Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2019 BCCA 66, 2021 SCC 7 (38601)  

“Wastech, a waste transportation and disposal company, and Metro, a statutory corporation responsible for the administration of waste disposal for the Metro Vancouver Regional District, had a long‑standing contractual relationship which contemplated the removal and transportation of waste by Wastech to three disposal facilities. 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. 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 reallocated waste from a disposal facility further away to one that was closer, resulting in Wastech recording an operating profit well shy of its target. 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 for 2011. 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 Supreme Court of British Columbia allowed Metro’s appeal, and set aside the arbitrator’s award on the basis that the imposition of a contractual duty to have appropriate regard for the interests of another contracting party must be based on the terms of the contract itself, and that in this case the parties had deliberately rejected a term constraining the exercise of discretionary power to allocate waste. The Court of Appeal dismissed Wastech’s appeal.”

The SCC (9:0, with separate joint concurring reasons) dismissed the appeal.

Justice Kasirer wrote as follows (at paras. 3-7, 111-113):

“The problem in this case is not so much whether the duty to exercise contractual discretion in good faith exists, but on what basis it exists and according to what standard its breach can be made out. To be sure, the appellant is right to say that the organizing principle of good faith recognized in Bhasin exemplifies the idea that a contracting party should have appropriate regard to the legitimate contractual interests of their contracting partners. But in claiming compensation for its lost opportunity based on a supposedly dishonest or unreasonable exercise of the discretion to reallocate waste under the contract, the appellant misrepresents the organizing principle and overstates one of the specific duties of good faith derived therefrom.
The duty to exercise contractual discretion is breached only where the discretion is exercised unreasonably, which here means in a manner unconnected to the purposes underlying the discretion. This will be made out, for example, where the exercise of discretion is arbitrary or capricious, as Cromwell J. suggested in Bhasin in his formulation of the organizing principle of good faith performance. According to Bhasin, this duty is derived from the same requirement of corrective justice as the duty of honest performance, which requirement demands that parties exercise or perform their rights and obligations under the contract having appropriate regard for the legitimate contractual interests of the contracting partner. Like the duty of honest performance observed in C.M. Callow Inc. v. Zollinger, 2020 SCC 45, the duty recognized here is one that applies in a manner Cromwell J. referred to as doctrine in Bhasin, i.e., the duty applies regardless of the intentions of the parties (Bhasin, at para. 74).

Carefully considered, the appellant’s case does not rest on allegations that it fell prey to lies or deception. There is no claim that the respondent exercised its discretion capriciously or arbitrarily. The appellant does not point to, under the guise of allegedly unreasonable conduct, any identifiable wrong committed by the respondent beyond seeking its own best interest within the bounds set for the exercise of discretion by the agreement. The duty of good faith at issue here constrains the permissible exercise of discretionary powers in contract but, in so doing, it does not displace the detailed, negotiated bargain as the primary source of justice between the parties.

Importantly, the good faith duty at issue does not require the respondent to subordinate its interests to those of the appellant, nor does it require that a benefit be conferred on the appellant that was not contemplated under the contract or one which stands beyond the purposes for which the discretion was agreed. Here, the appellant decries conduct that is self-interested, to be sure, and that, it says, made it impossible to achieve the fundamental benefit for which it had bargained. But in seeking damages for this loss, the appellant does not allege that the respondent committed any actionable wrong in exercising the discretion provided for under the contract. While it is true the arbitrator characterized the long-term contract here as a relational one, he found that the situation giving rise to this dispute, however unlikely it may have appeared to the parties, was a risk that the parties had specifically considered in drafting their detailed agreement. In that context, whatever trust and cooperation that the parties might owe one another arising out of the long‑term relational character of the contract cannot resolve this case in favour of the appellant by requiring the respondent to act as a fiduciary.

When the contours of good faith performance in this context are properly identified, it is plain that the respondent did not exercise its power to reallocate waste in breach of a good faith duty. In point of fact, in its call to be paid damages on the basis of the contractual duty of good faith owed to it by the respondent, the appellant is asking the Court to award it an advantage not provided for in the agreement between the parties in the absence of any appreciable breach of contract or identifiable wrong. This seems to me to confuse the requirements of good faith performance with an injunction to act selflessly in a way that stands outside the ordinary compass of social ordering by contract, in service of a notional solidarity between the parties based on a different theory of justice.

Where a party to a contract exercises its discretion unreasonably, which in this context means in a manner not connected to the underlying purposes of the discretion granted by the contract, its conduct amounts to a breach of the duty to exercise contractual discretionary powers in good faith — a wrongful exercise of the discretionary power — and thus a contractual breach that must be corrected. Requiring a party to pay damages to repair such a wrong accords with the theory of corrective justice and does not amount to a reallocation of the benefits under the contract as determined by the parties or a gift from one party to another.

This same theory of corrective justice anchors the organizing principle of good faith and the specific duties derived therefrom as reflected in Cromwell J.’s statements in Bhasin that the organizing principle is a “requirement of justice”. That does not require a party to subordinate its interests to those of the other party (para. 86). Like the distinct duty of honest performance, the duty to exercise contractual discretionary powers in good faith is not a fiduciary duty. In exercising a contractual discretionary power, “a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest” (para. 70). Doing so is not necessarily exercising discretion wrongfully or in “bad faith”.

I note once again that the duty to exercise discretionary powers in good faith does not require a party to confer a benefit on the other party that was not a part of their original agreement, nor does it require a party to subordinate its interests to those of the other party. Respectfully stated, the arbitrator failed to abide by these tenets and the arbitral award extends the good faith duty at issue beyond its proper bounds. In these circumstances, Wastech’s argument that Metro could not deprive it of the fundamental benefit for which it bargained fails to take into account the terms of the agreement itself and the purpose for which Metro was extended the discretionary power in question. The parties saw the risk that Wastech could fail to meet the Target OR in a given year. They chose to leave that risk in the bargain and refrained from guaranteeing Wastech’s profit margin. In light of this, Wastech cannot say the exercise of the discretion was unreasonable. In essence, it argues that good faith required Metro to subordinate its interests to Wastech, and to guarantee to Wastech something which the Contract they painstakingly negotiated over approximately 18 months did not. Generally speaking, this is not the role of good faith in the common law of contract in light of the requirement of justice spoken to in Bhasin and the arbitrator erred in law by giving effect to these arguments. For these reasons, I agree with the courts below that Wastech’s claim must fail: the arbitrator’s award cannot stand whether the standard of review is correctness or reasonableness.”

Justices Brown and Rowe, in separate joint concurring reasons, wrote as follows (at paras. 115, 122, 138-140):

“We are in accord with our colleague Kasirer J. to dismiss the appeal. Notwithstanding our agreement in the result, we write separately for four reasons. First, this Court should clarify the applicable standard of review. Secondly, while we agree that the purpose of a discretion is the proper focus of the good faith analysis, in assessing that purpose, courts must give effect to the parties’ bargain. Thirdly, we do not agree with our colleague’s treatment of the duty of honest performance insofar as he suggests that it is a preliminary step in addressing the duty to exercise discretion in good faith. Finally, our colleague’s reliance on the civil law of Quebec is unnecessary, ill‑advised and wholly misplaced. Rather than assisting in the development of the common law of good faith in contractual performance, as stated by this Court in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, the digression into the civil law gives rise to complication, uncertainty and confusion.

Instead of responding substantively, our colleague invokes an unfortunate passage from the majority judgment in Newfoundland and Labrador (Attorney General) v. Uashaunnuat (Innu of Uashat and of Mani‑Utenam), 2020 SCC 4, at para. 15, explicitly dismissing opposing views of colleagues as unworthy of answer. Of no less concern are the implications of his refusal to decide the appropriate standard of review, which risks undermining this Court’s decision in Vavilov as it relates to statutory appeals. To leave this undecided is to invite conflict and confusion.

…our colleague takes up the unfortunate invitation presented by the parties in their submissions to discuss the result that would follow by applying the Civil Code of Québec. But this case is from British Columbia. The Civil Code of Québec has no relevance here, and our colleague (yet further) confuses matters for no useful purpose by incorporating an analysis thereunder. This is particularly undesirable where the common law of British Columbia, which is the law that applies to the Agreement, readily answers the questions of law posed by this appeal.

Furthermore, even if the civil law of Quebec were remotely relevant (which it is not), Wastech did not rely on civilian concepts to expand the common law. Rather, it observed in passing that the approach to good faith which it espoused would be consistent with the civilian approach. Having concluded that Wastech’s understanding of the common law of good faith was flawed, there is no reason to address the way its claim would be handled under the civil law. And in any event, as our colleague stresses, Wastech’s claim would not be treated more favourably under the civil law (para. 108). This leaves us asking why he finds it appropriate to address the requirement of good faith and the doctrine of abuse of right under the civil law of Quebec at great length, or at all. As one of us stated in Callow, at para. 170, “unnecessary digression into external legal concepts [creates] practical difficulties on the ground by making the common law governing contractual relationships less comprehensible and therefore less accessible to those who need to know it, thereby increasing costs for all concerned”. Respectfully, our colleague’s extensive obiter dicta here, as in Callow, will surely achieve just that.

Our colleague’s digressions concerning honest performance and Quebec civil law do not reflect, to our mind, appropriate common law methodology. The common law develops best by increments, one brick at a time ⸺ as it did in Bhasin ⸺ carefully, and in response to the matters presented, and not by expositions on matters that are not. Instead, we say, again respectfully, that our colleague builds an edifice of unknown and untested stability. This is unwise.”

Full Decision