Bhasin v. Hrynew, 2014 SCC OnLine Can SC 55,  as relied by the appellant the Bench expressed, the good faith doctrine did not represent an abandonment of commercial certainty by requiring contracting parties to place their counterparty’s interests ahead of their own.

“Wastech is asking for an advantage for which it did not bargain: it asks that Metro confer a benefit upon it that was not contemplated, expressly or impliedly, under the contract.”

After reading the contract as a whole, which stated, to allow Metro the flexibility necessary to maximize efficiency and minimize costs of the operation, the majority expressed that Metro’s exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted. The contract gives Metro the absolute discretion to determine how the waste was to be allocated. There was no guaranteed minimum volume of waste allocated in a given year.

Verdict

 Hence, it had been held that the parties foresaw this risk — and chose to leave the discretion in place. The Bench expressed wonder on, how the exercise of an apparently unfettered contractual discretion could ever constitute a breach of contract since one could argue that a party, in exercising such a discretionary power, even opportunistically, is merely doing what the other party agreed it could do in the contract?

Consequently, the instant appeal was dismissed. [Wastech v. G.V. Sewerage and Drainage,  2021 SCC OnLine Can SC 1, decided on 05-02-2021]


Kamini Sharma, Editorial Assistant has put this story together.

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