Supreme Court of Canada to Review the Duty of Good Faith Contractual Performance

Introduction

In Bhasin v. Hrynew, 2014 SCC 71, the Supreme Court of Canada acknowledged that the law of contract includes both a duty of good faith contractual performance and a duty of honest performance. As outlined in this decision, this principle “underpins and informs” various rules governing contractual relationships in particular situations.

Since the Supreme Court of Canada’s decision, various courts throughout Canada have adopted the general organizing principle that parties must perform contracts in good faith. Courts have struggled to determine the nature and scope of the newly acknowledged principles as applied to the substantive law of contract. In a previous blog post, we wrote about CM Callow Inc. v. Zollinger, 2018 ONCA 896, in which the Court of Appeal for Ontario overturned a trial decision’s application of the Bhasin principles.

Fortunately, Canada’s highest court is set to revisit the Bhasin principles shortly in a case that offers the prospect of clarifying them. The Supreme Court of Canada 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, which puts the scope of the Bhasin principles to the test.

The Procedural History of the Case

Wastech Services Ltd. (“Wastech”) and Greater Vancouver Sewerage and Drainage District (“Greater Vancouver”) were involved in a 20-year contract for the disposal of solid waste from the Vancouver regional district. A dispute arose in 2011 over Metro’s discretionary allocation of solid waste to various dumping sites which impacted Wastech’s contractual profit margin.

The dispute proceeded to arbitration pursuant to the agreement’s arbitration clause. There, the arbitrator found that Greater Vancouver’s behaviour lacked “appropriate regard” for Wastech’s interests under the agreement. The arbitrator found that this constituted “dishonesty” for purposes of the Bhasin duty of good faith.

Greater Vancouver appealed the arbitrator’s decision to the British Columbia Supreme Court. There, the Court determined that there was no free-standing obligation on a party to exercise its contractual discretionary power in good faith. The chambers judge concluded that the arbitrator had expanded good faith beyond what was allowed in Bhasin.

The British Columbia court of appeal dismissed the subsequent appeal for reasons that differed from the chambers judge. The Court of Appeal determined that good faith exercise of discretion exists in contract law but that Wastech’s legitimate expectation had to be founded in the agreement. The duty of good faith did not apply because the arbitrator did not find an implied term in the agreement, including an expectation that Greater Vancouver would deny Wastech the possibility of achieving its profit margin.

Conclusion

The Supreme Court of Canada is scheduled to hear the appeal on December 6, 2019. While it remains to be seen how, and if, the Supreme Court of Canada will better define the scope and application of the Bhasin principles, the decision should certainly be closely monitored by anyone involved in the drafting of commercial contracts.

At Duncan, Linton LLP, we assist clients with every stage of contractual matters, from drafting and review of commercial contracts to advising in breach of contract litigation. Our lawyers also have extensive experience in construction matters, offering insightful advice about contracts and other issues to parties at every level of the industry. Contact us online or call 519-886-3340 to make an appointment with one of our lawyers.