The Supreme Court of Canada (SCC) recently released its decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7 (CanLII) which clarifies the operation of the duty to exercise contractual discretion in good faith described in the seminal case, Bhasin v. Hrynew, 2014 SCC 71 (CanLII), [2014] 3 SCR 494.
The SCC confirms that where a party exercises a discretionary power under a contract, it must do so in good faith (meaning that parties must exercise their contractual duties honestly, reasonably, and not capriciously or arbitrarily).
If a party violates the duty of good faith, the contract is breached.
The SCC opined that the following question must be asked when deciding if a party breached the duty of good faith: Was the exercise of contractual discretion unconnected to the purpose for which the contract granted discretion?
If the answer is yes, then the party has failed to exercise its contractual power in good faith and has breached the contract.
In other words, where a party exercises its discretion unreasonably (i.e. in a way that is not connected to the underlying purpose of the discretion granted by the contract), then it has violated the duty of good faith and breached the contract.
The court further advises that the duty of good faith does not completely eliminate a party’s choice; rather, it limits the range of legitimate ways in which a party can exercise its discretion (which are subject to the underlying purpose for which the discretion is granted under the contract).
Further, the substantial nullification or evisceration of the benefit of a contract is not a necessary prerequisite to a finding that a party breached the duty of good faith, but it may be a relevant consideration.
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