The Supreme Court of Canada gave judgment on Friday in favour of NST’s client, Greater Vancouver Sewerage and Drainage District (now Metro Vancouver) in a landmark case on the good faith limit on the exercise of contractual discretions: Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7.

NST partners Irwin Nathanson and Julia Lockhart acted for Metro Vancouver on this appeal from an arbitration award, achieving success at all levels of court, overturning a $2.88 million award made against Metro Vancouver. The Supreme Court of Canada confirmed that Metro Vancouver did not breach any duty of good faith when it made its waste allocation decision in 2011, finding that Metro Vancouver’s decision was consistent with the purposes for which it was given the discretion to make those decisions under the contract. Writing for the majority, Justice Kasirer held that Metro Vancouver had no obligation to put its counterparty, Wastech’s interests ahead of its own, which, implicitly, would be the result if the arbitration award were permitted to stand. Metro Vancouver’s only obligation was to be “loyal” to the contract, and not to Wastech. In the circumstances, Metro Vancouver’s waste allocation was consistent with that obligation.

The Supreme Court of Canada’s decision in this case will have important implications for all contracts that provide one party with discretionary powers, building on the Supreme Court of Canada’s decisions in Bhasin v. Hrynew, 2014 SCC 71, and C.M. Callow Inc. v. Zollinger, 2020 SCC 45. In reaching its decision in this case, the Supreme Court provided guidance on the circumstances in which the exercise of a contractual discretion will give rise to a claim for breach of contract, and rejected a previous line of authority from the lower courts which held that conduct that “nullifies”, “eviscerates” or causes a contracting partner to lose “some or even all of its anticipated benefit” from a contract is itself a breach of the good faith duty.  Instead, the Supreme Court of Canada endorsed a test for good faith which requires courts to assess the purpose for which a discretionary power was given, and then determine whether a particular exercise was consistent with that purpose. How this test is to be applied stands to be developed in future cases.

This case reflects the depth of NST’s knowledge and familiarity with the developing area of contractual good faith.