Choices, Choices: What You Now Need To Know About Contractual Discretion

• Published date: 18 February 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Trials & Appeals & Compensation
• Law Firm: Torkin Manes LLP
• Author: Mr Marco P. Falco

Since 2014, the Supreme Court of Canada has recognized that all commercial contracts must be performed honestly, in accordance with the principle of good faith: Bhasin v. Hyrnew, 2014 SCC 71 and C.M. Callow v. Zollinger, 2002 SCC 45.

A recent decision of the Court, Wastech Services Ltd. v. Greater Vancouver, 2021 SCC 7, now establishes that good faith includes not only honest contractual performance, but also a duty to exercise any discretion under the contract "reasonably".

What that may mean for your commercial agreement is a question of fact and interpretation.

A Wasteful Affair

Wastech arose out a commercial agreement between the plaintiff waste disposal service and a statutory corporation that administered waste in the Vancouver region ("Metro").

The services provided by the plaintiff to Metro over the years were set out in a complex commercial agreement (the "Contract"). Broadly speaking, the Contract provided that the plaintiff would remove and transport waste for Metro to one of three disposal facilities. The plaintiff would receive more compensation for its services if the site chosen by Metro was further away.

Specifically, the plaintiff's compensation depended on a target operating ratio ("TOR") which was 0.89, meaning costs amounted to 89% of revenue, leaving a profit of 11%. The Contract, however, in no way guaranteed that the plaintiff would achieve the TOR in any particular year.

The Contract further required Metro to provide the plaintiff each year with a prediction of the allocated waste to be handled in the following year.

Most important, the Contract gave Metro the "absolute discretion" to determine and change the minimum quantity of waste to be transported to a landfill of its choice.

Both parties knew that it was possible that Metro's exercise of "absolute discretion" could prevent Wastech from achieving its TOR. Since both parties assumed such a situation was unlikely, no mechanism was set out in the Contract to address this situation.

In 2011, Metro chose to send waste to a closer location, which had the effect of depriving the plaintiff of reaching its TOR that year. The plaintiff only earned a profit of 4%.

At arbitration, the plaintiff argued that Metro's discretion to allocate waste between the facilities in 2011 violated the duty of good faith as it deprived the plaintiff of the opportunity to achieve the TOR. The plaintiff sought compensation of $2.9 million, representing the additional amount of money the plaintiff...