The British Columbia Supreme Court has recently granted leave to appeal from an arbitrator’s award that applied a broad notion of the doctrine of good faith in the performance of a contract. As the court noted, the issues arising in Greater Vancouver Sewerage and Drainage District v. Wastech Services Ltd. (Wastech) involve an “interesting intersection between two recent Supreme Court of Canada decisions, being Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (when leave should be granted from an arbitrator’s award), and Bhasin v. Hrynew, 2014 SCC 71 (the duty of good faith in performance of a contract).”
In 1996, Greater Vancouver Sewerage and Drainage District (Metro) and Wastech Services Ltd. (Wastech Inc.) entered into a complex, long-term agreement by which Metro agreed to compensate Wastech Inc. for services relating to the transportation of waste from the Greater Vancouver Regional District (GVRD) to various locations in British Columbia (Agreement). The Agreement set out rates to be paid by Metro to Wastech Inc. for the services provided and contained several mechanisms for rate adjustments. Wastech Inc.’s compensation would be structured around a target ratio of operating costs to total revenue. Under the Agreement, Metro would provide an annual estimate of the waste to be allocated, which would allow Wastech Inc. to plan its operations.
Metro’s 2011 allocation resulted in a “material reduction” in the waste allocated to certain locations, which subsequently had significant financial implications for Wastech Inc., beyond the allocation mechanisms in the Agreement. As a result, Wastech Inc. did not achieve its target ratio.
The arbitrator found that Metro had discretion to set its annual waste allocation. He found that Metro did not act dishonestly with Wastech Inc. when it set its allocation in 2011. In fact, the arbitrator found that Metro’s conduct was both “honest and reasonable”, and “in furtherance of its own business objectives.” Rather, the arbitrator found that Metro had disregarded Wastech’s legitimate contractual expectations that Metro would “not exercise its discretion under the [Agreement] to implement a material change in the volume of waste allocated … that has the effect of depriving Wastech Inc. of the opportunity, if Wastech Inc. performs its own obligations, to achieve the [target ratio].” On this basis, the arbitrator found that Metro breached its duty of good faith and the Agreement, and granted Wastech Inc. an award of compensation of Wastech Inc.’s lost opportunity to obtain its target ratio in 2011.
LEAVE TO APPEAL GRANTED
Metro applied for leave to appeal of the arbitral award. Under British Columbia’s domestic Arbitration Act, a court may grant leave to appeal if the court determines that there is a question of law arising out of the award and there is sufficient importance in the resolution of that question to justify the intervention of the court. The Supreme Court of Canada in Sattva held that an arbitrator’s interpretation of a contract generally does not raise a question of law and that any review of the arbitrator’s award is subject to a reasonableness standard of review.
The British Columbia Supreme Court (Court) in Wastech granted leave to appeal. It found that there was a question of law on appeal that required the court’s intervention: that is, whether the Arbitrator confused the “organizing principle” stated in Bhasin with a free-standing obligation of contractual good faith. The Court rejected Wastech Inc.’s argument that Metro’s proposed appeal merely involved an interpretation of the Agreement.
Metro argued that the arbitrator’s application of Bhasin was incorrect because he imposed a duty of good faith without any basis for doing so in the terms of the Agreement. The arbitrator had expressly found that the parties had not implied any term into the Agreement that would have compensated Wastech Inc. in circumstances where there was a material re-allocation of waste by Metro. How, Metro argued, could Wastech Inc. be entitled to compensation on the basis of a denial of its “legitimate contractual interests” when there was no such express or implied contractual term compensating Wastech Inc. in these circumstances? In other words, the Agreement had accounted for this situation and it was a mistake for the arbitrator to essentially rewrite a term of the Agreement. Metro argued further that the arbitrator erred when he characterized Metro’s conduct as “bad faith” conduct when it was acting honestly and squarely within its contractual rights.
The Court agreed with Metro that these were meritorious legal questions that had to be heard on appeal. The Court noted that the arbitrator’s conclusions did not appear to rest on the Agreement, but on some broader notion of fairness in performance of the Agreement. Such an interpretation of Bhasin raised the interesting questions of whether a duty of good faith existed in the circumstances, and whether a party could be found to be in breach of the duty of good faith merely for acting in its own self-interest and contrary to the expectations of its contracting party, even when those expectations are not found in the contract.
The decision in Wastech demonstrates the degree to which courts and arbitral tribunals are struggling to come to grips with the common law “overarching principle of good faith” and the new duty of honest performance of contracts recognized by the Supreme Court of Canada in Bhasin. As demonstrated by the contrasting perspectives between the Court and the arbitrator, there is ample room to debate the extent of the legal right to expect “honest” performance. Courts will have to set the boundaries of this new contractual right and the overarching principle.