Absolute Discretion and the Duty of Good Faith

May 10, 2021

By Brian Babcock

Absolute discretion under a contract is not always absolute.

The Supreme Court of Canada continues to develop the law relating to the duty of good faith in the performance of a contract.

In Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, the parties had a long term contractual relationship for the disposal of waste. Wastech hauled the waste to one of three different sites owned by “Metro”. Wastech was paid different rates depending upon which facility was used, and the distance of the trips. 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 began allocating waste from the facility furthest away to one that was closer. This reduced Wastech’s profits.

The issue was whether or not the “absolute discretion” provision trumped the implied duty of good faith. If not, did that duty require Metro to have allocated the waste in a way that allowed Wastech more profit?

The duty to exercise discretion, even absolute discretion, in good faith, is now part of the general law of contracts. This duty exists independently of the intention of the parties – a restraint on freedom to contract that would have been unthinkable a few decades, maybe even just a few years, ago. The duty is seen as holding the parties to perform the contract’s purpose. Discretion cannot be used to contract out of that principle.

The court held that discretion under a contract must be exercised in a manner consistent with the objectives of that contract. This includes “absolute discretion”. Courts will intervene where the discretion is exercised arbitrarily.

However, if the discretion is exercised in a manner consistent with the purpose of the contract, courts will not intervene.

A reduction in anticipated profit is one factor in determining whether the discretion is exercised in good faith, but it is not the only factor. On the facts of the case, Metro was found to have acted in good faith. At the time the contract was entered into, Wastech accepted any risk arising from Metro’s discretion to allocate waste to various sites.

The duty of good faith does not require a party to a contract to subvert or ignore its own interests to benefit the other party. It also does not allow one party to rewrite the bargain to its own benefit.

This result strikes a good balance between the parties and is consistent with the sense of fairness at the core of the Court’s earlier decisions on the duty of good faith. It will take a few more decisions before we fully understand the limits of the duty and how it affects freedom to contract, which leaves some unfortunate commercial uncertainty.

At this stage, we know that:

  • good drafting still counts to clearly express the purpose of the contract, and provide the parameters within which discretion may be exercised;
  • in performing the contract, “absolute discretion” will not truly be absolute, but as long as you act fairly, without disregarding the interests of the other party, you are still allowed to act in your own best interests;
  • removing the benefits of the contract from the other party will not in itself always be bad faith, but it may be a factor in looking at the fairness of your actions;
  • if your actions are considered to be unreasonable, unfair, or unconnected to the purpose of the contract, you may be required to compensate the other party;
  • this means paying attention to the scope of the contract provisions, the words used in the entire contract, and the commercial context.

All of which reinforces the importance of careful drafting.