Good Faith, Or Preying On Bad Faith? Considerations For Discretionary Clauses – Corporate/Commercial Law

Canada:

Good Faith, Or Preying On Bad Faith? Considerations For Discretionary Clauses

Review of: Wastech Services Ltd. v. Greater Vancouver
Sewerage and Drainage District 2014 SCC 71.

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,¹ 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,”² rather than a free-standing
rule. The duty calls for parties to have “appropriate
regard” for the interests of other parties.³ 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.⁴

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.⁵

The Greater Vancouver Sewerage and Drainage District
(“GVS”) had a long-standing contract for waste disposal
with Wastech Services Ltd. (“Wastech”).⁶ 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:

1. Good faith is only breached where discretion is exercised
   unreasonably;




2. “Unreasonable” is exercising discretion that departs
   from the purpose of the discretion; and⁷




3. 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.⁸

The implications of this decision are twofold:

1. 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




2. 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.

Footnotes

1. 2014 SCC 71. [Bhasin].




2. Ibid, at para 64.




3. Ibid, at para 65.




4. Ibid.




5. 2021 SCC 7 [Wastech v. GVS].




6. Note: GVS was operating under the statutory corporation
   “Metro”.




7. Wastetech v. GVSat paras 71, 74.




8. Ibid, at para 77.

* * *

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