As a follow up to Taylor Maxston’s blog article “The Duty of Honest Performance in Contract Law: C. M. Callow Inc. v. Zollinger, 2020 SCC 45”, the Supreme Court of Canada released another decision earlier this year regarding the duty of good faith and honesty in the performance of contractual obligations. Contractual parties are not able to contract out of such duties, so it is important to be aware of what these duties mean and how to adhere to them.
In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 [“Wastech”] the Supreme Court affirmed that there is a duty to perform all contracts in good faith. Specifically, contractual parties must exercise discretionary powers included in the contract in good faith.
In this case, Wastech, a waste transportation company, entered into a contract with Metro, a statutory corporation responsible for the administration of waste disposal for a region in Vancouver, for the removal and transportation of waste by Wastech for the region. The contract provided Metro with the discretion to decide which disposal facility Wastech transported the waste to. Metro decided to instruct Wastech to dispose of most of the waste at the closest disposal facility thereby reducing Wastech’s profit under the contract. Wastech argued that Metro’s decision was not made in good faith and that Metro was therefore in breach of the contract.
The Supreme Court, in concurring reasons, unanimously determined that Metro’s exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted and therefore, Metro did not breach the contract.
The important takeaways from this case are as follows:
1. Contractual parties should be aware that, even if the wording of a contract provides for absolute and unfettered discretion, they must avoid unreasonable exercises of their discretion;
2. When making discretionary decisions under a contract, parties should be prepared to justify their decisions and ensure that any discretionary decisions are made in accordance with the purpose for which the discretionary power was granted. It should be noted however, that the Supreme Court reaffirmed that the duty to exercise discretionary powers in good faith does not require a party to subordinate their interests to the other party; and
3. When drafting a contract, parties should consider clarifying the purpose of discretionary powers to avoid unnecessary ambiguity.
In light of the above, if you are drafting a contract or if you are experiencing a breakdown in a contractual relationship, please do not hesitate to contact one of the lawyers at Stillman LLP for legal assistance.
By Erin Vanderveen