Written by Michael Theroux, Andrea Stempien and Roy Lou

The Supreme Court of Canada (SCC) recently granted leave to appeal from the British Columbia Court of Appeal's decision in Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd., 2019 BCCA 66. The case raises issues left outstanding in the SCC's decision of Bhasin v Hyrnew, 2014 SCC 71 [Bhasin], including the scope of the duty of good faith and honesty in contractual performance. In particular, the case considers whether a party who exercises a contractual right in an honest and reasonable manner may nonetheless breach its duty of good faith if its conduct undermines a counterparty's business interests.

The Principle from Bhasin: Parties Must Perform Contracts in Good Faith

In Bhasin, the SCC affirmed the existence of the duty of good faith as a "general organizing principle" of Canadian contract law. The principle of good faith requires contracting parties to have appropriate regard to the legitimate contractual interest of their contracting partner and not act in bad faith. Flowing from this principle is the duty of honest performance, which requires parties to perform their contractual obligations honestly and to not lie or knowingly mislead another party in the performance of the contract. While the principles enunciated by the Court in Bhasin are clear, the application of those principles has persistently plagued litigators across the country.

Background

Wastech Services Ltd. (Wastech) and Greater Vancouver Sewerage and Drainage District (Metro) had a long-term agreement for Wastech to dispose waste on behalf of Metro. In 2011, Metro, in accordance with the agreement, relocated waste disposal locations which significantly increased Wastech's operating costs.

Pursuant to the terms of the agreement, Wastech and Metro proceeded to arbitration, with Wastech arguing, in part, that the central issue to be determined was not one of contractual interpretation, but rather the operation of the duty of good faith in contractual performance. While the arbitrator did not find that Metro had exercised its discretion to relocate the facility capriciously or arbitrarily, he did find that Metro's behaviour lacked "appropriate regard" for Wastech's interests under the agreement. The arbitrator reasoned that the focus of the organizing principle of good faith, as 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.

Metro appealed to the British Columbia Supreme Court, which held that "Bhasin is not authority for the proposition that contracts may be adjusted to accommodate situations where one party regrets the contract in hindsight."

The Court of Appeal's Decision

Wastech's appeal to the Court of Appeal was dismissed with the Court holding that a party who exercises a bargained-for right is not dishonest or culpable for bad faith simply because the effects of that exercised right subverts the expectations of the counter-party, particularly those not reduced to writing in the contract. In arriving at this conclusion, the Court reasoned that:

• a party's legitimate contractual interests must arise out of the terms of the contract; only then can such an expectation be "contractual" and trigger the duty of good faith; and
• the principle of good faith and the duty of honest performance are concerned with conduct that has at least a subjective element of improper motive or dishonesty. A mere negative impact on a counterparty is insufficient.

Supreme Court of Canada to Revisit the Duty of Good Faith

The Canadian business community and those involved in commercial contracts eagerly await the outcome of this decision. The SCC has an opportunity to address the current state of the law following Bhasin and refine the scope and application of the duty of good faith.