SUPREME COURT OF CANADA
Appeal Heard: December 6, 2019 Judgment Rendered: February 5, 2021 Docket: 38601
Between:
Wastech Services Ltd.
Appellant
and
Greater Vancouver Sewerage and Drainage District
Respondent
- and -
Attorney General of British Columbia and Canadian Chamber of Commerce
Interveners
Coram: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ.
Reasons for Judgment: (paras. 1 to 114)
Kasirer J. (Wagner C.J. and Abella, Moldaver, Karakatsanis and Martin JJ. concurring)
Joint Concurring Reasons: (paras. 115 to 141)
Brown and Rowe JJ. (Côté J. concurring)
wastech v. g.v. sewerage and drainage
Wastech Services Ltd. Appellant
v.
Greater Vancouver Sewerage and Drainage District Respondent
and
Attorney General of British Columbia and
Canadian Chamber of Commerce Interveners
Indexed as: Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District
2021 SCC 7
File No.: 38601.
2019: December 6; 2021: February 5.
Present: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ.
on appeal from the court of appeal for british columbia
Contracts — Breach — Performance — Duty to exercise contractual discretion in good faith — Waste removal contract providing municipal district with absolute discretion to allocate waste to various disposal facilities — Municipal district's reallocation of waste resulting in reduction of waste company's profit — Waste company alleging breach of contract due to reallocation of waste depriving it of possibility of achieving target profit — Whether reallocation of waste constitutes breach of duty to exercise contractual discretion in good faith.
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.
Held : The appeal should be dismissed.
Per Wagner C.J. and Abella, Moldaver, Karakatsanis, Martin and Kasirer JJ.: Where a party to a contract exercises its discretion unreasonably, that is, 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. Metro's exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted and was therefore not a breach of the duty. Accordingly, the arbitrator's award cannot stand, whether the standard of review is correctness or reasonableness.
The duty to exercise contractual discretion in good faith is well‑established in the common law. It was expressly recognized by the Court in its account of the organizing principle of good faith in Bhasin v. Hrynew , 2014 SCC 71 , [2014] 3 S.C.R. 494 . However, it was not necessary in Bhasin to spell out the contours of this duty. In order to answer Wastech's claim then, the Court must determine what constraints the duty to exercise contractual discretion in good faith imposes on the holder of that discretion.
The 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, or, in the terminology of the organizing principle in Bhasin , to exercise their discretion reasonably. The duty to exercise contractual discretion is breached only where the discretion is exercised unreasonably, in a manner unconnected to the purposes underlying the discretion. Where discretion is exercised in a manner consonant with the purpose, that exercise may be characterized as reasonable according to the bargain the parties had chosen to put in place. But where the exercise stands outside the compass set by contractual purpose, the exercise is unreasonable in light of the agreement for which the parties bargained and may be thought of as unfair and contrary to the requirements of good faith.
The measure of fairness is what is reasonable according to the parties' own bargain. It is not what a court sees as fair according to its own view of the proper exercise of the discretion. Where the exercise of discretionary power falls outside of the range of choices connected to its underlying purpose — outside the purpose for which the agreement the parties themselves crafted provides discretion — it is thus contrary to the requirements of good faith. Courts can intervene where the exercise of the power is arbitrary or capricious in light of its purpose as set by the parties; however, their role is not to ask whether the discretion was exercised in a morally opportune or wise fashion from a business perspective. Courts must only ensure parties have not exercised their discretion in ways unconnected to the purposes for which the parties themselves grant that power. In a contractual context, these choices are ascertained principally by reference to the contract, interpreted as a whole — the first source of justice between the parties.
What a court considers unreasonable is highly context‑specific, and ultimately depends upon the intention of the parties as disclosed by their contract. Generally, however, for contracts that grant discretionary power in which the matter to be decided is readily susceptible of objective measurement, the range of reasonable outcomes will be relatively smaller. For contracts that grant discretionary power in which the matter to be decided or approved is not readily susceptible to objective measurement, the range of reasonable outcomes will be relatively larger. It is in properly interpreting the contract for the purposes for which discretion was granted that the range of good faith behaviour comes into focus and breaches can be identified.
Requiring substantial nullification — that is, the evisceration by one party of the better part of the benefit of the contract of the other — is not the appropriate standard for concluding a breach of the duty to exercise discretionary power in good faith. The fact that a party's exercise of discretion causes its contracting partner to lose some or even all of its anticipated benefit under the contract is not dispositive, in itself, as to whether the discretion was exercised in good faith. However, it could well be relevant to show that discretion had been exercised in a manner unconnected to the relevant contractual purposes.
Finally, the duty to exercise discretion in good faith is a general doctrine of contract law. It need not find its source in an implied term in the contract, but rather it operates in every contract irrespective of the intentions of the parties. Recognizing this general duty interferes very little with freedom of contract for two reasons. First, just as parties will rarely expect that their contract permits dishonest performance, contracting parties rarely if ever expect discretion granted by the contract to be exercised in a manner unconnected to the purposes for which it was conferred. Second, the content of the duty is guided by the will of the parties as expressed in their contract. Rather than interfering with the objectives of the contracting parties or imposing duties on them beyond their reasonable contemplation, this duty merely requires that parties operate within the scope of discretion defined by their own purposes for which they freely negotiated its grant. Parties who provide for discretionary power cannot contract out of the implied undertaking that the power will be exercised in good faith, in light of the purposes for which it was conferred.
Metro's exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted. Wastech's case does not rest on allegations that it fell prey to lies or deception or that Metro exercised its discretion capriciously or arbitrarily, and it does not point to any identifiable wrong committed by Metro beyond seeking its own best interest within the bounds set for the exercise of discretion by the contract. The contract gives Metro the absolute discretion to determine how the waste is to be allocated. There is no guaranteed minimum volume of waste allocated in a given year. Reading the contract as a whole, the purposes become clear: to allow Metro the flexibility necessary to maximize efficiency and minimize costs of the operation. The fact that this discretion exists alongside a detailed framework to adjust payments towards the goal of a negotiated level of profitability, belies the idea that the parties intended this discretion be exercised so as to provide Wastech with a certain level of profit. Those incentives are already carefully created elsewhere in the contract.
Based on these purposes, Metro did not act unreasonably. Metro's exercise of discretion was guided by the objectives of maximizing efficiency, preserving remaining site capacity, and operating the system in the most cost-effective manner, and was made in furtherance of its own business objectives. 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. Although Wastech emphasized that the contract was a long‑term relational agreement dependent upon an element of trust and cooperation between Wastech and Metro, this is not dispositive of the case in favour of Wastech. This is not an example of an unforeseen or unregulated matter that, by reason of the relational character of the contract, was left to the trust and cooperation said to be inherent in the long-term arrangement. The parties foresaw this risk — and chose to leave the discretion in place.
Wastech asks the Court to have Metro subvert its own interest in name of accommodating Wastech's interest. However, Metro is Wastech's contracting partner, not its fiduciary. The loyalty required of it in the exercise of this discretion was loyalty to the bargain, not loyalty to Wastech. Wastech cannot rely on an understanding of good faith that sits uncomfortably with the foundation of contractual justice. When the contours of good faith performance in this context are properly identified, it is plain that Metro did not exercise its power to reallocate waste in breach of a good faith duty. An analogy to the standard of reasonable conduct in the law of abuse of contractual rights in Quebec does not assist Wastech in this case.
Per Côté, Brown and Rowe JJ.: There is agreement that the appeal should be dismissed. Answering the question posed is a matter of straightforwardly applying Bhasin , and confirming that, while Bhasin organized several established common law doctrines under the rubric of good faith, it did not represent an abandonment of commercial certainty by requiring contracting parties to place their counterparty's interests ahead of their own.
While the majority refrains from identifying the standard of review, clear guidance on this point ought to be provided. Although there are important differences between commercial arbitration and administrative decision-making, those differences do not affect the standard of review where the legislature has provided for a statutory right of appeal. Appellate standards of review apply as a matter of statutory interpretation. The appeal in this case was brought pursuant to s. 31 of British Columbia's Arbitration Act , which provides that, either by consent of the parties or with leave of the Supreme Court of British Columbia, a party to an arbitration may appeal to the court on a question of law arising out of the award. In light of Canada (Minister of Citizenship and Immigration) v. Vavilov , 2019 SCC 65 , [2019] 4 S.C.R. 653 , it follows that the standard of review to be applied by the Court in this case is correctness.
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‑for rights and obligations or to alter the express terms of the contract. Where an agreement reflects a shared, reasonable expectation as to the manner in which a discretion may be exercised, that expectation will be enforced. While parties will usually expect that a discretion will be exercised in accordance with the purposes for which it was conferred, this is so only where the purpose of a discretionary power arises from the terms of the contract, construed objectively, and having regard to the factual matrix. The obligation to exercise discretion reasonably does not reflect the imposition of external standards on the exercise of discretion, but rather giving effect to the standards inherent in the parties' own bargain. Accordingly, there is disagreement with the majority that where a discretion is unfettered on its face, a court must form a broad view of the purposes of the venture to which the contract gives effect, and of what loyalty to that venture might involve for a party to it, and to take those broad purposes as providing the inherent limits for the exercise of the power. The majority's invocation of loyalty to the venture suggests that parties must use their discretion, even where it is chosen by the parties to be unfettered, in a way that advances the objectives of the contract. Approaching the interpretive task from such a starting point risks, even invites, undermining freedom of contract and distorting the parties' bargain by imposing constraints to which they did not agree.
Additionally, the purpose of a discretion is always defined by the parties' intentions, as revealed by the contract. Therefore, where a contract discloses a clear intention to grant a discretion that can be exercised for any purpose, courts, operating within their proper role, must give effect to that intention. With careful drafting, parties can largely immunize the exercise of discretion from review on this basis, or choose to specify the purpose for which a discretion has been granted in order to provide a clear standard against which the exercise of discretion is to be assessed. In either instance, their intention should be given effect and not subverted.
The duty of honest performance and the duty to exercise discretionary powers in good faith should remain distinct. Any suggestion that the duty of honest performance is a preliminary step in assessing whether there is a breach of the duty to exercise discretionary powers in good faith fails to comprehend or have regard for how the common law has distinguished between these duties. Further, rather than assisting in the development of the common law of good faith in contractual performance, the majority's digression into the civil law of Quebec gives rise to complication, uncertainty and confusion. It has no relevance in the present case, and it confuses matters for no useful purpose. The common law of British Columbia applies to the contract at issue and readily answers the questions of law posed in the appeal.
Cases Cited
By Kasirer J.
Applied: Bhasin v. Hrynew , 2014 SCC 71 , [2014] 3 S.C.R. 494; overruled: Gateway Realty Ltd. v. Arton Holdings Ltd. (1991) , 106 N.S.R. (2d) 180, aff'd (1992), 1992 NSCA 70 , 112 N.S.R. (2d) 180; referred to: C.M. Callow Inc. v. Zollinger , 2020 SCC 45 , [2020] 3 S.C.R. 908; Styles v. Alberta Investment Management Corp. , 2017 ABCA 1 , 44 Alta. L.R. (6th) 214; Finney v. Barreau du Québec , 2004 SCC 36 , [2004] 2 S.C.R. 17; Sattva Capital Corp. v. Creston Moly Corp. , 2014 SCC 53 , [2014] 2 S.C.R. 633; Teal Cedar Products Ltd. v. British Columbia , 2017 SCC 32 , [2017] 1 S.C.R. 688; Canada (Minister of Citizenship and Immigration) v. Vavilov , 2019 SCC 65 , [2019] 4 S.C.R. 653; Agraira v. Canada (Public Safety and Emergency Preparedness) , 2013 SCC 36 , [2013] 2 S.C.R. 559; Newfoundland and Labrador (Attorney General) v. Uashaunnuat (Innu of Uashat and of Mani‑Utenam) , 2020 SCC 4 , [2020] 1 S.C.R. 15; Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada , [1995] 2 S.C.R. 187; Greenberg v. Meffert (1985) , 50 O.R. (2d) 755; 2123201 Ontario Inc. v. Israel Estate , 2016 ONCA 409 , 130 O.R. (3d) 641; LeMesurier v. Andrus (1986) , 54 O.R. (2d) 1; Jack Wookey Hldg. Ltd. v. Tanizul Timber Ltd. (1988) , 27 B.C.L.R. (2d) 221; Canadian National Railway Co. v. Inglis Ltd. (1997) , 36 O.R. (3d) 410; Marshall v. Bernard Place Corp. (2002) , 58 O.R. (3d) 97; Shelanu Inc. v. Print Three Franchising Corp. (2003) , 64 O.R. (3d) 533; Filice v. Complex Services Inc. , 2018 ONCA 625 , 428 D.L.R. (4th) 548; Abu Dhabi National Tanker Co. v. Product Star Shipping Ltd. (The "Product Star") (No. 2) , [1993] 1 Lloyd's Rep. 397 ; Renard Constructions (ME) Pty Ltd. v. Minister for Public Works (1992), 26 N.S.W.L.R. 234; A.I. Enterprises Ltd. v. Bram Enterprises Ltd. , 2014 SCC 12 , [2014] 1 S.C.R. 177; OBG Ltd. v. Allan , [2007] UKHL 21, [2008] 1 A.C. 1 ; Sherry v. CIBC Mortgages Inc. , 2016 BCCA 240 , 88 B.C.L.R. (5th) 105; Mesa Operating Limited Partnership v. Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 , 149 A.R. 187; Klewchuk v. Switzer , 2003 ABCA 187 , 330 A.R. 40; British Telecommunications plc v. Telefónica O2 UK Ltd. , [2014] UKSC 42, [2014] 4 All E.R. 907 ; Houle v. Canadian National Bank , [1990] 3 S.C.R. 122; Ponce v. Montrusco & Associés inc. , 2008 QCCA 329 , [2008] R.J.D.T. 65; Churchill Falls (Labrador) Corp. v. Hydro‑Québec , 2018 SCC 46 , [2018] 3 S.C.R. 101; Dunkin' Brands Canada Ltd. v. Bertico inc ., 2015 QCCA 624 , 41 B.L.R. (5th) 1 ; Gestion immobilière Bégin inc. v. 9156‑6901 Québec inc. , 2018 QCCA 1935 .
By Brown and Rowe JJ.
Applied: Bhasin v. Hrynew , 2014 SCC 71 , [2014] 3 S.C.R. 494; Canada (Minister of Citizenship and Immigration) v. Vavilov , 2019 SCC 65 , [2019] 4 S.C.R. 653; Housen v. Nikolaisen , 2002 SCC 33 , [2002] 2 S.C.R. 235; referred to: Northland Utilities (NWT) Limited v. Hay River (Town of) , 2021 NWTCA 1 ; Ontario First Nations (2008) Limited Partnership v. Ontario Lottery And Gaming Corporation , 2020 ONSC 1516 ; Cove Contracting Ltd. v. Condominium Corporation No 012 5598 (Ravine Park) , 2020 ABQB 106 , 10 Alta. L.R. (7th) 178; Allstate Insurance Co. v. Ontario (Minister of Finance) , 2020 ONSC 830 , 149 O.R. (3d) 761; Buffalo Point First Nation v. Cottage Owners Association , 2020 MBQB 20 ; Clark v. Unterschultz , 2020 ABQB 338 , 41 R.F.L. (8th) 28; Sattva Capital Corp. v. Creston Moly Corp. , 2014 SCC 53 , [2014] 2 S.C.R. 633; Teal Cedar Products Ltd. v. British Columbia , 2017 SCC 32 , [2017] 1 S.C.R. 688; Newfoundland and Labrador (Attorney General) v. Uashaunnuat (Innu of Uashat and of Mani‑Utenam) , 2020 SCC 4 , [2020] 1 S.C.R. 15; C.M. Callow Inc. v. Zollinger , 2020 SCC 45 , [2020] 3 S.C.R. 908; Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada , [1995] 2 S.C.R. 187; Transamerica Life Canada Inc. v. ING Canada Inc. (2003) , 68 O.R. (3d) 457; Styles v. Alberta Investment Management Corp. , 2017 ABCA 1 , 44 Alta. L.R. (6th) 214; Mesa Operating Limited Partnership v. Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 , 149 A.R. 187.
Statutes and Regulations Cited
Arbitration Act , R.S.B.C. 1996 , c. 55 [rep. & sub. 2020, c. 2, s. 72 ], s. 31 [rep. & sub. 2020, c. 2, s. 59].
Civil Code of Québec , arts. 6, 7, 1375.
Greater Vancouver Sewerage and Drainage District Act , S.B.C. 1956, c. 59 .
Authors Cited
Baudouin, Jean‑Louis, Patrice Deslauriers et Benoît Moore. La responsabilité civile , vol. 1, Principes généraux , 8e éd. Cowansville, Que.: Yvon Blais, 2014.
Baudouin, Jean-Louis et Pierre-Gabriel Jobin. Les obligations , 7e éd., par Pierre‑Gabriel Jobin and Nathalie Vézina. Cowansville, Que.: Yvon Blais, 2013.
Burton, Steven J. "Breach of Contract and the Common Law Duty to Perform in Good Faith" (1980), 94 Harv. L. Rev. 369.
Collins, Hugh. "Discretionary Powers in Contracts", in David Campbell, Hugh Collins and John Wightman, eds., Implicit Dimensions of Contract: Discrete, Relational and Network Contracts . Portland, Or.: Hart Publishing, 2003, 219.
Fleming's The Law of Torts , 10th ed. by Carolyn Sappideen and Prue Vines, eds. Pyrmont, N.S.W.: Lawbook Co., 2011.
Fridman, Gerald Henry Louis. The Law of Contract in Canada , 6th ed. Toronto: Carswell, 2011.
Gray, Anthony. "Development of Good Faith in Canada, Australia and Great Britain" (2015), 57 Can. Bus. L.J. 84.
Hall, Geoff R. Canadian Contractual Interpretation Law , 3rd ed. Toronto: LexisNexis, 2016.
Lluelles, Didier, et Benoît Moore. Droit des obligations , 3e éd. Montréal: Thémis, 2018.
Mason, Anthony. "Contract, Good Faith and Equitable Standards in Fair Dealing" (2000), 116 L.Q.R. 66.
McCamus, John D. "Abuse of Discretion, Failure to Cooperate and Evasion of Duty: Unpacking the Common Law Duty of Good Faith Contractual Performance" (2005), 29 Adv. Q. 72.
McCamus, John D. The Law of Contracts , 3rd ed. Toronto: Irwin Law, 2020.
McCamus, John D. "The New General 'Principle' of Good Faith Performance and the New 'Rule' of Honesty in Performance in Canadian Contract Law" (2015), 32 J.C.L. 103.
Paterson, Jeannie Marie. "Good Faith Duties in Contract Performance" (2014), 14 O.U.C.L.J. 283.
Paterson, Jeannie Marie. "Implied Fetters on the Exercise of Discretionary Contractual Powers" (2009), 35 Mon. L. R. 45.
Robertson, Joseph T. "Good Faith as an Organizing Principle in Contract Law: Bhasin v. Hrynew ⸺ Two Steps Forward and One Look Back" (2015), 93 Can. Bar Rev. 809.
Sales, Philip. "Use of Powers for Proper Purposes in Private Law" (2020), 136 L.Q.R. 384.
Stack, David. "The Two Standards of Good Faith in Canadian Contract Law" (1999), 62 Sask. L. Rev. 201.
Steyn, Johan. "Contract Law: Fulfilling the Reasonable Expectations of Honest Men" (1997), 113 L.Q.R. 433.
Swan, Angela, Jakub Adamski, and Annie Y. Na. Canadian Contract Law , 4th ed. Toronto: LexisNexis, 2018.
Waddams, S. M. The Law of Contracts , 7th ed. Toronto: Thomson Reuters, 2017.
APPEAL from a judgment of the British Columbia Court of Appeal (Newbury, Stromberg-Stein and Fisher JJ.A.), 2019 BCCA 66 , 19 B.C.L.R. (6th) 217, 431 D.L.R. (4th) 512, [2019] B.C.J. No. 236 (QL), 2019 CarswellBC 336 (WL Can.), affirming a decision of McEwan J., 2018 BCSC 605 , [2018] B.C.J. No. 684 (QL), 2018 CarswellBC 910 (WL Can.). Appeal dismissed.
Geoffrey G. Cowper , Q.C. , Mark D. Andrews , Q.C. , and Stanley Martin , for the appellant.
Irwin G. Nathanson , Q.C. , and Julia K. Lockhart , for the respondent.
Jonathan Eades and Graham J. Underwood , for the intervener the Attorney General of British Columbia.
Jeremy Opolsky and Winston Gee , for the intervener the Canadian Chamber of Commerce.
The judgment of Wagner C.J. and Abella, Moldaver, Karakatsanis, Martin and Kasirer JJ. was delivered by
Kasirer J. —
I. Overview
[ 1 ] This appeal raises the issue of whether a common law duty of good faith performance applies in a long-term contract for waste removal in the greater Vancouver region. More specifically, it bears on how principles of good faith might preclude what one scholar has called the "abuse of contractual discretionary powers" (J. D. McCamus, The Law of Contracts (3rd ed. 2020), at p. 938). In Bhasin v. Hrynew , 2014 SCC 71 , [2014] 3 S.C.R. 494, at paras. 47 and 50 , Cromwell J. observed that the exercise of contractual discretion is one circumstance in which courts have found a duty of good faith performance exists in a manner consonant with the "organizing principle" from which this and other good faith duties derive: "parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily" (para. 63, see also McCamus, pp. 931-943). However, Bhasin does not explore the source or content of the specific duty to exercise discretion in good faith, which matters were not at issue in that appeal.
[ 2 ] The appellant here, a waste removal contractor, says the respondent exercised its contractual power to decide where the waste would be allocated in the region contrary to the requirements of good faith. The appellant argues that the courts below failed to understand the notion at the core of Bhasin , according to which a contracting party should have "appropriate regard to the legitimate contractual interests of [their] contracting partner" ( Bhasin , at para. 65 ). It says that the respondent's exercise of discretion made it impossible to earn the level of profit it had bargained for under what it depicts as a long-term relational contract, predicated on trust between the parties. In the result, the respondent exercised its discretionary power in a way the appellant has described as failing to meet the standard of honesty and reasonableness required by Bhasin in this context.
[ 3 ] 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.
[ 4 ] 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 , [2020] 3 S.C.R. 908, 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 ).
[ 5 ] 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.
[ 6 ] 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.
[ 7 ] 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. Accordingly, I would dismiss this appeal.
II. Background
A. The Contract
[ 8 ] The appellant, Wastech Services Ltd. ("Wastech"), is a British Columbia company engaged in waste transportation and disposal. The respondent, the Greater Vancouver Sewerage and Drainage District ("Metro"), is a statutory corporation constituted under the Greater Vancouver Sewerage and Drainage District Act , S.B.C. 1956, c. 59 . One of its primary mandates is the administration of waste disposal from the Metro Vancouver Regional District.
[ 9 ] Wastech and Metro had a long-standing commercial relationship. They entered into contracts for the disposal of waste from the Greater Vancouver Regional District twice in 1986, once in 1988 and again in 1992. In 1996, after approximately 18 months of negotiations, Wastech and Metro entered into a new waste disposal agreement ("Contract"), setting out what the parties described as "an integrated, comprehensive municipal solid waste transfer system . . . and sanitary landfill in a reliable, cost-effective and environmentally-sound manner" (A.R., vol. II, at p. 9, recital B). The Contract was complex, and included several recitals, numerous defined terms and schedules. It replaced the four existing agreements between Wastech and Metro and had a term of 20 years.
[ 10 ] The Contract contemplated the removal and transportation of waste by Wastech on behalf of the district represented by Metro to three disposal facilities: the Cache Creek Landfill (approximately 350 km from Vancouver), the Vancouver Landfill (approximately 30 km from Vancouver), and the Burnaby Incinerator (approximately 20 km from Vancouver). Wastech was to be paid at a different rate depending on which disposal facility the waste was directed to and how far away the facility was located. The compensation structure was geared to the relative distances that the waste was transported, with the Cache Creek Landfill being the most remunerative destination. The Vancouver Landfill was less remunerative, and the Burnaby Incinerator was the least remunerative. The Contract provided Metro with the "absolute discretion" to determine the minimum amount of waste that would be transported to the Cache Creek Landfill and the Vancouver Landfill in each year (A.R., vol. II, at p. 51, s. 5.1). The term of the Contract was from January 1, 1996 to December 31, 2015.
[ 11 ] Wastech's compensation was structured around a "Target Operating Ratio" ("Target OR"). Defined in s. 14.1(ag) of the Contract as a ratio of 0.87, the Target OR was designed to give Wastech an operating profit of approximately 13 percent. An operating ratio of 1.0 would have meant Wastech was breaking even. The Target OR was achieved when Wastech earned enough from the contract to cover its costs plus a reasonable profit.
[ 12 ] The Contract provided for various adjustments to allow for fluctuations in the actual operating ratio ("Actual OR") achieved by Wastech. Section 14.2 of the Contract set out provisions for "Adjustments to Rates", which allowed for adjustments if Wastech's Actual OR was above or below the Target OR. A shortfall in the Target OR was compensated for by a Profit Shortfall Adjustment and/or Rate Adjustment. These provisions were designed to put Wastech in a position to achieve the Target OR in the long run, but they imposed dollar caps on the adjustments in any given year. In short, Wastech's actual profitability was a function of both the rates set for transporting waste to each of the facilities and the volumes of waste Wastech actually transported to each facility.
[ 13 ] Section 12.7 of the Contract required Metro to provide Wastech, annually, with a detailed forecast of the allocation of all of the waste expected to be collected during the following year. Wastech used this forecast to plan for its operations, including scheduling staff and arranging for equipment maintenance. Although the allocations were subject to change within the year based on the various factors affecting waste disposal, the Contract provided that the annual forecast would form the basis of Wastech's planning.
[ 14 ] During negotiations, Wastech and Metro realized that waste transported to the long-haul Cache Creek Landfill might decrease and that one possible response would be to impose a minimum amount of waste allocated to Cache Creek per year. Ultimately, the parties agreed to give Metro "absolute discretion" to allocate waste among the three facilities, without imposing a minimum allocation to the Cache Creek Landfill. This approach was deliberately selected by the parties.
B. Circumstances of the Alleged Breach
[ 15 ] In September 2010, Metro provided Wastech its annual waste allocation plan for 2011, according to which about 600,000 to 700,000 tonnes of waste would be transported by Wastech. This forecast included approximately 150,000 tonnes of waste allocated to the Cache Creek Landfill. Shortly after providing this forecast, however, Metro decided to redirect waste from the Cache Creek Landfill to the Vancouver Landfill for a number of reasons, including the imminent closure of the Cache Creek Landfill due to capacity constraints, the benefit of preserving the remaining capacity of the Cache Creek Landfill, operating costs, and the desire to maximize efficiency.
[ 16 ] Ultimately, the total waste transported by Wastech during the 2011 operating year was 609,340 tonnes; approximately 8 percent less than in 2010. In 2011, 0 tonnes of waste was transported to the Cache Creek Landfill; instead, the waste was transported to the Vancouver Landfill and the Burnaby Incinerator. This reallocation resulted in a much lower rate of compensation than Wastech would have received had the Cache Creek Landfill allocation been implemented as contemplated.
[ 17 ] As a result of the waste reallocation, and before adjustment payments, Wastech operated at a loss, achieving an operating ratio of 1.045. However, because of the various rate adjustment provisions in the Contract, Wastech received approximately $2.9 million in adjustment payments from Metro. After these adjustments, Wastech's Actual OR was 0.9065. Wastech's adjusted Actual OR for 2011 was about 0.0165 below the Target OR of 0.87. In other words, it fell just short of the Target OR, even after the contractually provided adjustments.
[ 18 ] Pursuant to s. 18.3 of the Contract, Wastech referred the dispute to arbitration, alleging that Metro breached the Contract by allocating waste among the facilities in a manner that deprived Wastech of the possibility of achieving the Target OR. Wastech sought compensatory damages from the arbitrator.
III. Decisions Below
A. The Arbitral Award — BCICAC Case No. DCA-1560, February 13, 2015 (Gerald W. Ghikas, Q.C.)
[ 19 ] The arbitrator ruled in favour of Wastech.
[ 20 ] Wastech advanced two submissions. First, it argued that Metro's reallocation of waste from the Cache Creek Landfill to the Vancouver Landfill implied a contractual term — that Metro would not so exercise its discretion as to make it impossible for Wastech to achieve the Target OR. Second, it argued in the alternative that Metro's exercise of its discretionary power was subject to a duty of good faith, which Metro had breached.
[ 21 ] In the alternative, Wastech submitted that Metro's discretionary power to allocate waste between the facilities was subject to a duty of good faith, which was part of the common law of contract. Metro breached this duty by exercising its discretion "in a manner contrary to the reasonable expectations of [Wastech] in a way that [was] dishonest and unreasonable because [it] deprived [Wastech] of the possibility of achieving the Target OR" (A.F., para. 17).
[ 22 ] The arbitrator declined to find that the term proposed by Wastech was implied because it was not obvious that the parties would have agreed to it. Both parties had explicitly considered a minimum allocation of waste to the Cache Creek Landfill during the negotiations for the Contract, but had deliberately rejected such a term. The parties had bargained for the "absolute discretion" to be exercised by Metro in allocating waste, and it was therefore not appropriate to imply a term limiting that discretion.
[ 23 ] Nevertheless, the arbitrator felt that this did not preclude him from considering whether Metro's discretionary power under the Contract was constrained by a duty of good faith. He turned to the second, alternative submission.
[ 24 ] The arbitrator began by reviewing this Court's judgment in Bhasin . He observed that where a contract expressly confers a discretionary power on a party, the duty of honest performance requires that the power not be exercised dishonestly, and the organizing principle requires that it not be exercised unreasonably. He understood the relevant test to be whether Metro exercised its discretion in a "manner contrary to the reasonable expectations of [Wastech] in a way that [was] dishonest and unreasonable".
[ 25 ] Turning to the evidence before him, the arbitrator accepted that Metro's reallocation of waste away from the Cache Creek Landfill for 2011 was made in good faith, in the sense of not being dishonest. However, Metro's decision to reallocate the waste away from the Cache Creek Landfill was not arbitrary. Metro's decision was driven by the imminent closure of the Cache Creek Landfill, the need to preserve the remaining Cache Creek capacity, and the need to redirect waste to the best alternative facility for its desired purposes. The arbitrator therefore found that Metro's reallocation of waste was made with good business reasons.
[ 26 ] In the arbitrator's view, it still remained to be determined whether Metro had "appropriate regard" to Wastech's interests under the Contract. He concluded it had not. The arbitrator's conclusion that Metro did not have appropriate regard to Wastech's interests turned on the fact that Metro's reallocation of waste made it "not possible" for Wastech to achieve the Target OR.
[ 27 ] The arbitrator found that Metro's exercise of its discretionary power made it "not possible" for Wastech to achieve the Target OR (para. 89). He concluded that Metro's conduct showed "a lack of appropriate regard for Wastech's legitimate expectations" and that Metro had therefore breached the duty of good faith (para. 90).
[ 28 ] Based on this reasoning, the arbitrator held that "Metro's conduct show[ed] a lack of appropriate regard for Wastech's legitimate expectations" under the Contract, and awarded Wastech $2,906,413 in damages (para. 90).
B. Supreme Court of British Columbia — Leave Decision, 2016 BCSC 68 , 409 D.L.R. (4th) 9 (Fitzpatrick J.)
[ 29 ] Metro petitioned for leave to appeal the arbitrator's award under s. 31 of the Arbitration Act , R.S.B.C. 1996, c. 55 [rep. & sub. 2020, c. 2, s. 72]. Leave to appeal was granted on the following two questions of law:
Did the Arbitrator err in law in failing to apply proper principles in holding that the exercise of a bargained-for right could be "dishonest" and/or a breach of a duty of good faith even without evidence that the party exercising that right acted other than in good faith or that it exercised that right for an improper purpose?
Did the Arbitrator err in law by confusing the "organizing principle" stated in Bhasin with a free-standing obligation of contractual good faith, divorced from any established doctrine of contract law?
C. Court of Appeal for British Columbia — Leave Decision, 2016 BCCA 393 , 409 D.L.R. (4th) 4 (Frankel, MacKenzie and Fenlon JJ.A.)
[ 30 ] Wastech appealed the order granting Metro leave to appeal. In brief oral reasons, the Court of Appeal unanimously dismissed Wastech's appeal.
D. Supreme Court of British Columbia — Appeal Decision, 2018 BCSC 605 (McEwan J.)
[ 31 ] The chambers judge hearing the merits of Metro's appeal set aside the arbitrator's award, awarded costs of the appeal to Metro, and remitted the matter back to the arbitrator for reconsideration in accordance with the chambers judge's reasons.
[ 32 ] The chambers judge rejected Wastech's argument that "objectively reasonable constraints on the exercise of Metro's discretion must be imposed" (para. 36) on the basis of the Contract. The chambers judge concluded that Wastech could not "import into [the] contract the sort of objective duty of care based on impact that it relies on. These concepts are not present in the contract" (para. 38).
[ 33 ] In the chambers judge's view, the imposition of a duty to have appropriate regard for the interests of another contracting party must be based on the terms of the contract itself. The chambers judge specifically noted that the parties had deliberately rejected a term constraining Metro's discretionary power to allocate waste. The chambers judge held that the arbitrator had effectively imposed terms on the parties' contract beyond anything they had agreed to.
[ 34 ] Recalling that Bhasin explicitly recognized that a party may sometimes cause loss to another in the legitimate pursuit of economic self-interest, the chambers judge concluded that Metro was entitled to exercise its discretion in the way it deemed fit, as long as it was acting honestly. The chambers judge held that Metro had acted honestly, and that was sufficient to conclude that it had not breached a duty of good faith.
E. Court of Appeal for British Columbia — Appeal Decision, 2019 BCCA 66 , 19 B.C.L.R. (6th) 217 (Newbury, Stromberg-Stein and Fisher JJ.A.)
[ 35 ] Wastech appealed the chambers judge's order. In reasons written by Newbury J.A., the Court of Appeal unanimously dismissed the appeal, with costs.
[ 36 ] Newbury J.A. began her analysis by noting that the chambers judge did not clearly answer the two questions of law before him. Accordingly, she undertook a fresh analysis of the two questions.
[ 37 ] First, the Court of Appeal held that the arbitrator applied the wrong legal test for determining whether Metro's conduct nullified the benefits of the contract to Wastech. The arbitrator found that Metro's reallocation of waste made it "not possible" for Wastech to achieve the Target OR. But, according to the Court of Appeal, the proper question was whether Metro's conduct substantially nullified the benefit of the whole contract — not whether Wastech was deprived of one of the benefits it could receive from the contract.
[ 38 ] Second, the arbitrator erred in concluding that his rejection of Wastech's proposed implied term did not "add anything" to his good faith analysis. The arbitrator's good faith analysis effectively incorporated as a relevant consideration — whether the exercise of discretion made it "not possible" for Wastech to achieve the Target OR — the very term that the arbitrator declined to imply. This was an error.
[ 39 ] Third, the Court of Appeal held that the arbitrator erred in deciding that it was unnecessary to determine whether Metro's conduct had nullified the benefits of the whole contract or substantially impacted Wastech. Wastech had not proven that its legitimate contractual interests — meaning the overall benefit of the contract — were substantially nullified by Metro's exercise of discretion.
[ 40 ] Finally, Newbury J.A. wrote that the arbitrator was wrong to hold that "dishonesty" included the exercise of contractual rights in a manner that showed a "disregard" for the other contracting party's interests. That was a "radical extension of the law" (para. 70) and not supported by Bhasin .
[ 41 ] In light of the arbitrator's errors, the Court of Appeal dismissed Wastech's appeal, concluding that the chambers judge was correct to allow Metro's appeal from the arbitrator's award.
IV. Analysis
A. Standard of Review
[ 42 ] The parties raise preliminary issues relating to the standard of review applicable on appeal from a commercial arbitration award and the proper characterization of the issues presented in this case. I will address these preliminary issues before turning to the good faith question.
[ 43 ] Wastech submits, first, that the Court of Appeal erred in reviewing the arbitrator's finding of a breach of the duty to exercise contractual discretionary powers in good faith on a correctness standard. On Wastech's view, the arbitrator's finding rested on a mixed question of law and fact, which in the commercial arbitration context is only reviewable for palpable and overriding error. Second, Wastech submits that the questions of law relevant in this case, as decided by the arbitrator, are subject to review on the reasonableness standard. Nevertheless, Wastech also says the arbitrator committed no reviewable errors even on a correctness standard.
[ 44 ] Metro answers by noting that the Court of Appeal considered Sattva and Teal Cedar fully and was aware of the limited scope of appeals in commercial arbitration. The court rightly confirmed that the questions raised here are questions of law reviewable on the correctness standard. Here, says Metro, the questions upon which leave was granted relate to the content of the duty to exercise contractual discretionary powers in good faith and the arbitrator's error in stating the legal test, which are plainly questions of law. Metro further submits that even if the applicable standard is reasonableness, the arbitrator's award was unreasonable and cannot stand.
[ 45 ] This Court has indeed held that the standard of review applicable in appeals under s. 31 of the Arbitration Act is reasonableness, unless the question is one that would attract the correctness standard, such as constitutional questions or those questions of law that are of central importance to the legal system as a whole and outside the adjudicator's expertise ( Sattva , at paras. 102‑6; Teal Cedar , at paras. 74‑76). I am mindful, however, that this Court's judgment in Canada (Minister of Citizenship and Immigration) v. Vavilov , 2019 SCC 65 , [2019] 4 S.C.R. 653, which was released shortly after this appeal was heard, set out a revised framework for determining the standard of review a court should apply when reviewing the merits of an administrative decision. I note that Vavilov does not advert either to Teal Cedar or Sattva , decisions which emphasize that deference serves the particular objectives of commercial arbitration (see Sattva , at para. 104; Teal Cedar , at paras. 81‑83).
[ 46 ] In these circumstances, I would leave for another day consideration of the effect, if any, of Vavilov on the standard of review principles articulated in Sattva and Teal Cedar , as that matter is best addressed in the context of a case where it is directly in issue. In this appeal, the determination of that question is unnecessary: whether the standard of review is correctness or reasonableness, the result is the same. The arbitrator's award cannot stand. More specifically, the legal test applied by the arbitrator — that Metro breached a duty of good faith by exercising its discretion in a manner that made it "not possible" for Wastech to achieve the Target OR — is an error whether judged on either standard of review.
[ 47 ] I also agree with Metro that Wastech cannot, at this stage, challenge the questions on which the award was granted. After all, it did not appeal that leave order when it had the opportunity to do so.
B. Good Faith
[ 48 ] Wastech submits that the courts below erred in overturning the arbitrator's determination that Metro breached a duty of good faith, specifically by exercising its contractual discretionary power to reallocate waste in a manner that made it impossible for Wastech to achieve the Target OR.
[ 49 ] To this end, Wastech invokes the organizing principle of good faith recognized by this Court in Bhasin — that "parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily" ( Bhasin , at para. 63 ) — and the specific duties of good faith performance derived from that principle.
[ 50 ] Wastech disagrees with the Court of Appeal's conclusion that the arbitrator erred by effectively creating a free-standing obligation not to show "disregard of [the other party's] contractual interests", which the Court of Appeal considered to be a "radical extension of the law" (para. 70). Wastech acknowledges that the organizing principle is not a "stand alone" or "free-standing" obligation to have appropriate regard to the contracting party's interests when performing a contract. Wastech submits, however, that the arbitrator correctly held that a specific manifestation of the organizing principle of good faith applies in this case, and that Metro failed to abide by the constraints imposed on its exercise of discretion by that existing doctrine.
[ 51 ] Wastech is certainly not mistaken in saying that the organizing principle of good faith performance provides a standard from which more specific legal doctrines may be derived ( Bhasin , at para. 64 ). Generally, claims of breach of good faith will not succeed if they do not fall within an "existing doctrin[e]" of good faith, although the existing doctrines "overlap to some extent" and all derive from the same organizing principle ( Bhasin , at paras. 48 and 66 ). Furthermore, the list of existing doctrines is not closed and may be developed incrementally where the existing law is found wanting. But such developments should be consistent with the structure of the common law of contracts and give due weight to the importance of private ordering through agreements as well as certainty in commercial affairs ( Bhasin , at para. 66 ).
[ 52 ] While Wastech is correct to observe that the organizing principle of good faith rests, in part, on the notion that contracting parties should have "appropriate regard to the legitimate contractual interests of [their] contracting partner" ( Bhasin , at para. 65 ), the parties disagree about precisely what flows from this principle in the context of the exercise of contractual discretion.
[ 53 ] In my view, it has not been shown that Metro performed its obligations or executed its rights under the Contract in a manner contrary to the applicable duty of good faith. To be clear about why, I will consider separately the duties of honest performance and the exercise of contractual discretion in good faith.
(1) The Duty of Honest Performance
[ 54 ] Wastech and Metro agree that for a contractual discretionary power to be exercised in good faith, it cannot, at a minimum, be exercised dishonestly. As this Court confirmed in Callow , the duty of honest performance, initially recognized in Bhasin , is a "general doctrine of contract law that applies to all contracts as a matter of law" ( Callow , at para. 38 , citing Bhasin , at para. 74 ).
[ 55 ] I hasten to say that the duty of honest performance, as contemplated in Bhasin , is not at issue here. Wastech does not allege that Metro lied to it or actively deceived it in any way. Indeed, in the course of oral argument before this Court, Wastech's counsel confirmed that it is not alleging that Metro was dishonest in exercising its discretion. As a result, there is no need to determine whether Metro's conduct amounted to dishonest performance within the meaning of Bhasin and Callow .
[ 56 ] I agree generally with the Court of Appeal on this point. Here there is certainly no lie. There is not even an allegation of misrepresentation in the Bhasin sense. Metro actively considered Wastech's interest and its operational needs, notwithstanding the result. While an exercise of a contractual discretionary power to harm or deceive a contracting partner could well violate the duty of honest performance, the exercise of a discretionary power in the pursuit of a party's self-interest in a manner that has an adverse financial consequence for the other party is plainly distinguishable.
(2) The Duty to Exercise Contractual Discretion in Good Faith
[ 57 ] Pursuant to the framework set out in Bhasin , the arbitrator concluded that an existing doctrine obliged Metro to exercise its discretion in good faith. He was right to do so. As I discuss further below, such a duty is a feature of the common law of contracts.
[ 58 ] I agree with the parties that the duty to exercise contractual discretionary powers in good faith is well-established in the common law and not newly created by this decision. It was expressly recognized by Cromwell J. in his account of the organizing principle of good faith in Bhasin .
[ 59 ] It was not necessary in Bhasin to spell out the contours of this aspect of good faith performance of contracts. In this appeal, in order to answer Wastech's claim of breach, the Court must determine what constraints the duty to exercise contractual discretion in good faith imposes on the holder of that discretion. To do so, I will consider in turn the content and source of the duty.
[ 60 ] In their submissions before this Court, the parties have marshalled an array of arguments in their efforts to identify the proper limits imposed by the duty to exercise contractual discretion in good faith. In essence, Wastech argues that this duty prohibited Metro from exercising its discretion in a way that deprived Wastech of any possibility of achieving the Target OR. Metro argues that the duty requires no more than that the exercise of the discretion not be "arbitrary or capricious", which the arbitrator expressly found it was not.
[ 61 ] In my respectful view, Wastech's position contains two closely related flaws. First, it overstates the meaning of "reasonableness" in this context — i.e., reasonableness as a measure of good faith conduct. Second, Wastech conflates the contractual guarantee of reasonable exercise of discretion with an implicit guarantee that it would achieve its Target OR in every year of the Contract. Metro's position, on the other hand, too narrowly confines the duty's content to the requirement of non-arbitrary and non-capricious conduct, which I think is best understood as a species of the duty and not its full content.
[ 62 ] One may well ask — as courts and scholars have on occasion — how the exercise of an apparently unfettered contractual discretion could ever constitute a breach of good faith. After all, discretion, by its nature, connotes the power of the holder to make choices, and the choice of one particular course of action over another. As I will explain, however, the answer lies in connecting the exercise of that discretion to the purposes underlying its grant in the agreement. An exercise of discretion unconnected to those purposes is outside the scope of the discretion the parties have agreed to confer, and thus constitutes a breach of the duty to exercise that discretion in good faith.
[ 63 ] Stated simply, the 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, or, in the terminology of the organizing principle in Bhasin , to exercise their discretion reasonably. Where discretion is exercised in a manner consonant with the purpose, it is characterized as a reasonable exercise of that discretion, consistent with good faith performance. But where the exercise stands outside the compass set by contractual purpose, it is unreasonable in light of the bargain the parties made and thus contrary to the requirements of good faith.
(a) Content of the Duty
[ 64 ] I begin with an observation that, in Bhasin , this Court unanimously agreed that, in some circumstances, good faith may require "reasonable" conduct of contracting parties ( Bhasin , at para. 63 ). This general proposition is foundational to the organizing principle of good faith and finds application across various good faith duties, including the duty to exercise contractual discretion in good faith.
[ 65 ] I also observe that many Canadian courts have held that reasonableness is required in the specific context of exercises of contractual discretion. For example, in Greenberg v. Meffert (1985) , 50 O.R. (2d) 755 (C.A.), at p. 763, the Ontario Court of Appeal held that "the obligation of good faith . . . requires that a party exercising a discretionary power under a contract exercise it reasonably". Other courts have similarly interpreted "good faith" to require that contractual discretion be exercised consistently with the purposes of the agreement. Similar decisions have been rendered in other common law jurisdictions, including courts of the United Kingdom and Australia.
[ 66 ] Courts in the United Kingdom and Australia have ruled similarly (see, e.g., Abu Dhabi National Tanker Co. v. Product Star Shipping Ltd. (The "Product Star") (No. 2) , [1993] 1 Lloyd's Rep. 397 (C.A.); Renard Constructions (ME) Pty Ltd. v. Minister for Public Works (1992), 26 N.S.W.L.R. 234 (C.A.)).
[ 67 ] Finally, many jurists have expressed support for the proposition that contractual discretionary powers must be exercised reasonably in order to comport with good faith performance (see, e.g., Burton"Breach of Contract and the Common Law Duty to Perform in Good Faith" (1980), 94 Harv. L. Rev. 369; McCamus, The Law of Contracts , at pp. 940-942; Gray"Development of Good Faith in Canada, Australia and Great Britain" (2015), 57 Can. Bus. L.J. 84; Hall, Canadian Contractual Interpretation Law (3rd ed. 2016), at pp. 117-121; Swan, Adamski and Na, Canadian Contract Law (4th ed. 2018), at p. 818).
[ 68 ] I think it best to note at the outset that I do not refer to reasonableness in an administrative law sense. Rather, I agree with Professor McCamus that "reasonableness" in this context means that the exercise of discretion must be "connected to the purposes underlying the discretion, as ascertained from the agreement" (The Law of Contracts , at p. 940; see also Sales"Use of Powers for Proper Purposes in Private Law" (2020), 136 L.Q.R. 384, at p. 391).
[ 69 ] Thus, beyond the requirement of honest performance, to determine whether a party failed in its duty to exercise discretionary power in good faith, a court must consider whether the exercise of discretion was reasonable in the sense of being connected to the purposes for which the parties granted the discretion. The organizing principle of good faith in Bhasin describes this as requiring that parties perform their obligations "reasonably" and not "capriciously or arbitrarily" — meaning that parties must perform their obligations in a manner connected to the contractual purposes to which they agreed ( Bhasin , at para. 63 ).
[ 70 ] The touchstone for measuring whether a party has exercised a discretionary power in good faith is the purpose for which the discretion was created, as ascertained by reference to the contract as a whole. Where discretion is exercised in a manner consonant with the purpose, that exercise may be characterized as reasonable according to the bargain the parties had chosen to put in place.
[ 71 ] But where the exercise stands outside of the compass set by contractual purpose, the exercise is unreasonable in light of the agreement for which the parties bargained and may be thought of as unfair and contrary to the requirements of good faith. Where the exercise of discretionary power falls outside of the range of choices connected to its underlying purpose — outside the purpose for which the agreement the parties themselves crafted provides discretion — it is thus contrary to the requirements of good faith.
[ 72 ] Sometimes, the text of the discretionary clause itself will make the parties' contractual purpose clear. In other circumstances, purpose can only be ascertained through a wider interpretive lens that encompasses the contract as a whole, the factual matrix and the surrounding circumstances. The contract must be interpreted as a whole to discern the purpose for which discretion was conferred so as to determine the range of reasonable behaviour.
[ 73 ] I hasten to say that the role of the courts is not to ask whether the discretion was exercised in a morally opportune or wise fashion from a business perspective. Courts can intervene where the exercise of the power is arbitrary or capricious in light of its purpose as set by the parties; however, their role is not to impose their own view of the proper exercise of the discretion. Courts must only ensure parties have not exercised their discretion in ways unconnected to the purposes for which the parties themselves grant that power. In a contractual context, these choices are ascertained principally by reference to the contract, interpreted as a whole — the first source of justice between the parties.
[ 74 ] Not only does this deferential approach ensure "some elbow-room for the aggressive pursuit of self-interest" (C. Sappideen and P. Vines, eds., Fleming's The Law of Torts (10th ed. 2011), at p. 6) within the latitude provided by the parties' contractual bargain, it also reflects the parties' autonomy and their freedom to contract: "the freedom of persons to order their relations within whatever limits the law prescribes" (A.I. Enterprises , at para. 21, per Cromwell J.).
[ 75 ] To this end, it is helpful to keep in mind that, generally speaking, a range of outcomes flows from the choices that may be considered a reasonable exercise of discretion. Courts must be respectful of this range of reasonable choices. The duty to exercise contractual discretion in good faith is breached only where the exercise of discretion is unreasonable, in the sense of being unconnected to the purposes underlying the discretion.
[ 76 ] With this approach in mind, I stress that what a court considers unreasonable is highly context-specific, and ultimately "depend[s] upon the intention of the parties as disclosed by their contract" (McCamus, The Law of Contracts , at p. 940; see also Waddams, The Law of Contracts (7th ed. 2017), at pp. 367-368; Fridman, The Law of Contract in Canada (6th ed. 2011), at pp. 469-470).
[ 77 ] I add, however, the following comment as a general guide. For contracts that grant discretionary power in which the matter to be decided is readily susceptible of objective measurement, the range of reasonable outcomes will be relatively smaller. For contracts that grant discretionary power in which the matter to be decided or approved is not readily susceptible to objective measurement, the range of reasonable outcomes will be relatively larger. It is in properly interpreting the contract for the purposes for which discretion was granted that the range of good faith behaviour comes into focus and breaches can be identified.
[ 78 ] To understand the requirements of this duty it is helpful to consider the standards advanced by the parties, and the extent to which these conform with, or exceed, the duty's requirements.
[ 79 ] I recall that Wastech argues that the good faith duty at issue prohibited Metro from exercising its discretion in a way that denied it benefits it had bargained for — more specifically, that denied it the possibility of achieving the Target OR. In Wastech's submission, the "substantial nullification" test formulated by the Nova Scotia Supreme Court in Gateway Realty Ltd. v. Arton Holdings Ltd. (1991) , 106 N.S.R. (2d) 180 , aff'd (1992), 1992 NSCA 70 , 112 N.S.R. (2d) 180 (C.A.), and adopted by the Court of Appeal in this case, states the appropriate standard for concluding a breach of the duty to exercise discretionary power in good faith. This standard should be adopted by this Court. Wastech's counsel acknowledged during argument that it was asserting that Metro had failed to exercise its discretion reasonably, and not merely that Metro had been dishonest.
[ 80 ] In support of its position, Wastech relies principally upon Gateway Realty Ltd. v. Arton Holdings Ltd. (1991) , 106 N.S.R. (2d) 180 , aff'd (1992), 1992 NSCA 70 , 112 N.S.R. (2d) 180 (C.A.), in which the Nova Scotia Supreme Court trial court held that "[a] party to a contract has a duty to act in good faith towards the other party such that it is not entitled to take any action or refuse to take any action which would substantially nullify the benefit of the contract to the other party, or defeat the reasonable contractual expectations of the other party" (p. 191).
[ 81 ] Wastech submits that the arbitrator's conclusions as to the nature of the impact on Wastech of Metro's exercise of discretion amount to a finding of substantial nullification. By making it impossible for Wastech to achieve the Target OR, Metro substantially nullified the benefit of the Contract to Wastech.
[ 82 ] Respectfully stated, I am of the view that requiring "substantial nullification" — that is to say, the evisceration by one party of the better part of the benefit of the contract — is not the appropriate standard for concluding a breach of the duty to exercise discretionary power in good faith. As a result, I would overrule Gateway Realty to the extent that it establishes this as the required test for finding a breach of the duty to exercise contractual discretion in good faith.
[ 83 ] The fact that a party's exercise of discretion causes its contracting partner to lose some or even all of its anticipated benefit under the contract is not dispositive, in itself, as to whether the discretion was exercised in good faith. However, it could well be relevant to show that discretion had been exercised in a manner unconnected to the relevant contractual purposes.
[ 84 ] For these reasons, I conclude that the "substantial nullification" or "evisceration" of the benefit of a contract is not a necessary prerequisite for finding a breach of the duty to exercise contractual discretionary power in good faith, and I would overrule Gateway Realty to the extent it stands for that proposition. However, I would also note that the manner in which and the extent to which a party's exercise of discretion has an impact on the other party's ability to enjoy the benefits of the contract may be relevant to assessing whether the discretion was exercised in good faith, in that an extreme impact on the other party may signal that the discretion was not exercised in a manner connected to the underlying contractual purpose.
[ 85 ] The parties also submit that the good faith duty at issue does not permit a party to exercise its discretion capriciously or arbitrarily. In support, they cite Cromwell J.'s description of the organizing principle of good faith in Bhasin — that parties "generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily" ( Bhasin , at para. 63 ) — and his observation that the exercise of contractual discretion is a circumstance where courts have found a duty of good faith performance.
[ 86 ] I agree with the parties that the jurisprudence supports a conclusion that the good faith duty at issue does not permit a party to exercise its discretion capriciously or arbitrarily. For example, in The "Product Star" , at p. 404, the English Court of Appeal held that where a party has a discretion"it must be exercised honestly and in good faith for the purposes for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably".
[ 87 ] Although capriciousness and arbitrariness have sometimes been referred to independently of improper purpose, I agree with the Supreme Court in The "Product Star" that these concepts are generally captured by the notion of a purpose-based standard of reasonableness. Where a discretion is exercised capriciously or arbitrarily, it will generally constitute a failure to exercise the discretion for the purposes for which it was granted. In other words, arbitrary or capricious conduct tends to be unconnected to the purposes of the contract.
[ 88 ] In sum, then, the duty to exercise discretion in good faith will be breached where the exercise of discretion is unreasonable, in the sense that it is unconnected to the purposes underlying the discretion. This may manifest as arbitrary or capricious conduct. And it may also manifest where the exercise of the discretion, while not arbitrary or capricious in the strict sense, is nonetheless at odds with the purposes for which the discretion was granted, as I explain below.
(b) Source of the Duty
[ 89 ] Having determined the content of the duty, I turn now to consider its source so as to ascertain whether it arises on the facts of this case.
[ 90 ] I acknowledge that there is some debate as to the source of this duty. The arbitrator held that the requirements of the officious bystander test were met, and the duty arose as an implied term. However, there is also authority for the proposition that the duty arises as a general doctrine of contract law, as Cromwell J. confirmed in Bhasin with respect to the duty of honest performance.
[ 91 ] In my view, it is appropriate to recognize the duty to exercise discretion in good faith as a general doctrine of contract law. Like the duty of honest performance, it need not find its source in an implied term in the contract, but rather it operates in every contract irrespective of the intentions of the parties (see Bhasin , at para. 74 ). This brings conceptual clarity to the law of good faith by analyzing the duty to exercise discretion in good faith in line with the Bhasin duty.
[ 92 ] Further, recognizing this general duty interferes very little with freedom of contract for two reasons. First, just as parties will rarely expect that their contract permits dishonest performance ( Bhasin , at para. 76 ), contracting parties rarely if ever expect discretion granted by the contract to be exercised in a manner unconnected to the purposes for which it was conferred. For example, on the facts of this case, a duty on Metro to exercise its discretion in good faith was necessary to give business efficacy to the Contract. As the arbitrator rightly observed, absent a duty of good faith constraining the exercise of Metro's discretion"Metro theoretically ha[d] the discretion to reduce the volume of waste directed to the [Cache Creek Landfill] to zero" (A.F., para. 94). It is absurd to think the parties intended for Metro to have such untrammelled power given that it would have left Wastech subject to Metro's "uninhibited whim" (The "Product Star" , at p. 404, per Leggatt L.J.). Indeed, it is difficult to imagine any party wishing to confer such untrammelled power on its contracting partner.
[ 93 ] Second, as discussed above, the content of the duty is guided by the will of the parties as expressed in their contract. Rather than interfering with the objectives of the contracting parties or imposing duties on them beyond their reasonable contemplation, this duty merely requires that parties operate within the scope of discretion defined by their own purposes for which they freely negotiated its grant. Parties who provide for discretionary power cannot contract out of the implied undertaking that the power will be exercised in good faith, in light of the purposes for which it was conferred.
[ 94 ] Overall, then, like the duty of honest performance, the duty to exercise contractual discretion in good faith is not an implied term, but a general doctrine of contract law that applies to all contracts as a matter of law, regardless of the intentions of the parties.
[ 95 ] Accordingly, there is no question that the duty to exercise contractual discretionary powers in good faith applies in this case. The entire agreement between the parties is premised on Metro having the discretion to allocate waste among the facilities. The duty of good faith applies to constrain the exercise of this power.
(c) Application to Metro's Exercise of Discretion
[ 96 ] Was Metro's exercise of discretion unreasonable with regard to the purposes for which the discretion was granted and thereby a breach of the duty to exercise contractual discretion in good faith?
[ 97 ] I recall that the Contract gives Metro the "absolute discretion" to determine the minimum amount of waste that will be transported to the Cache Creek Landfill and the Vancouver Landfill in each year. The text of the discretionary clause itself does not spell out the purpose for which the discretion was granted. This is not surprising: the parties may well have been unwilling or unable to foresee all the circumstances in which the discretion might be exercised over the 20-year term of the Contract, and so wisely left a wide margin of discretion to Metro. I note, however, that the text of the discretionary clause alone does not say whether it was intended to be restricted, or to have a particular purpose. One must look to the contract as a whole to make this determination.
[ 98 ] However, reading the clauses in the context of the Contract as a whole, the purposes become clearer. The recitals at the beginning of the Contract describe the essential nature of the agreement: Metro wishes to retain Wastech's services for "an integrated, comprehensive municipal solid waste transfer system . . . and sanitary landfill in a reliable, cost-effective and environmentally-sound manner" (A.R., vol. II, at p. 9, recital B). It is not difficult to see how these purposes inform why the Contract gave Metro "absolute discretion" in the allocation of waste.
[ 99 ] In this context, the purposes of giving Metro discretion to determine waste allocation in its "absolute discretion" were clearly to allow it the flexibility necessary to maximize efficiency and minimize costs of the system. The Contract did not, in this context, guarantee Wastech a particular level of profitability in any given year. Rather, the system of incentives and adjustments it provided were designed to allow Wastech to earn what it had bargained for over the long term of the Contract, while allowing Metro to maximize efficiency.
[ 100 ] Based on these purposes, Metro did not act unreasonably. Metro's exercise of discretion was "guided by the objectives of maximizing the [Burnaby] incinerator utilization while preserving the remaining [Cache Creek] site capacity and operating the system in the most cost-effective manner" and "was made in furtherance of [its] own business objectives" (A.F., para. 95). There is nothing in this exercise of discretion that is at odds with the purposes for which the discretion was granted. Metro's exercise of discretion was reasonable in the sense that it was connected to the purposes underlying the discretion, and thus did not breach the duty to exercise contractual discretion in good faith.
[ 101 ] Importantly, the duty did not require Metro to subordinate its interests to those of Wastech in exercising its discretionary power in the manner contemplated under the Contract. As I have already noted, the Contract did not guarantee Wastech would receive the Target OR in any given year. The Contract was designed to allow Wastech to achieve the Target OR over the long term, not to guarantee it in each year.
[ 102 ] Although, during the hearing of this appeal, Wastech repeatedly emphasized the arbitrator's conclusion that the Contract was a long-term, relational contract in which trust and cooperation had a role to play, this does not resolve the case in favour of Wastech. While I accept that the long-term relational nature of the Contract may inform the interpretation of its provisions, I also note that the parties agreed on the specific discretionary term at issue in this case, and the arbitrator himself found that the situation giving rise to the dispute — i.e., the reduction of waste allocated to the Cache Creek Landfill — was a risk that "the parties had specifically considered and had decided, by the terms of [the Contract], to leave in place" (A.F., para. 94).
[ 103 ] It seems to me that the only questionable conduct raised here is that Metro's exercise of discretion made it "impossible" for Wastech to achieve the Target OR. But Wastech has confused this difficulty with a breach of the duty to exercise contractual discretion in good faith. Metro has the absolute discretion to allocate waste, and the purposes of that discretion are to maximize efficiency and minimize costs. Metro's exercise of that discretion in pursuit of those purposes, even if it results in a financial loss to Wastech in a given year, does not constitute a breach of the duty. This approach to the facts demonstrates why — in the absence of arbitrary or capricious conduct or conduct unconnected to the purposes of the contract — the duty does not require that the exercise of discretion be guided by Wastech's interests.
[ 104 ] The text of the discretionary clause in the case at bar did not spell out, in explicit terms, why the Contract provides Metro with "absolute discretion" to allocate waste. That said, the Contract as a whole provides a clear picture of the purposes of the discretion. The recitals express the parties' mutual intentions. It would be absurd to think that the parties intended for Metro's discretion to be exercised in a way that would undermine these stated purposes. The absolute discretion was also explicitly chosen by the parties, as the arbitrator himself found.
[ 105 ] Reading the Contract as a whole, one understands that there was no guarantee that Wastech would achieve the Target OR in any given year. The parties expressly agreed that Metro would have "absolute discretion" in allocating waste. The parties also negotiated a detailed structure of incentives and compensation adjustments that would allow for fluctuations in Wastech's profitability year to year, while providing for adjustments over the long term to allow Wastech to achieve the Target OR.
[ 106 ] While Metro's choice, from the point of view of its contracting partner, Wastech, was disadvantageous, that choice was within the range permitted by the contract for which the parties themselves had bargained. Accordingly, Metro's exercise of discretion to reallocate waste in the manner that it did was within the bounds of the duty to exercise contractual discretion in good faith.
[ 107 ] By asking for what amounts to a guarantee of the Target OR in every year of the Contract, Wastech is asking for an outcome that stands outside of the agreement the parties negotiated. Wastech is asking the Court to have Metro subvert its own interest in name of accommodating Wastech's interest. However, Metro is Wastech's contracting partner, not its fiduciary. The loyalty required of it in the exercise of this discretion was loyalty to the bargain, not loyalty to Wastech.
(d) Quebec Civil Law Would Not Assist Wastech
[ 108 ] Lastly, I allow myself to observe that Metro argues, after noting Cromwell J.'s allusions to the abuse of rights in civil law in Bhasin , that an analogy to Quebec civil law in the context of the abuse of contractual rights would not assist Wastech and, indeed, supports Metro's position.
[ 109 ] I agree with Metro that invoking the substantive content of what constitutes an abuse in the exercise of a discretionary contractual clause in Quebec civil law does not assist Wastech. In Quebec civil law, the exercise of a right constitutes an abuse of right where it is exercised, for example, with the intent of injuring another or in an excessive and unreasonable manner (art. 7 C.C.Q.). [1] This standard is not significantly different from the standard I have identified here.
[ 110 ] More importantly still, Wastech's argument that Metro's discretionary power should have been exercised in the spirit of cooperation — a principle which some consider to permeate civil law obligations — does not accord with the Quebec civil law of contractual performance. The duty of good faith in Quebec civil law is framed in terms of acting in a manner that is honest or in conformity with the reasonable expectations of the parties (arts. 6, 1375 C.C.Q.; see Lluelles and Moore, Droit des obligations (3rd ed. 2018), at para. 2128; Baudouin, Deslauriers and Moore, La responsabilité civile (8th ed. 2014), vol. 1, at para. 1-231; Baudouin and Jobin, Les obligations (7th ed. 2013), at para. 136). The analysis in Quebec civil law would similarly focus on whether Metro's exercise of its contractual discretion was excessive or unreasonable.
(3) Conclusion on Good Faith
[ 111 ] 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. The same conclusion arises where a party exercises its contractual discretion arbitrarily or capriciously, which are merely instances of the more general concept of conduct unconnected to the underlying contractual purpose.
[ 112 ] This same theory of corrective justice anchors the organizing principle of good faith and the specific duties derived therefrom as reflected in Bhasin — the duty of honest performance and the duty to exercise contractual discretion in good faith. The organizing principle and its attendant specific duties do not require parties to abandon their self-interest in service of a notional goal. Rather, they require that each party exercise their rights, including their discretionary rights, having appropriate regard for the legitimate contractual interests of their contracting partner, in the sense of exercising those rights in a manner connected to the purposes for which those rights were conferred.
[ 113 ] 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 contemplated by the contract. It does not require a party to exercise discretion so as to guarantee the other party's desired outcome. It does not impose a fiduciary duty on contracting parties. And, importantly, it does not displace the parties' negotiated bargain as the primary source of justice between contracting parties.
V. Disposition
[ 114 ] I would dismiss the appeal with costs.
The reasons of Côté, Brown and Rowe JJ. were delivered by
Brown and Rowe JJ. —
I. Introduction
[ 115 ] 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: (1) we disagree with our colleague's treatment of the standard of review; (2) we prefer a narrower statement of the duty to exercise discretionary powers in good faith; (3) we disagree with the majority's treatment of the duty of honest performance; and (4) we disagree with the majority's digression into the civil law of Quebec.
[ 116 ] At root, answering the question posed by this appeal is a matter of straightforwardly applying Bhasin and confirming that, while Bhasin organized several established common law doctrines under the rubric of good faith, it did not represent an abandonment of commercial certainty by requiring contracting parties to place their counterparty's interests ahead of their own.
II. Standard of Review
[ 117 ] Our colleague refrains from identifying the standard of review, since on either standard he would overturn the arbitrator's conclusions. In our view, clear guidance on this point ought to be provided.
[ 118 ] In Vavilov , this Court concluded that the appellate standards of review identified in Housen v. Nikolaisen , 2002 SCC 33 , [2002] 2 S.C.R. 235 , apply where a legislature has conferred a right of appeal. As a matter of statutory interpretation, Vavilov concluded that, when a legislature provides for a right of appeal from an administrative decision to a court, it is presumed to expect the same standards to apply as in other appeals ( Vavilov , at para. 37 ). Vavilov wrote:
More generally, there is no convincing reason to presume that legislatures mean something entirely different when they use the word "appeal" in an administrative law statute than when they use it in private law legislation.
( Vavilov , at para. 44 )
[ 119 ] There are important differences between commercial arbitration and administrative decision‑making ( Sattva , at para. 104). Those differences are relevant to whether a court ought to afford deference in the absence of a right of appeal. They are not, however, relevant to the standard of review where the legislature has provided for a statutory right of appeal.
[ 120 ] Factors that justify deference to the arbitrator, notably respect for the parties' decision in favour of alternative dispute resolution and sensitivity to the nature and purpose of commercial arbitration, speak to whether there ought to be a right of appeal, not to the applicable standard of review where a right of appeal exists. Institutional design considerations do not override the statutory text.
[ 121 ] The appeal in this case was brought pursuant to s. 31 of the Arbitration Act , R.S.B.C. 1996, c. 55, [2] which provides that, either by consent of the parties or with leave of the Supreme Court of British Columbia, a party to an arbitration may appeal to the court on a question of law arising out of the award. In light of Vavilov , it follows that the standard of review to be applied by the Court in this case is correctness.
[ 122 ] 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 , [2020] 1 S.C.R. 15, at para. 62, for the proposition that it is sometimes permissible to avoid reaching a contested legal question. Our colleague does not explain why, in this case, the question of standard of review is unnecessary to decide. As a matter of principle, courts should answer the legal questions squarely presented to them. Doing so advances the rule of law and provides meaningful guidance to lower courts, arbitrators, and the parties appearing before them.
III. Background
[ 123 ] This appeal arises from a 20‑year comprehensive agreement ("Agreement") between the Greater Vancouver Sewerage and Drainage District ("Metro") and Wastech Services Ltd. ("Wastech"), a British Columbia company engaged in waste transportation and disposal. Under the Agreement, Wastech transported waste from Metro's transfer stations to one of three disposal facilities: a landfill in Cache Creek, a landfill in Vancouver, and an incinerator in Burnaby. Wastech received different rates of compensation depending on which facility received the waste.
[ 124 ] Significantly, the Agreement did not guarantee that Wastech would achieve its Target OR; rather, it addressed what would happen if the Target OR was not achieved. Importantly, Metro was given wide discretion, specifically described as "absolute discretion", to determine the amount of waste to be hauled to each facility.
[ 125 ] The total waste hauled by Wastech under the Agreement had declined steadily since 2007. Metro therefore decided to redirect flows of waste from Cache Creek to Vancouver in 2011, for reasons relating to operating costs and preserving Cache Creek's remaining landfill capacity. Wastech's actual operating ratio fell below the Target OR, even with the adjustment payments Metro made to compensate for the shortfall.
[ 126 ] The arbitrator expressly declined to imply a term in the Agreement guaranteeing the Target OR, finding that the parties had considered such a guarantee but deliberately chose not to include it. Yet, the arbitrator found that Metro's discretion had been improperly exercised because it made the Target OR "not possible" to achieve. In practical effect, the arbitrator implied the very term he had just declined to imply.
IV. Issues
[ 127 ] Metro was granted leave to appeal the arbitrator's decision on two questions of law:
Did the Arbitrator err in law in failing to apply proper principles in holding that the exercise of a bargained‑for right could be "dishonest" and/or a breach of a duty of good faith even without evidence that the party exercising that right acted other than in good faith or that it exercised that right for an improper purpose?
Did the Arbitrator err in law by confusing the "organizing principle" stated in Bhasin with a free‑standing obligation of contractual good faith, divorced from any established doctrine of contract law?
( 2016 BCSC 68 , 409 D.L.R. (4th) 9, at para. 40 )
Ultimately, these questions both raise one straightforward issue: what is the standard applicable when determining whether a contractual discretion has been exercised in a manner consistent with good faith?
V. Analysis
A. The Duty to Exercise Discretionary Powers in Good Faith
[ 128 ] The first step in deciding a common law good faith claim is to consider whether any established good faith doctrines apply ( C.M. Callow Inc. v. Zollinger , 2020 SCC 45 , [2020] 3 S.C.R. 908, at para. 36 ). The parties agree that the common law duty to exercise discretionary powers in good faith applies on the facts of this case. We agree.
[ 129 ] While this Court has recognized the existence of this good faith doctrine, it has never opined on the applicable standard (see Mitsui & Co. (Canada) Ltd. v. Royal Bank of Canada , [1995] 2 S.C.R. 187 , at para. 57; see also Styles v. Alberta Investment Management Corp. , 2017 ABCA 1 , 44 Alta. L.R. (6th) 214, at para. 44; Mesa Operating Limited Partnership v. Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 , 149 A.R. 187 (C.A.), at para. 25). We are called upon to do so today.
[ 130 ] First, the purpose of good faith is to "secur[e] the performance and enforcement of the contract made by the parties" ( Transamerica Life Canada Inc. v. ING Canada Inc. (2003) , 68 O.R. (3d) 457 (C.A.), at para. 54). Good faith cannot be used as a device to create new, unbargained‑for rights and obligations or to alter the express terms of the contract. Bhasin does not support any such role for good faith.
[ 131 ] Where an agreement reflects a shared, reasonable expectation as to the manner in which a discretion may be exercised, that expectation will be enforced. While parties will usually expect that a discretion will be exercised in accordance with the purposes for which it was conferred, this is so only where the purpose of a discretionary power arises from the terms of the contract, construed objectively, and having regard to the factual matrix.
[ 132 ] Accordingly, we do not share our colleague's view that, where a discretion is unfettered on its face, a court must "form a broad view of the purposes of the venture to which the contract gives effect, and of what loyalty to that venture might involve for a party to it", and to take those broad purposes as providing the inherent limits for the exercise of the power. The obligation to exercise discretion reasonably does not reflect the imposition of external standards on the exercise of discretion, but rather giving effect to the standards inherent in the parties' own bargain. The majority's invocation of loyalty to the venture suggests that parties must use their discretion, even where it is chosen by the parties to be unfettered, in a way that advances the objectives of the contract. Approaching the interpretive task from such a starting point risks, even invites, undermining freedom of contract and distorting the parties' bargain by imposing constraints to which they did not agree.
[ 133 ] Secondly, our colleague says that the duty to exercise discretion in good faith is a general doctrine of contract law. Consequently"it need not find its source in an implied term in the contract, but rather it operates in every contract irrespective of the intentions of the parties". He says that parties cannot contract out of this duty. With respect, we disagree. The purpose of a discretion is always defined by the parties' intentions, as revealed by the contract. Therefore, where a contract discloses a clear intention to grant a discretion that can be exercised for any purpose, courts, operating within their proper role, must give effect to that intention. With careful drafting, parties can largely immunize the exercise of discretion from review on this basis, or choose to specify the purpose for which a discretion has been granted in order to provide a clear standard against which the exercise of discretion is to be assessed. In either instance, their intention should be given effect and not subverted.
[ 134 ] In this case, the Award was predicated on the view that Metro was to have "appropriate regard" for Wastech's interest in achieving the Target OR. Bhasin does not support such a reading. "Appropriate regard" for the other party's interests does not translate into a duty to prioritize those interests, or to sacrifice one's own. It means, rather, that parties must not exercise a contractual discretion for a purpose wholly unconnected to the contract, which would be contrary to the parties' own intentions.
[ 135 ] It is for this reason that we say this matter really is quite straightforward. In the bargain struck by the parties, Metro was given wide discretion, in fact absolute discretion, to determine the amount of waste to be hauled to each facility. The arbitrator found no implied term limiting Metro's discretion. Having given Metro that absolute discretion, Wastech cannot complain when Metro exercised it to pursue its own business interests in a manner consistent with the Agreement. Metro did not act dishonestly and did not exercise its discretion for an improper purpose. Metro's exercise of its discretion was not unconnected to the purposes of the Agreement, and thus did not breach the duty to exercise discretionary power in good faith.
B. Other Issues
[ 136 ] Two other matters arising from our colleague's reasons require comment.
[ 137 ] First, our colleague addresses the duty of honest performance in his reasons. The issue of honesty arose here because the arbitrator described Metro's conduct as "dishonest". Our colleague agrees with the Court of Appeal's conclusion that there was no dishonesty. He nevertheless discusses the duty of honest performance at some length, including the relationship between the duty of honest performance and the duty to exercise contractual discretion in good faith. The duty of honest performance and the duty to exercise discretionary powers in good faith should remain distinct, and any suggestion that the duty of honest performance is a preliminary step in assessing whether there is a breach of the duty to exercise discretionary powers in good faith fails to comprehend or have regard for how the common law has distinguished between these duties.
[ 138 ] Secondly, our colleague takes up the unfortunate invitation presented by the parties in their submissions to discuss the result that would follow from the application of Quebec civil law. The majority's digression into the civil law of Quebec gives rise to complication, uncertainty and confusion. It has no relevance in the present case, and it confuses matters for no useful purpose. The common law of British Columbia applies to the contract at issue and readily answers the questions of law posed in the appeal.
[ 139 ] 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 scope of good faith under the common law. Rather, Wastech invoked civilian principles to support its contention that the "substantial nullification" test satisfies the civil law standard for the abuse of rights. This argument fails, as our colleague rightly points out.
[ 140 ] Our colleague's digressions concerning honest performance and Quebec civil law do not reflect, to our mind, appropriate common law methodology. Any meaningful development of the common law should proceed through principled incremental development, guided by careful analysis of relevant precedent.
VI. Conclusion
[ 141 ] We would dismiss the appeal, with costs.
Appeal dismissed with costs.
Solicitors for the appellant: Fasken Martineau DuMoulin, Vancouver.
Solicitors for the respondent: Nathanson, Schachter & Thompson, Vancouver.
Solicitor for the intervener the Attorney General of British Columbia: Attorney General of British Columbia, Victoria.
Solicitors for the intervener the Canadian Chamber of Commerce: Torys, Toronto.
[1] Article 7 C.C.Q. : " No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith."
[2] Since repealed, and replaced by the appeal clause in the Arbitration Act , S.B.C. 2020, c. 2, s. 59.
