CITATION: Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7
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)
NOTE: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports.
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, 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), 112 N.S.R. (2d) 180;
referred to:
C.M. Callow Inc. v. Zollinger, 2020
SCC 45;
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;
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;
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), 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;
ChurchillFalls (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;
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;
C.M. Callow Inc. v. Zollinger, 2020 SCC 45;
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; S
tyles v. Alberta Investment Management Corp., 2017 ABCA 1, 44 Alta. L.R. (6th) 214;
Mesa Operating Limited Partnership v. Amoco Canada Resources Ltd. (1994), 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.: Yvons Blais, 2014.
Baudouin, Jean-Louis, et Pierre-Gabriel Jobin, Les obligations, 7e éd., par Pierre-Gabriel Jobin and Nathalie Vézina. Cowansville, Que.: Yvons 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. —
[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, 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.
[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 Vancouver Landfill; the Burnaby Waste to Energy Facility; and the Cache Creek Landfill. Wastech was to be paid at a reduced rate, subject to a number of variables, for the short-haul transportation of waste to the Vancouver Landfill and the Burnaby Waste to Energy Facility as compared to the rate paid to transport to the Cache Creek Landfill, which is farther away.
[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 0.890, the Target OR reflected a scenario where Wastech’s operating costs were 89 percent of its total revenues, resulting in an operating profit of 11 percent. It bears noting that the Contract did not guarantee that Wastech would achieve the Target OR in any given year.
[12] The Contract provided for various adjustments to allow for fluctuations in the actual operating ratio (“Actual OR”) achieved by Wastech. Section 14.19 of the
Contract provided that if the Actual OR deviated from the Target OR, the parties would share equally the financial consequences of the deviation. If the Actual OR were to exceed the Target OR, Metro would pay Wastech an additional sum equal to 50 percent of the difference between the Target OR and the Actual OR. Wastech would similarly compensate Metro if the Actual OR was less than the Target OR. Section 14.11 of the Contract also provided that the rates to be paid to Wastech and Metro’s contribution to fix operating expenses would each be adjusted annually if the Actual OR achieved in the immediately preceding operating year was less than 0.860 or greater than 0.920.
[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 handled under the Contract for the following operating year. The arbitrator found that, “[o]ne purpose of this requirement [was] to give Wastech an opportunity to plan its future operations and manage its costs” (A.R., vol. I, p. 1 (“Award”), at para. 44). However, ss. 30.1, 30.2 and 30.4 gave Metro “absolute discretion” to determine and amend the minimum amount of waste to be transported to the Cache Creek Landfill for any given year.
[14] During negotiations, Wastech and Metro realized that waste transported to the long-haul Cache Creek Landfill might decrease and that one possible reason for such a decrease could be Metro’s decision to reduce the waste transported to that site by redirecting it to the short-haul Vancouver Landfill. Moreover, both parties were aware that this could preclude Wastech from achieving the Target OR. Both parties believed that such a scenario was highly unlikely. Given their mutual desire to simplify
the Contract, Wastech and Metro agreed not to include an adjustment provision dealing with that scenario in the Contract.
[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 have to be disposed of in the operating year. Metro directed Wastech to reallocate waste transportation for 2011: the Vancouver Landfill was to receive 200,000 tonnes, up from the 138,380 it received in 2010; the Burnaby Waste to Energy Facility was to receive enough waste to operate at maximum capacity; and the Cache Creek Landfill was to receive the remaining waste.
[16] Ultimately, the total waste transported by Wastech during the 2011 operating year was 609,340 tonnes; approximately 8 percent less than in 2010. The Cache Creek Landfill received 273,018 tonnes; approximately 31 percent less than in 2010. The Vancouver Landfill received 187,428 tonnes; approximately 36 percent more than it received in 2010. These totals reflected a conscious decision by Metro to reallocate waste from the Cache Creek Landfill to the Vancouver Landfill.
[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, after taking into account the adjustment payments under s. 14.19, Wastech operated at a profit, achieving an operating ratio of 0.960. As I noted above, this adjustment payment was
intended to ensure that the parties would share the financial consequences of a deviation from the Target OR equally. After taking into account this payment, Wastech therefore recorded an operating profit of 4 percent for the year, well shy of its target of 11 percent.
[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 for 2011 in a manner that deprived Wastech of the possibility of achieving the Target OR that year. Wastech sought compensatory damages in the amount of $2,888,162, which, it said, represented the additional amount the company would have earned in 2011 if Metro’s allocation of waste had not deprived it of the opportunity to achieve the Target OR.
[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 in the 2011 operating year violated an implied term of the Contract based on the presumed intentions of the parties. The alleged implied term as formulated by Wastech before the arbitrator was complex. In substance, it would oblige the parties to reset retroactively
various rates and payments in the event that Metro reallocated waste in a manner that made it impossible for Wastech to achieve the Target OR in the immediately preceding operating year.
[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 such that it could not be exercised in a way that would deprive Wastech of the opportunity to achieve the Target OR.
[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. On the contrary, the arbitrator found that the parties made a decision not to include a term in the Contract “dealing with the subject-matter of the term” that Wastech submitted was implied (Award, at para. 74).
[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. On this point, he agreed with Wastech that a duty of good faith applied, that Metro had breached that duty, and that Wastech was therefore entitled to compensation.
[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, courts have held that the power must be exercised in good faith. Since the Contract was
a long-term, relational agreement dependent upon an element of trust and confidence between Wastech and Metro, the arbitrator held that the “existing doctrines” of good faith required Metro to have “‘appropriate regard’ for the legitimate contractual interests of Wastech when exercising its discretionary contractual power” to allocate waste (para. 85).
[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 “guided by the objectives of maximizing the [Burnaby Facility’s] efficiency, preserving remaining site capacity at the [Cache Creek Landfill], and operating the system in the most cost-effective manner” (para. 87). In addition, prior to the reallocation of waste, Metro’s financial position had suffered as a result of declining volumes of waste. Based on this evidence, the arbitrator found that Metro’s reallocation decision “was made in furtherance of its own business objectives” and that, “[i]f viewed only from Metro’s perspective and without regard to the interests of Wastech, Metro’s conduct was both honest and reasonable” (para. 88).
[26] In the arbitrator’s view, it still remained to be determined whether Metro had “appropriate regard” to Wastech’s interests under the Contract. This was the key question because “[t]he focus of the organizing principle stated in
Bhasin is on conduct that does not show ‘appropriate regard’ for the ‘legitimate expectations’ of the other party as to how the contract will be performed” (para. 90). He wrote that, according to
Bhasin, the exercise of a “bargained-for contractual right [is] ‘dishonest’ where it is wholly at odds with the legitimate contractual expectations of the other party”, and that
no additional form of dishonesty, such as “half-truths, lies or deceit”, need be shown (para. 90).
[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 also found that Wastech had a legitimate contractual expectation that Metro would not exercise its power in a way that would deprive Wastech of the opportunity to achieve the Target OR (para. 92). Furthermore, the arbitrator wrote that having the opportunity to achieve the Target OR in every year of the Contract was “the fundamental benefit for which Wastech bargained” (para. 94). Noting that courts have often required evidence that a party’s conduct “gutted” or eviscerated the contract, or deprived the other contracting party of all or substantially all of the benefit for which it bargained, the arbitrator said it was not necessary for Wastech to provide such evidence because “the over-arching principle stated in
Bhasin does not include such a requirement” (para. 93).
[28] Based on this reasoning, the arbitrator held that “Metro’s conduct show[ed] a lack of appropriate regard for Wastech’s legitimate expectations” that was sufficient to justify finding a breach of a duty of good faith (para. 94). However, the arbitrator clarified that the breach occurred not in the reallocation decision itself, but rather in Metro’s failure to compensate Wastech for its lost opportunity to achieve the Target OR (para. 95).
[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], and was granted leave to appeal upon the following questions of law:
1. 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 an act undertaken in bad faith simply because it was wholly at odds with the expectations of the counter-party, which expectations were not embodied in the contract?
2. Did the Arbitrator err in law by confusing the “organizing principle” stated in Bhasin with a free-standing obligation of contractual good faith, disregarding the applicable principles of good faith as found in the authorities? [para. 40]
[30] Wastech appealed the order granting Metro leave to appeal. In brief oral reasons, the Court of Appeal unanimously dismissed Wastech’s appeal.
[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 issue of costs of the arbitration to the arbitrator.
[32] The chambers judge rejected Wastech’s argument that “objectively reasonable constraints on the exercise of Metro’s discretion must be imposed” based
on the requirement that Metro had to show “appropriate regard” for Wastech’s interests (paras. 23 and 41 (CanLII)).
[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. In this case, the parties considered and deliberately rejected a term constraining the exercise of Metro’s discretionary power to allocate waste. He wrote: “This was a case of sophisticated parties leaving aside a term that might have addressed the problem”, rather than an instance of overlooking or failing to consider a provision. For the chambers judge, this alone “negate[d] the approach taken by the Arbitrator” (para. 57).
[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 also held that the arbitrator had effectively ignored the terms of the Contract in finding that Metro’s conduct was “dishonest” only because it was “at odds” with Wastech’s legitimate contractual expectations (paras. 60-62). At the end of the day, he found it difficult to “see how the principle of good faith [could] be applied to [the Contract] in light of the actual circumstances in which the [Contract] was developed” (para. 61). He therefore allowed Metro’s appeal.
[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 of the appeal awarded to Metro.
[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 considered the two questions afresh (paras. 63-65). In answering each of them affirmatively, the Court of Appeal identified four errors of law committed by the arbitrator.
[37] First, the Court of Appeal held that the arbitrator applied the wrong legal test for determining whether Metro’s conduct nullified the benefits that Wastech reasonably expected to obtain from the Contract. Specifically, he failed to ascertain Wastech’s legitimate contractual interests or expectations by reference to the terms of the Contract itself (para. 68).
[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 when, as a matter of law, it “substantially took away from” Wastech’s arguments in support of a breach of a duty of good faith (para. 69 (emphasis deleted); Award, at para. 91).
[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 or eviscerated the Contract in order to conclude that Metro had breached a duty of good faith (para. 70). That conclusion effectively created, contrary to what this Court wrote in
Bhasin, a
stand-alone duty not to show “disregard of [the other party’s] contractual interests” (para. 70). Relying on Styles v. Alberta Investment Management Corp., 2017 ABCA 1, 44 Alta. L.R. (6th) 214, the Court of Appeal held that such a conclusion would constitute a “radical extension of the law” (para. 70).
[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 is wholly at odds with the legitimate contractual expectations of the other party. In
Bhasin, Cromwell J. was “concerned substantially with conduct that has at least a subjective element of improper motive or dishonesty” (C.A. reasons, at para. 71). Some subjective element of dishonesty, untruthfulness, improper motive, or “bad faith” is therefore necessary to attribute dishonesty to a party and find a breach of a duty of good faith. This could include conduct so reckless that contractual performance is inexplicable and incomprehensible to the point that it can be regarded as an “abuse of power, having regard to the purposes for which it [was] meant to be exercised” (para. 71, quoting
Finney v. Barreau du Québec, 2004 SCC 36, [2004] 2 S.C.R. 17, at para. 39).
[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. However, it also noted that its conclusions would have been the same had it applied a standard of reasonableness, rather than correctness, in reviewing the arbitrator’s award (para. 74).
[42] The parties raise preliminary issues relating to the standard of review applicable on appeal from a commercial arbitration award and the proper character of the questions of law on appeal in this particular case.
[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. Relying on s. 31 of the
Arbitration Act and the judgments of this Court in
Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, and
Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, [2017] 1 S.C.R. 688, Wastech says that appeals from commercial arbitration awards are confined to extricable questions of law and that, here, Metro has failed to demonstrate a proper legal basis to set aside the award. Matters of contractual interpretation raise, both generally and in this case, questions of mixed fact and law, says Wastech and, as such, they are not reviewable on appeal. 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, 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. We have not had the benefit of submissions on that question, nor do we have the assistance of reasons on point from the courts below. Moreover, the parties here agree, rightly in my view, that the outcome of this appeal does not depend on the identification of the proper standard of review. Thus, although this Court would
ordinarily be called upon to determine whether the Court of Appeal identified the correct standard of review and applied it properly, in this case it is unnecessary to decide whether the standard is correctness or reasonableness (see Agraira v. Canada (Public Safety and Emergency Preparedness), 2013 SCC 36, [2013] 2 S.C.R. 559, at paras. 45-47). On either standard, the arbitrator’s award cannot stand. Respectfully stated, the fact that I do not pursue discussion of this particular point raised in the opinion of my colleagues should not be understood as my agreeing with their view (see, similarly, Newfoundland and Labrador (Attorney General) v. Uashaunnuat (Innu of Uashat and of Mani-Utenam), 2020 SCC 4, at para. 15).
[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 the Court of Appeal’s leave to appeal decision, where it had unsuccessfully argued that the order granting Metro leave to appeal should be overturned on the principal ground that the issues raised were questions of mixed fact and law. Nevertheless, I respectfully agree with the Attorney General of British Columbia’s submission that, in granting leave to appeal, leave courts should ensure that the questions of law upon which leave is granted are simply and precisely stated to prosecute the appeal efficiently. In this case, the complicated formulation of the first question of law, in particular, made it difficult for the courts below to provide a direct and effective answer.
[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? In my view, it was not.
[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 as opposed to the other waste disposal sites in a given period. Unlike some previous agreements between the parties, there is no guaranteed minimum volume of waste allocated to this site in a given year (Award, at para. 84). This minimum amount (“Trailer Capacity Guarantee”) is to be determined in reference to the seasonal variation of waste flows and “other factors which influence the volume of [w]aste being delivered to the Cache Creek Landfill during a calendar year” (A.R., vol. II, at p. 68,
s. 30.5). Beyond this general statement, there is no guidance as to the purposes underlying the grant of discretion to Metro to determine this amount.
[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 parties’ intention to, among other things, incentivize each other to “maximize efficiency and minimize costs”, to provide for the “maximization of the municipal solid waste disposal capacity of the Cache Creek Landfill”, and to be “sensitive to significant changes in operating standards, services or system configuration” (A.R., vol. II, at p. 9, recitals C(2) and (6) to (7)). This is consistent with the text of the overall Contract, which provides flexibility to account for variable factors foreseen by the parties such as waste volumes, operating costs and the capacity of the waste disposal sites (Award, at para. 43). As discussed above, the Contract adjusts for the impacts these factors will have on Wastech’s profitability, not only by adjusting the rates payable by Metro, but also by requiring it to share in the consequences of failing to meet the target level of profitability (ss. 14.11 and 14.19). It was through this structure that the parties decided to manage the risk and rewards of the operation.
[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 operation. Granting such discretion, as opposed to fixing certain waste volumes, serves the overall objective of allowing the parties to adapt to changing circumstances over the life of the Contract so as to ensure this operational efficiency. Further, the fact that this discretion exists alongside a
detailed framework to adjust payments towards the goal of a negotiated level of profitability, contradicts 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. Reading these clauses in context, then, the purposes for granting Metro “absolute discretion” was to allow it to structure the disposal of waste for which it had contracted Wastech in an efficient and cost-effective manner given the operational variability the parties foresaw.
[100] Based on these purposes, Metro did not act unreasonably. Metro’s exercise of discretion was “guided by the objectives of maximizing the [Burnaby Waste to Energy Facility’s] efficiency, preserving remaining site capacity at the [Cache Creek Landfill], and operating the system in the most cost-effective manner” and “was made in furtherance of its own business objectives” (Award, at paras. 87-88). All this points to an exercise of discretion that cannot be said to be unconnected to the contractual purposes for which it was granted.
[101] Importantly, the duty did not require Metro to subordinate its interests to those of Wastech in exercising its discretionary power in the manner that Wastech claims. The Contract purposely included no guarantee that the Target OR would be achieved. The parties were aware of the risk that the exercise of discretion represented and chose, notwithstanding long negotiations and a detailed agreement, not to constrain the discretion in the way Wastech now requests. In point of fact, Wastech is asking for an advantage for which it did not bargain. It asks, in effect, that Metro confer a benefit upon it that was not contemplated, expressly or impliedly, under the Contract. On my
understanding, this stands outside of the “requirement of justice” identified by Cromwell J. in Bhasin (para. 64).
[102] Although, during the hearing of this appeal, Wastech repeatedly emphasized the arbitrator’s conclusion 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. Despite the arbitrator’s conclusion, which I do not purport to disturb, the detailed nature of the Contract plainly demonstrates that the parties carefully structured their relationship, and precisely allocated the risks of their bargain between them by means of, among other things, the various adjustment mechanisms set out in the Contract. Assessing whether Metro exercised its discretion in good faith cannot ignore this context. 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.
[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 in 2011. To be sure, given the spirit of trust and cooperation underlying the Contract — which, again, the arbitrator, in his review of the facts, described as being long-term and relational — the legitimate contractual interests of these parties were different than parties to, say, a more transactional agreement (see
Bhasin, at para. 69). The fact remains that the Contract did not guarantee that Wastech would achieve the Target OR in any given year. Indeed, the various, complex adjustment mechanisms
provided in the Contract itself, which only apply where the Actual OR for a given year deviates from the Target OR, plainly demonstrate that the parties anticipated that the Target OR would not be achieved in some years (Award, at para. 84). Accordingly, the mere fact that Wastech did not have the opportunity to achieve the Target OR in one year of the 20-year Contract is not altogether surprising, notwithstanding the arbitrator’s conclusion that the Contract was a long-term, relational agreement. Rather, it seems to me that the impact of Metro’s exercise of discretion on Wastech simply reflects the allocation of risk set out in the Contract, for which Wastech negotiated and to which it agreed. Indeed, recital C(3) specifically notes that the Contract provided for the sharing of “risks and benefits”. It is true that the eventuality at the origin of this dispute was thought by both parties to be unlikely. But together they saw the risk and, together, they turned away from it, leaving the discretion in place. In this sense, Metro cannot be said to have exercised its discretion in a manner demonstrably unconnected with the relevant purposes. Wastech itself may have expected that opportunity every year, but given the terms of the bargain to which it agreed, that expectation was not shared.
[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 from one year to the next. But when read in the context of the Contract as a whole, with an eye to what Lord Sales calls the parties’ “loyalty to th[e] venture”, the purpose that constrained Metro’s exercise of discretion becomes plain.
[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 risk that revenues could vary from one year to the next was in the contemplation of the parties, and this variance could well be based on factors such as the exercise of Metro’s discretion to reallocate waste. This risk was addressed in the Contract, notably through the adjustment clauses. The risk that the exercise of discretion would affect profitability of either party in a given year was thus a considered one and, that risk notwithstanding, the discretionary power was left in place. In these circumstances, the purpose of the clause was plainly to give Metro the leeway, based on its judgment as to what was best for itself, to adjust the proportions of the allocations of waste amongst the three sites as it required to ensure the efficiency of the operation. The ability to make that allocation was not only permitted, but it could be said to reflect the purpose of the clause.
[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 purpose of the clause. In that sense it was in good faith even if the exercise meant that Wastech’s own interest suffered as a consequence. Because the exercise of discretion was within the range of conduct contemplated by the purpose of the clause, it cannot be said, according to the standards of contractual justice, to be in bad faith or unfair.
[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 Contract. It complains that the outcome is unfair because, in the result, it would not be in a
position to earn the revenue to which it felt entitled. In point of fact, Wastech is asking for Metro’s discretion to be constrained so that it can achieve a result — an advantage — for which it did not bargain and, in fact, that it might have been said to have bargained away. It asks the Court to have Metro subvert its own interest in name of accommodating Wastech’s interest. But 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.
[114] I would dismiss the appeal with costs.
The reasons of Côté, Brown and Rowe JJ. were delivered by
BROWN AND ROWE JJ. —
[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. First, this Court should clarify the applicable standard of review. Secondly, while we agree that the purpose of a discretion is the proper focus of the good faith analysis, in assessing that purpose, courts must give effect to the parties’ bargain. Thirdly, we do not agree with our colleague’s treatment of the duty of honest performance insofar as he suggests that it is a preliminary step in addressing the duty to exercise discretion in good faith. Finally, our colleague’s reliance on the civil law of Quebec is unnecessary, ill-advised and wholly misplaced. Rather than assisting in the development of the common law of good faith in contractual performance, as stated by this Court in
Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, the digression into the civil law gives rise to complication, uncertainty and confusion.
[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. Inasmuch as the effect of the arbitrator’s decision in this case was to require that the respondent protect the appellant’s interests at the expense of its own, it is not consistent with
Bhasin or the jurisprudence that preceded it. We would therefore dismiss the appeal.
[117] Our colleague refrains from identifying the standard of review, since on either standard he would overturn the arbitrator’s conclusions. In our view, however, this Court ought to provide clear guidance on this point. Conflicting lines of authority have arisen concerning the application of
Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, to arbitration appeals
(Northland Utilities (NWT) Limited v. Hay River (Town of), 2021 NWTCA 1, at paras. 21-44 (CanLII);
Ontario First Nations (2008) Limited Partnership v. Ontario Lottery And Gaming Corporation, 2020 ONSC 1516, at paras. 62-75 (CanLII);
Cove Contracting Ltd. v. Condominium Corporation No 012 5598 (Ravine Park), 2020 ABQB 106, 10 Alta. L.R. (7th) 178, at paras. 3-12;
Allstate Insurance Co. v. Ontario (Minister of Finance), 2020 ONSC 830, 149 O.R. (3d) 761, at paras. 12-19;
Buffalo Point First Nation v. Cottage Owners Association, 2020 MBQB 20, at paras. 46-48 (CanLII);
Clark v. Unterschultz, 2020 ABQB 338, 41 R.F.L. (8th) 28, at paras. 55-56). This question ought to be resolved.
[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 to statutory rights of appeal from administrative decisions (para. 37). Certain trial courts have, however, resisted applying this principle to appeals from arbitral awards. Two reasons are offered for this. First,
Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, and
Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, [2017] 1 S.C.R. 688, do not support the application of appellate standards of review to arbitration appeals, and
Vavilov did not expressly overrule those decisions (
Ontario First Nations, at para. 71;
Cove Contracting Ltd., at paras. 10-12). Secondly,
Vavilov was driven by “constitutional considerations that justify deference by the judiciary to the legislature” (
Ontario First Nations, at para. 72). In contrast, the standard of review that applies to appeals from private arbitration awards is “guided by commercial considerations about respect for the decision-makers chosen by the parties. As a result, deference is justified by the parties’ contractual intent” (
Ontario First Nations, at para. 72).
[119] There are important differences between commercial arbitration and administrative decision-making (
Sattva, at para. 104). Those differences do not, however, 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. As this Court explained in
Vavilov, “a legislative choice to enact a
statutory right of appeal signals an intention to ascribe an appellate role to reviewing courts” (para. 39). This interpretive principle applies in similar manner to statutory rights of appeal from arbitral awards:
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 they do in, for example, a criminal or commercial law context. Accepting that the word “appeal” refers to the same type of procedure in all these contexts also accords with the presumption of consistent expression, according to which the legislature is presumed to use language such that the same words have the same meaning both within a statute and across statutes: R. Sullivan, Sullivan on the Construction of Statutes (6th ed. 2014), at p. 217.
(Vavilov, at para. 44)
[120] Factors that justify deference to the arbitrator, notably respect for the parties’ decision in favour of alternative dispute resolution and selection of an appropriate decision-maker, are not relevant to this interpretive exercise. What matters are the words chosen by the legislature, and giving effect to the intention incorporated within those words. Thus, where a statute provides for an “appeal” from an arbitration award, the standards in
Housen apply. To this extent,
Vavilov has displaced the reasoning in
Sattva and
Teal Cedar. Concluding otherwise would undermine the coherence of
Vavilov and the principles expressed therein.
[121] The appeal in this case was brought pursuant to s. 31 of the
Arbitration Act, R.S.B.C. 1996, c. 55,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 any question of law arising out of the award”. In light of Vavilov, it follows that the standard of review to be applied by this Court in this case is correctness (Housen, at para. 8). Our conclusion on this point is limited to the specific statutory provision at issue. In every case, the question is one of legislative intention, as reflected in the language of the statute.
[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, at para. 15, explicitly dismissing opposing views of colleagues as unworthy of answer. Of no less concern are the implications of his refusal to decide the appropriate standard of review, which risks undermining this Court’s decision in
Vavilov as it relates to statutory appeals. To leave this undecided is to invite conflict and confusion.
[123] This appeal arises from a 20-year comprehensive agreement (“Agreement”) between the Greater Vancouver Sewerage and Drainage District (“Metro”) and Wastech Services Inc. (“Wastech”) to deal with the management of municipal solid waste. Specifically, the Agreement contemplated that Wastech or its subcontractors would deliver solid waste to transfer stations in Cache Creek, Vancouver and Burnaby. Wastech operated the Cache Creek transfer station. Metro had discretion under the Agreement to determine the allocation of waste each year
among these stations. The volume of waste distributed to each facility would impact the costs, revenues, and, accordingly, Wastech’s ability to earn a profit. In particular, Wastech received a higher rate of pay for disposals at Cache Creek. Wastech’s total compensation under the Agreement was structured around a target operating ratio of 0.890 (“Target OR”), meaning that, in any given year, operating costs should comprise 89 percent of revenue so that Wastech would receive the remaining 11 percent of revenue as profit.
[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. If the actual operating ratio (“Actual OR”) fell between 0.860 and 0.920 at year end, the Agreement provided for a retroactive payment by or to Wastech of 50 percent of the difference between the Target OR and the Actual OR. Effectively, the parties would share the financial consequences of any deviation of 0.300 or less from the Target OR. In addition, the Agreement contained a prospective adjustment, which was applied if the Actual OR fell outside of the “target band” between 0.860 and 0.920 (“Outside Band Adjustment”). The Outside Band Adjustment was intended to be sufficient to return the operating ratio to just outside the target band. Further, if Wastech’s Actual OR fell outside of the target band for three consecutive years, the rates were subject to re-calculation.
[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 for the 2011 year to “maximize the remaining life of the Cache
Creek Landfill” (Arbitrator’s decision, A.R., vol. I, p. 1 (“Award”), at para. 52) and because of Metro’s own budget concerns. Metro was aware that Wastech might not be able to reduce its costs to account for the change in allocation, which ultimately caused delivery volumes at Cache Creek to drop by 31 percent in 2011, relative to 2010. Because of Metro’s decision, Wastech had no possibility of achieving the Target OR in 2011.
[126] The arbitrator expressly declined to imply a term in the Agreement guaranteeing the Target OR, finding that the parties had considered such a term and rejected it. He also concluded, however, that Metro was bound by its duty of good faith to have appropriate regard for Wastech’s legitimate interests. While the 2011 allocation decision was honest and reasonable when considered from Metro’s perspective, it also “had significant financial implications [for Wastech] beyond those addressed by the [Agreement’s] adjustment mechanisms” (para. 86). The arbitrator concluded that Metro’s decision was “dishonest” because it inappropriately negated Wastech’s legitimate expectation of at least having the opportunity to earn the Target OR in each year of the Agreement.
[127] Metro was granted leave to appeal the arbitrator’s decision on two questions of law:
1. 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 an act undertaken in bad faith simply because it was wholly at odds with the expectations of the counter-party, which expectations were not embodied in the contract?
2. Did the Arbitrator err in law by confusing the “organizing principle” stated in Bhasin with a free-standing obligation of contractual good faith, disregarding the applicable principles of good faith as found in the authorities?
(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 good faith?
[136] Two other matters arising from our colleague’s reasons require comment.
[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.