Referee’s decision overturned due to bad faith contact
EDMONTON, AB, CANADA, May 30, 2022 /EINPresswire.com/ — The Supreme Court of Canada recently clarified the scope and limits of liability to act in good faith when performing a contract in a game-changing decision.
Where a contract grants a party some degree of choice, that choice must be exercised fairly or the party will be deemed to have breached the contract by acting in bad faith. When companies enter into contracts, they have an implicit obligation to act honestly, in good faith and fairly. If they fail to do so, they can be sued for breach of this obligation.
“While this case does not involve a service contract for used laser or aesthetic machines, the consequences of the judgment should be considered if someone finds themselves in a similar situation,” said Dr. Alhallak, director from the Albany Cosmetic and Laser Center in Edmonton. “I plan to use this quote from this case against my dispute with sensitive lasers in case number 2:2021cv00767,” he continues.
The Supreme Court of Canada recently clarified the scope and limits of the liability to act in good faith when performing a contract in a game-changing decision.
Where a contract grants a party some degree of choice, that choice must be exercised fairly or the party will be deemed to have breached the contract by acting in bad faith.
The case before the judge
Wastech Services Ltd. vs. Greater Vancouver Sewerage and Drainage District (“Watech”) involved a long-term contract between a waste disposal company (the “Company”) and the Greater Vancouver Sewerage and Drainage District (the “District”) for the transportation and the removal of solid waste from three different disposal sites. Depending on the site chosen, the Company was reimbursed at varying rates, with the most profitable site being the furthest away.
The district was given “full discretion” to decide which disposal site to use under the contract. In the contract, there was a cost/revenue objective for the remuneration of the company. The contract, on the other hand, did not guarantee that the objective would be achieved.
The district reallocated waste disposal locations in 2011 and elected to transfer significantly more waste to a closer site. This resulted in a significant drop in revenue and an increase in costs, causing the company to miss its target.
The Company filed a claim for compensatory damages against the District in arbitration.
The district allegedly breached the contract and failed to act in good faith by directing waste to areas that made it difficult for the company to meet its deadline. The arbitrator ruled in favor of the Company and found that the District acted in bad faith by using its discretion in a manner that prevented the Company from achieving its objective.
The Supreme Court decision
The case eventually reached the Supreme Court, where the arbitrator’s decision was overturned after a series of appeals.
Because the contract provided the district with “absolute discretion” in deciding which disposal sites to use, the Supreme Court held that the district was not required to use this discretion to ensure that the company met his goal. When the Company accepted the Contract, it was also emphasized that it was well aware of this discretion and the risks involved.
Consequently, although it had a duty to exercise its discretionary power in good faith, the District did not fail to do so in this situation.
It is impossible to overestimate the importance of the Wastech decision. Despite the fact that the District was not found to have acted in bad faith, in that case the Supreme Court explicitly stated the need to behave in good faith when discretion is present under a contract and when that responsibility will be breached.
What it can mean
The answer is that when a party has a choice under a contract, they must use it in a way that relates to the reason for which it was given. If a party uses its discretion in a way that is unrelated to its purpose, the party has breached its obligation to make a choice in good faith.
Despite Wastech’s concerns about a garbage removal agreement, the Supreme Court ruled that the duty of good faith “applies to every contract, regardless of the intentions of the parties,” and that it applies to any contract with some degree of choice. Accordingly, it can be used in a variety of agreements, such as commercial leases, development agreements and construction contracts.
Wastech, for example, was cited in a recent Ontario Superior Court of Justice decision regarding a commercial lease dispute between The Ottawa Hospital and an adjacent medical center, just weeks after its ruling. A dispute arose over the number of parking spaces granted to the medical center, and the hospital successfully argued that it had exercised its discretion to allocate in good faith the appropriate number of parking spaces in accordance with the contract, citing Wastech .
When exercising the power of a contract to make a discretionary decision, we must keep Wastech in mind. Before passing judgment, it is crucial to remember why the discretion was granted in the first place. The decision will be deemed to have been taken in bad faith if it is exercised for an arbitrary reason or for a cause unrelated to its purpose, which may give rise to an action for damages.
Dr. Kamal alhallak
Albany Cosmetic and Laser Center
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