Good Faith and the Exercise of Discretion in Contracts
The Supreme Court of Canada recently developed the law regarding good faith in the case of Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7. The Court looked specifically at the circumstances in which the excercise of discretion in a contract will be in bad faith.
At 63 the Court said:
Stated simply, the duty to exercise contractual discretion in good faith requires the parties to exercise their discretion in a manner consistent with the purposes for which it was granted in the contract, or, in the terminology of the organizing principle in Bhasin, to exercise their discretion reasonably.
The Court said at 88:
In sum, then, the duty to exercise discretion in good faith will be breached where the exercise of discretion is unreasonable, in the sense that it is unconnected to the purposes for which the discretion was granted. This will notably be the case where the exercise of discretion is capricious or arbitrary in light of those purposes because that exercise has fallen outside the range of behaviour contemplated by the parties. The fact that the exercise substantially nullifies or eviscerates the fundamental contractual benefit may be relevant but is not a necessary pre-requisite to establishing a breach.
If you believe a party in a contract has exercised their contractual discretion unreasonably, please feel free to contact us.
The information contained in this article is not legal advice. No solicitor client relationship is formed through this article. The reader is encouraged to retain counsel for advice in these matters.