Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd 2019 BCCA 66

COURT OF APPEAL FOR BRITISH COLUMBIA

GREATER VANCOUVER SEWERAGE AND DRAINAGE DISTRICT
Respondent
(Appellant)

V

WASTECH SERVICES LTD
Appellant
(Respondent)

 

DOCKET: CA45252
DATE OF HEARING: 22 & 23 January 2019
PLACE OF HEARING: Vancouver, British Columbia
DATE OF JUDGMENT: 22 February 2019

 

Summary:

Appeal from a Supreme Court judge’s order allowing an appeal of an arbitrator’s award in favour of the appellant “Wastech”. The litigants were parties to a long-term and complex agreement providing for the removal and hauling of solid wastes by Wastech on behalf of the respondent District (“Metro”.) Wastech claimed compensation when Metro substantially re-allocated wastes in 2011 between short-and long-haul destinations, which increased Wastech’s costs such that it could not meet a so-called “Target Operating Ratio” or “OR” as defined in the Agreement. This ratio, which was fixed at 0.89, represented the proportion of Wastech’s costs as against revenues and if met would give it operating profit of 11% p.a. Various adjustments were provided for in the contract, and Metro paid Wastech some $2.8 million as a result of the re-allocation, but the parties had consciously chosen not to provide adjustments beyond a certain point. The actual OR for the year, after the one adjustment, was .96.

Wastech took its claim to arbitration, arguing that a term should be implied or that a duty of good faith should apply so as to entitle it to a further $2.8 million. The arbitrator declined to imply a term in light of the parties’ deliberate choice not to include such an adjustment, but found that although Metro’s conduct had been honest and reasonable from its own point of view, it had failed to give “appropriate regard” to Wastech’s interests or expectations. He found that this constituted “dishonesty” for purposes of the duty of good faith as explained in Bhasin (SCC).

Metro obtained leave to appeal under s. 31 of the Arbitration Act on two questions of law. On appeal to this court, Wastech’s appeal of the leave order was dismissed. The Court of Appeal approved the two questions of law proposed by Metro for appeal to the SCBC.

The SCBC chambers judge allowed the appeal, apparently ruling that Bhasin had not created a free-standing obligation on a contracting party not to disregard the interests of the other party. However, he went on to make other comments and did not clearly address the two questions of law brought to the Court. Wastech appealed to this court.

Appeal dismissed (for reasons somewhat different from those of the chambers judge.) The arbitrator had erred in law in the manner referred to in the two questions of law brought to the Court. More particularly, he had erred in law in failing to address whether Wastech had had a legitimate contractual expectation that Metro would compensate it over and above the adjustment provided for in the contract; failing to consider the effect of his rejection of an implied term in his analysis of good faith; concluding that a breach of the duty of good faith occurs whenever a party fails to give “appropriate regard” to the other’s interests in the absence of a finding that the contract has been “eviscerated” or “nullified”; and in finding “dishonesty” and thus breach of the duty of good faith without any element of dishonesty, improper motive, of bad faith as understood in existing law.

Reasons for Judgment of the Honourable Madam Justice Newbury:

[1]           This appeal tests the nature and scope of changes made recently by the Supreme Court of Canada in both the substantive law of contract (in Bhasin v. Hrynew 2014 SCC 71 (CanLII)) and the law relating to the appellate review of arbitral decisions resolving contractual disputes (in Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53 (CanLII) and Teal Cedar Products Ltd. v. British Columbia 2017 SCC 32 (CanLII).) In the case at bar, the court below is said to have found that an arbitrator erred in law in ruling that the conduct of the respondent Greater Vancouver Sewerage and Drainage District (referred to as “Metro” by the parties) had been “dishonest” only by reason that it was “at odds” with the legitimate contractual expectations of the appellant Wastech Services Ltd. (“Wastech”.) In the result, the Court set aside the arbitrator’s award of damages to Wastech in the amount of $2,888,162 for breach of the duty of good faith.

[2]           On appeal to this court, Wastech asserts certain errors of law on the part of the chambers judge. It also suggests in its factum that the judge failed to determine whether the questions on which leave to appeal to the Supreme Court of British Columbia had been granted, were “reviewable issues under the narrow compass of the Arbitration Act.” Section 31 of the Act (R.S.B.C. 1996, c. 55) states that only questions of law arising from an arbitral award may be appealed, that the result must be important to the parties and that the court’s intervention must be necessary to prevent a miscarriage of justice.

Characterization

[3]           Obviously, then, this case has engaged the process of characterizing issues of law as opposed to those of mixed law and fact, or fact alone. In the arbitralcontext, as in the realm of judicial review, this process has become a vexed one. In Sattva, the Supreme Court saw similarities in the appellate review of arbitralcases and judicial reviews: both involve the examination of decisions of non-judicial decision-makers by appellate courts. Expertise on the part of such decision-makers is “a factor”, as it may be presumed they are chosen because of their expertise in a given field or are otherwise qualified in a manner acceptable to the parties – just as administrative tribunals are presumed to have expertise in their areas of jurisdiction. On the other hand, there are differences between the two contexts. One identified in Sattva is that parties engage in arbitration by “mutual choice” rather than by statutory process; another is that as mentioned, the Arbitration Act limits appeals to questions of law, thus ‘forbidding’ review of an arbitrator’s factual findings, whereas in judicial review the court is not precluded from reviewing a decision, although it must apply a deferential standard. (At para. 104.)  

[4]           With respect to standard of review, the Supreme Court in Sattva and Teal Cedar suggested that a standard of reasonableness (as explained in Dunsmuir v. New Brunswick 2008 SCC 9 (CanLII)), now the norm in administrative law, applies to all questions of law on appeal in commercial arbitrations, unless “the question is one that would attract the correctness standard, such as constitutional questions or questions of law of central importance to the legal system as a whole.” (See Sattva at para. 106; Teal Cedar at para. 74.) Since the Court in Sattva also decided that in future, questions of contractual interpretation were to be regarded as questions of mixed fact and law, only a very small window for appellate review of arbitral decisions remains.

[5]           Nevertheless, counsel for appellants from arbitral awards continue – not surprisingly – to argue in favour of the existence and significance of questions of law to which the correctness standard applies. This has led the Supreme Court to direct appellate courts repeatedly to be “vigilant” against attempts to find extricable questions of law when in reality the objection is to how the arbitrator applied the law to the facts. As stated by Justice Rothstein in Sattva:

… it may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law (Housen, at paras. 31 and 34-35). Legal errors made in the course of contractual interpretation include “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor” (King, at para. 21). Moreover, there is no question that many other issues in contract law do engage substantive rules of law: the requirements for the formation of the contract, the capacity of the parties, the requirement that certain contracts be evidenced in writing, and so on.

However, courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation. Given the statutory requirement to identify a question of law in a leave application pursuant to s. 31(2) of the [Arbitration Act], the applicant for leave and its counsel will seek to frame any alleged errors as questions of law. The legislature has sought to restrict such appeals, however, and courts must be careful to ensure that the proposed ground of appeal has been properly characterized. [At paras. 53-4.]

[6]           Similarly, in Teal Cedar, Gascon J., speaking for the Court, built on Sattva in describing the “process for characterizing” a question of law, fact or mixed fact and law. In his words:

In particular, it is not disputed that legal questions are questions “about what the correct legal test is”…; factual questions are questions “about what actually took place between the parties”…; and mixed questions are questions about “whether the facts satisfy the legal tests” or, in other words, they involve “applying a legal standard to a set of facts”…

That said, while the application of a legal test to a set of facts is a mixed question, if, in the course of that application, the underlying legal test may have been altered, then a legal question arises. For example, if a party alleges that a judge (or arbitrator) while applying a legal test failed to consider a required element of that test, that party alleges that the judge (or arbitrator), in effect, deleted that element from the test and thus altered the legal test. …

Such an allegation ultimately challenges whether the judge (or arbitrator) relied on the correct legal test, thus raising a question of law… Accordingly, such a legal question, if alleged in the context of a dispute under the Arbitration Act, and assuming the other jurisdictional requirements of that Act are met, is open to appellate review. These “extricable questions of law” are better understood as a covert form of legal question — where a judge’s (or arbitrator’s) legal test is implicit to their application of the test rather than explicit in their description of the test — than as a fourth and distinct category of questions. [At paras. 43-4; emphasis added.]

He also warned against taking too wide a view of questions of law:

…mixed questions, by definition, involve aspects of law. The motivations for counsel to strategically frame a mixed question as a legal question – for example, to gain jurisdiction in appeals from arbitration awards or a favourable standard of review in appeals from civil litigation judgments – are transparent… A narrow scope for extricable questions of law is consistent with finality in commercial arbitration and, more broadly, with deference to factual findings. Courts must be vigilant in distinguishing between a party alleging that a legal test may have been altered in the course of its application (an extricable question of law…), and a party alleging that a legal test, which was unaltered, should have, when applied, resulted in a different outcome (a mixed question).

… The identification of an alleged legal error should be based on the arbitrator’s application of the wrong test, not on the fact that one would have applied the appropriate legal test differently. [At paras. 45, 59; emphasis added.]

This restrictive approach is said to be consistent with the principles of finality and deference (see Teal Cedar at para. 45); parties seeking correctness in the application of law to the facts are effectively left without recourse. (Whether the Supreme Court intends to discourage the selection of arbitration as opposed to judicial determination is unclear, as is whether contracting parties who provide for arbitration in their agreements are likely to be aware of the limited scope for appellate review in the event of arbitral error.)

[7]           In Richmont Mines Inc. v. Teck Resources Limited 2018 BCCA 452 (CanLII), this court recently applied Sattva and Teal Cedar in connection with an appeal from an order of a chambers judge in the Supreme Court of British Columbia granting leave to appeal an arbitrator’s decision. The appeal was taken on the basis that the chambers judge had erred in law in, inter alia, identifying an extricable question of law where none existed and applying the incorrect standard of review to decide if the proposed appeal had some merit. Since the chambers judge had in reaching his decision agreed with the respondent’s interpretation of a recital and had not addressed whether an extricable question of law had been demonstrated, this court allowed the appeal and set aside the order granting leave.

The Duty of Good Faith in Bhasin

[8]            With the warnings of Sattva and Teal Cedar in mind, I turn to the substantive law relating to the duty of good faith between contracting parties as explained in Bhasin. This was the subject of the majority of counsels’ submissions over the two days of the hearing of this appeal.

[9]           It is perhaps unnecessary to recount the facts of Bhasin in detail. It should be sufficient to recall that the plaintiff Mr. Bhasin had a three-year ‘evergreen’ agency contract with the defendant “Can-Am” i.e., one that was automatically renewable unless one of the parties gave written notice of termination to the other within the time specified in the agreement. The trial judge found that Can-Am had repeatedly misled Mr. Bhasin concerning its plans for the business in which the parties were engaged, and concerning the state of negotiations between Can-Am and a third party about a possible merger. It had also engaged in a civil conspiracy with the other defendant, Mr. Hrynew. As Mr. Justice Cromwell for the Supreme Court recounted:

Mr. Bhasin sued Can-Am and Mr. Hrynew. Moen J. in the Alberta Court of Queen’s Bench found that it was an implied term of the contract that decisions about whether to renew the contract would be made in good faith. The court held that the corporate respondent was in breach of the implied term of good faith, that Mr. Hrynew had intentionally induced breach of contract, and that the respondents were liable for civil conspiracy.

The trial judge found that Can-Am acted dishonestly with Mr. Bhasin throughout the events leading up to the non-renewal: it misled him about its intentions with respect to the merger and about the fact that it had already proposed the new structure to the Commission; it did not communicate to him that the decision was already made and final, even though he asked; and it did not communicate with him that it was working closely with Mr. Hrynew to bring about a new corporate structure with Hrynew’s being the main agency in Alberta. The trial judge also found that, had Can-Am acted honestly, Mr. Bhasin could have “governed himself accordingly so as to retain the value in his agency”: para. 258. [At paras. 14-5; emphasis added.]

At the Court of Appeal level, Can-Am’s appeal was allowed on the basis that Mr. Bhasin’s pleadings had been deficient and that the lower court had erred by implying a term of good faith into an “unambiguous contract containing an entire agreement clause.” (See para. 16.)

[10]        The Supreme Court of Canada allowed Mr. Bhasin’s appeal. Cromwell J. began his analysis at para. 32, reviewing the “unsettled and incoherent body of law” that had developed in various pockets of contract law. Notably for our purposes, he observed that good faith often plays a role in the law of implied terms, since the implying of terms “plays a functionally similar role in common law contract law to the doctrine of good faith in civil law jurisdictions by filling in gaps in the written agreement of the parties”. (At para. 44.) He noted the suggestion of Kerans J.A. in Mesa Operating Limited Partnership v. Amoco Canada Resources Ltd. 1994 ABCA 94 (CanLII) that when judges imply a term, they actually have good faith in mind. (At para. 22, quoted in Bhasin at para. 44.)

[11]        At para. 47, Cromwell J. recalled that in The Law of Contracts (2nd ed., 2012), Professor McCamus had identified three broad types of situations in which a duty of good faith had been found to exist. One of these was where one party exercises a discretionary power under the contract. As an example, the Court notedMitsui & Co. (Canada) Ltd. v. Royal Bank of Canada 1995 CanLII 87 (SCC), [1995] 2 S.C.R. 187, in which the lessee of a helicopter had an option to purchase it at the “reasonable fair market value of the helicopter as established by Lessor”. The Court held that that this clause did not permit the lessor to choose any amount it felt was appropriate; rather, the lessor was bound to act in good faith to determine the reasonable fair market value. Without such a requirement, it was said, the option would have been a mere agreement to agree and thus unenforceable. (See Mesa at para. 22; see also Greenberg v. Meffert (1985) 1985 CanLII 1975 (ON CA), 50 O.R. (2d) 755 (C.A.) and Sherry v. CIBC Mortgages Inc. 2016 BCCA 240 (CanLII).)

[12]        Overall, Cromwell J. stated, the situations in which terms are implied as a matter of law, as a matter of intention or as a matter of interpretation, are sometimes “blurred or even ignored, resulting in uncertainty and a lack of coherence at the level of principle.” (At para. 52.) He described various other types of situations in which a duty of good faith is already recognized – in employment contracts, contracts of insurance, and in the tendering context. However, a “stand-alone doctrine” had not yet been adopted in the U.K., Australia or Canada.

[13]        In Cromwell J.’s view, it was time to take two incremental steps to make the common law in Canada “less unsettled and piecemeal, more coherent and more just.” The first step was to recognize good faith as a “general organizing principle” – i.e., a principle that “states in general terms a requirement of justice from which more specific legal doctrines may be derived.” It was thus “not a free-standing rule, but rather a standard that underpins and is manifested in more specific legal doctrines and may be given different weight in different situations”. (At para. 64.)

[14]        That organizing principle of good faith, he said, was “simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily.” (At para. 63.) He continued:

The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first.

This organizing principle of good faith manifests itself through the existing doctrines about the types of situations and relationships in which the law requires, in certain respects, honest, candid, forthright or reasonable contractual performance. Generally, claims of good faith will not succeed if they do not fall within these existing doctrines. But we should also recognize that this list is not closed. The application of the organizing principle of good faith to particular situations should be developed where the existing law is found to be wanting and where the development may occur incrementally in a way that is consistent with the structure of the common law of contract and gives due weight to the importance of private ordering and certainty in commercial affairs. [At paras. 65-6; citations omitted; emphasis added.]

He also emphasized that the principle:

… calls for a highly context-specific understanding of what honesty and reasonableness in performance require so as to give appropriate consideration to the legitimate interests of both contracting parties. For example, the general organizing principle of good faith would likely have different implications in the context of a long-term contract of mutual cooperation than it would in a more transactional exchange… [At para. 69.]

[15]        The principle of good faith should be applied, he said, consistently with the ‘commitment’ of the common law of contract to the freedom of contracting parties to pursue their individual self-interest. Again in his words:

In commerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest… Doing so is not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency… The development of the principle of good faith must be clear not to veer into a form of ad hoc judicial moralism or “palm treeˮ justice. In particular, the organizing principle of good faith should not be used as a pretext for scrutinizing the motives of contracting parties.

Tying the organizing principle to the existing law mitigates the concern that any general notion of good faith in contract law will undermine certainty in commercial contracts. In my view, this approach strikes the correct balance between predictability and flexibility. [At paras. 70-1; citations omitted; emphasis added.]

[16]        The plaintiff’s objection to the defendant’s conduct in Bhasin did not, however, fit within any of the existing relationships in which a duty of good faith had been found, and classifying Can-Am’s decision not to renew the contract as a contractual “discretion” would “constitute a significant expansion of the decided cases under that type of situation.” (At para. 72.) As well, it would be difficult to say that a duty of good faith should be implied, given the existence of an ‘entire agreement’ clause in the parties’ agency contract. Cromwell J. therefore turned to his second step in the “way forward” – the creation of a new common law duty of “honesty in contractual performance” under the umbrella of the organizing principle of good faith. He described this duty as follows:

This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directly from the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most widely recognized aspects of the organizing principle of good faith… For example, the duty of honesty was a key component of the good faith requirements which have been recognized in relation to termination of employment contracts… [At para. 73; citations omitted; emphasis added.]

and at para. 74:

….as I see it, this should not be thought of as an implied term, but a general doctrine of contract law that imposes as a contractual duty a minimum standard of honest contractual performance. It operates irrespective of the intentions of the parties, and is to this extent analogous to equitable doctrines which impose limits on the freedom of contract, such as the doctrine of unconscionability. [Emphasis added.]

(Mr. Cowper on behalf of Wastech acknowledged that his client does not rely, and did not rely in the arbitration, on any breach of the ‘new’ duty of honest performance, but only on the organizing principle of good faith.)

[17]        The Court warned at para. 86 of Bhasin that the proposed duty of honest performance should not be confused with a duty of disclosure or of fiduciary loyalty. A party to a contract, it said, has no general duty to subordinate his or her interest to that of the other party. (At para. 86.) On this point, the Court cited an American decision, United Roasters, Inc. v. Colgate-Palmolive Co. 649 F. (2d) 985 (4th Cir. 1981), in which a lessee who was entitled to terminate a lease and who had decided to do so, did not give notice of its intention until the time specified in the lease. The Court declined to find that the lessee had breached its duty of good faith in failing to give notice as soon as its decision was made. In its analysis:

It is hardly to be suggested that good faith requires the tenant to inform the landlord of his decision soon after January. Though the landlord may have found earlier notice convenient, formal exercise of the right of termination in August will do. [At 989-90.]

[18]        In Bhasin itself, the Court declined to adopt a broader duty of good faith (i.e., broader than the “modest, incremental change” proposed by Cromwell J.) or to endorse the trial judge’s conclusion that because of its breach of the duty, Can-Am should not be permitted to exercise its right of termination. Effectively, that conclusion had turned a three-year contract that contained a right of termination into a contract of indefinite duration. Cromwell J. continued:

…Can-Am’s contractual liability would still have to be measured by reference to the least onerous means of performance, which in this case would have meant simply not renewing the contract. Since no damages flow from this breach, it is unnecessary to decide whether reliance on a discretionary power to achieve a purpose extraneous to the contract and which undermined one of its key objectives might call for further development under the organizing principle of good faith contractual performance. [At para. 90; emphasis added.]

At the end of the day, the Court agreed that Can-Am’s breach of the duty of good faith had consisted of its failure to be honest with Mr. Bhasin about its contractual performance and in particular, with respect to its settled intentions concerning renewal. The Court awarded the plaintiff damages of $87,000, being the approximate value of Mr. Bhasin’s business around the time of renewal. (See para. 110.)

[19]        At para. 93, the Court summarized “the principles” as follows:

(1)        There is a general organizing principle of good faith that underlies many facets of contract law.

(2)        In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3)        It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the performance of their contractual obligations.

The Parties’ Agreement and the Arbitrator’s Findings

[20]        I turn next to the terms of the parties’ contract dated December 20, 1996 (the “Agreement”) and the arbitrator’s findings of fact in the case at bar. As Mr. Cowper emphasized, the Agreement was complex, had a term of 20 years, and had been negotiated over many months. It had replaced and superseded four separate agreements between Metro and Wastech or its predecessors dating back to as early as 1986. As one might expect in a contract of this kind, it contained many defined terms, was augmented by various schedules, and contained many common ‘boilerplate’ clauses, including an ‘entire agreement’ clause at section 32.17. It also provided for events of Force Majeure (section 31), “Fundamental Default” and “Minor Default” on the part of Wastech (sections 20, 22), and obviously, the settlement of claims and disputes by arbitration.

[21]        Recital B of the Agreement confirmed that the parties intended to:

… enter into a comprehensive agreement providing for the delivery of an essential public service entailing the operation of an integrated, comprehensive municipal solid waste transfer system… and sanitary landfill in a reliable, cost-effective and environmentally-sound manner and in accordance with the Greater Vancouver Regional Solid Waste Management Plan…

Recital C also confirmed their intention that the Agreement would, inter alia:

2. provide incentives for both GVS&DD [Metro] and Wastech to maximize efficiency and minimize costs;

3. provide for the sharing between GVS&DD and Wastech of risks and benefits, with risks to be allocated to the party best able to manage them;

…

6. provide for the maximization of the municipal solid waste disposal capacity of the Cache Creek Landfill….; and

7. be durable, but sensitive to significant changes in operating standards, services or system configuration….

[22]        In general terms, the Agreement (referred to by the arbitrator as the “CA”) contemplated that Wastech would provide the “Services” in accordance with the terms of the Agreement and all applicable permits, laws and insurance and bonding requirements. “Services” was defined in Schedule B to include providing all services necessary for the receiving, transport and disposal of waste and recyclables, and the administration of certain facilities in connection therewith.

[23]        Under section 4.4 of the Agreement, Wastech was bound to accept all Municipal Solid Waste provided to it by Metro from time to time and, under Schedule B, to transport the same to the Cache Creek Landfill (a “Long-Haul”) or to the Burnaby Incinerator or the Vancouver Landfill (“Short-Hauls”) as directed. Metro was obliged to make monthly payments to Wastech for Short-Haul and Long-Haul services as well as certain operating expenses and capital expenses allocable to each Operating Year. Given the long-term nature of the Agreement, many variables, including the Short-Haul and more lucrative Long-Haul rates and fixed operating and capital expenses, had to be adjusted from time to time in accordance with formulas set out in the Agreement.

[24]        Section 30.1, for example, required Metro to provide Wastech, at the Cache Creek Landfill, such “total amount or amounts of trailer capacity… during such period or periods, all as may be determined by [Metro] in its absolute discretion.” (This was referred to as the “Trailer Capacity Guarantee”). If the guaranteed volume was not met, Metro was required to pay all costs and expenses incurred by Wastech in replacing any shortfall in Trailer Capacity provided by Metro. As noted by the arbitrator, the purpose of this provision was to give Wastech the opportunity to make “back-hauling” commitments to third parties. As well, Short- and Long- Haul rates were to be adjusted on the occurrence of a “Major Event” having an impact of less than 10% on Waste Volumes (section 14.15) or more than 10% (section 14.16.) “Major Events” included “external events” beyond the parties’ control (including changes in law), and specified events as a result of which either party ‘demonstrated’ that an adjustment in rates was ‘warranted’. (No Major Event was alleged to have occurred in this case.)

[25]        More importantly for our purposes, the parties employed the mechanism of a Target Operating Ratio, or “OR”, which the arbitrator described as follows:

The concept of a Target OR of .89 is an important feature of the CA. It balanced the interest of Wastech in receiving appropriate compensation over the life of the CA with the interest of Metro in not being obliged to make payments that might over time be considered excessive.

When the CA was made, both parties knew that the actual operating ratio achieved in any year would depend on a number of variable factors. The revenues received by Wastech would depend on the volume of waste it handled and the rates payable for that waste. Because of the Long-Haul Rates and Short-Haul Rates were different, Wastech’s revenue also depended on the volumes of waste allocated for delivery to [Cache Creek Landfill] (to which Long-Haul Rates applied) and to [Vancouver Landfill] (to which Short-Haul Rates applied). Wastech’s operating costs also were subject to variation for a number of reasons, including the varying financial demands of its sub-contractors, suppliers and employees. The volumes allocated to the disposal facilities impacted costs, which were not allocated proportionately to long-haul and short-haul services. Although operating costs would generally increase or decrease in absolute terms as waste volumes increased or decreased, operating costs could be reduced on a per-unit basis, and the OR could thereby be improved, by taking advantage of economies of scale. Thus, when the CA was made, the parties knew that if the Target OR was to be achieved, rates, costs, total volumes and volumes allocated to each disposal site all had to be in an appropriate balance. [At paras. 42-3.]

[26]        The Target OR was 0.89 (see section 14.1). It would be reached if operating costs in a given Operating Year were equal to 89% of revenues – presumably leaving the balance (11%) as operating profits for Wastech. As the arbitrator noted, the ratio had been arrived at after a review of financial performance under predecessor agreements between Wastech and Metro. However, as observed by Madam Justice Fitzpatrick in her reasons for granting leave, it was common ground that the Agreement did not provide a guarantee that the OR would be met, in any given year or over the 20-year term of the Agreement. (See 2016 BCSC 68 (CanLII) at para. 13.) Rather the OR was a figure around which certain adjustments would be made in certain carefully-defined circumstances.

[27]        Section 12.7 of the Agreement required Metro to provide Wastech with a detailed forecast (the “Annual Waste Allocation Plan”) of the allocation of waste between Short- and Long- Haul destinations expected to be handled in the following year. The arbitrator found that one purpose of this requirement was to give Wastech an “opportunity to plan its future operations and manage its costs in the light of the forecasted total volume and Metro’s allocation, all with a view to maximizing operating efficiencies.” (At para. 44.)

[28]        If the Target OR was exceeded – i.e., if Wastech’s operating costs exceeded 89% of revenues – or if the actual OR was less than .89, and the deviation in either case was 3% or less, the parties were to share the difference equally by means of a “Carry-Over Variance Adjustment” under section 14.19. The arbitratordescribed it as follows:

Section 14.19 of the CA provides for a retroactive payment by or to Wastech of 50% of the difference between the Target OR and the Actual OR. This is referred to in the CA as the “Carry-Over Variance Adjustment”. The result of this adjustment is that the parties share equally the financial consequences of the deviation from the Target OR for the relevant year to the extent that the deviation is .03 or less. [At para. 48; emphasis added.]

[29]        A further adjustment, this one to hauling rates, was provided at section 14.11 of the Agreement where the actual OR was less than .86 or more than .92. This was referred to as the “Outside Band Adjustment”. As the arbitrator found, it was “only intended to be sufficient to return the OR to the ‘outside’ of the band of operating results that is represented by an OR of between .86 and .92”. (At para. 49.) No adjustment was contemplated, then, to the extent that the actual OR exceeded .92. Indeed, as already mentioned, it was common ground that the Agreement did not provide a guarantee that the OR would be met in any year or years.

[30]        At paras. 57-63 of his reasons, the arbitrator reviewed the parties’ evidence as to why the Agreement had not provided for the eventuality of a “substantial” re-allocation of waste volumes. He found that Mr. Rattray, who gave evidence for Metro, “genuinely did not consider that a substantial redirection of waste to [Vancouver Landfill] and away from [Cache Creek Landfill] was likely to occur” during the term of the Agreement. Based on all the evidence, the arbitrator found that when the Agreement was negotiated:

1. Both parties were aware of the possibility that waste flows to [Cache Creek Landfill] might reduce and that one possible reason for a volume reduction would be the direction of waste to [Vancouver Landfill] rather than [Cache Creek Landfill];

2. Both parties were aware that a possible consequence of a reduction in waste volumes delivered to [Cache Creek Landfill] would be that Wastech would not achieve the Target OR;

3. Both parties thought that it was highly unlikely that there actually would be a substantial reallocation of waste away from [Cache Creek Landfill] to [Vancouver Landfill];

4. As a consequence, and because of a mutual desire to simplify the [Agreement], both parties agreed that no provision dealing with that eventually should be included in the [Agreement]. [At para. 63; emphasis added.]

The Re-allocation for 2011

[31]        In February 2010, Metro gave Wastech notice that it was amending the base Trailer Capacity Guarantee such that the quantity guaranteed in 2010 (320,000 tonnes) would be reduced to 250,000 tonnes in 2011. Then, in September 2010, Metro gave Wastech its Annual Waste Allocation Plan for 2011. The arbitratorquoted the following passage from the notification letter:

Metro Vancouver anticipates that Wastech will be required to dispose of approximately 600,000 to 700,000 tonnes of Municipal Solid Waste during the 2011 Operating Year.

For the 2011 Operating Year, Metro Vancouver hereby directs Wastech to haul Metro Vancouver’s Municipal Solid Waste as follows:

(i)         Sufficient tonnage to keep the Burnaby Waste to Energy Facility operating at maximum capacity;

(ii)        Approximately 200,000 tonnes to Vancouver Landfill; and

(iii)      All remaining tonnage to the Cache Creek Landfill.

Metro Vancouver is notifying Wastech of the anticipated tonnages now so Wastech has sufficient time to adjust operations to reduce Total Eligible Operating Expenses so that the Operating Ratio remains as close to 0.89 as possible …. [At para. 47.]

As a result, out of 609,340 tonnes of waste transported by Wastech in the 2011 Operating Year, only 273,018 tonnes would be hauled to the Cache Creek Landfill. Metro paid a Carry-Over Variance Adjustment of $2,888,183 pursuant to section 14.19 of the Agreement. The actual OR for 2011 was 1.05; taking the Variance Adjustment into account, it was .96. (At para. 47.) This meant that, subject to other terms of the Agreement, Wastech would recover an operating profit for 2011 of 4%.

[32]         The arbitrator dealt with Metro’s re-allocation decision at paras. 52-54 of his reasons. He found that Metro had made a “conscious decision” to redirect waste from the Cache Creek Landfill to the Vancouver Landfill. He cited a memorandum of Mr. Remillard, a Metro official, to the effect that the District had ordered the re-allocation in order to “maximize the remaining life of the Cache Creek Landfill” and because it had determined it was “better off financially to re-route 100,000 tonnes from Cache Creek Landfill to the Vancouver Landfill based on the assumption that Wastech would reduce costs at the [Cache Creek Landfill] to reduce the projected 4.4 million negative Carry-Over Variance that we share 50/50.” Mr. Remillard had acknowledged in a memorandum in December 2010 that there was “no certainty” Wastech could reduce its costs significantly in light of the new Allocation Plan and that the Plan was likely to cause “significant operational issues with Wastech such as employee layoffs and reduced funding for the Village of Cache Creek due to lower royalty payments.” (At para. 53.)

[33]        The arbitrator made the following key findings about Metro’s re-allocation decision and its effect on Wastech:

Metro’s allocation decision for 2011 caused volumes delivered to [Cache Creek Landfill] to drop precipitously (by 123,328 tonnes or 31%) relative to 2010 while [Vancouver Landfill] volumes were substantially increased (by 49,048 tonnes or 36%). On the whole of the evidence, I am satisfied that the substantial increase in the OR in 2011 was caused by Metro’s decision to allocate a full 200,000 tonnes of a declining volume of total waste to [Vancouver Landfill] in priority to [Cache Creek Landfill]. I accept the evidence of Mr. Rattray that Wastech acted prudently in the light of Metro’s 2011 waste allocations and took timely and appropriate measures to control costs in response to changing circumstances. I find that in all the circumstances, as a result of Metro’s 2011 Waste Allocation Plan, it was simply not possible for Wastech to achieve the Target OR for the 2011 Operating Year. [At para. 54; emphasis added.]

The Parties’ Positions

[34]        In September 2014, Wastech initiated a claim that was brought to arbitration in accordance with section 18.3 of the Agreement. Wastech sought another $2,888,162 from Metro, which represented what Wastech would have earned in 2011 if rates payable under the Agreement had been adjusted to achieve the Target OR, less Wastech’s actual earnings after taking into account the Carry-Over Variance Payment of $2,888,163 already received from Metro. (At para. 64.)

[35]        As noted at para. 28 of the award, Wastech conceded that the Agreement had given Metro the authority to allocate waste among the disposal facilities. It argued, however, that in circumstances where the allocation “deprives Wastech of any opportunity to achieve the Target OR, there must be contractual consequences.” It relied on two alternative legal bases for its claim – first that it was an implied term of the Agreement that in such circumstances Wastech would be entitled to a retroactive rate adjustment; and second, that by exercising its power to allocate waste as it had, Metro had breached an implied duty to perform the Agreement in good faith. (At para. 28.) Putting the second proposition another way, Wastech submitted that Metro could not, in good faith, exercise its power to allocate waste “in such a way as to deprive Wastech of the opportunity to earn the Target OR.” (At para. 32.)

[36]        In response, Metro emphasized that when the Agreement was being negotiated, both parties had been aware that the actual OR achieved in any year would depend on a number of variables, including volumes of waste and the allocation of wastes between Short- and Long-Haul facilities. On this point, the arbitratorfound that:

… Although operating costs would generally increase or decrease in absolute terms as waste volumes increased or decreased, operating costs could be reduced on a per-unit basis, and the OR could thereby be improved, by taking advantage of economies of scale. Thus, when the [Agreement] was made, the parties knew that if the Target OR was to be achieved, rates, costs, total volumes and volumes allocated to each disposal site all had to be in an appropriate balance. [At para. 43; emphasis added.]

[37]        Metro also argued that the evidence did not support the notion that it had made a “radical re-direction” of waste away from Cache Creek; and that in any event, the express terms of the Agreement gave it the right to decide waste allocations and placed “no limit” on the exercise of that right. Further, Metro submitted:

… The risks associated with a reduction in total waste volumes or a reduction in volumes of waste allocated to [Cache Creek Landfill] are fully addressed by the provisions of the [Agreement], which set out in detail when rate adjustments are to be made. To the extent, if any, that evidence of pre-contractual matters is admissible, Metro submits that the omission of the term that Wastech wishes to have implied was not an oversight. It submits that the term Wastech seeks to imply is fatally imprecise and would, in any event, be inconsistent with the express terms of the [Agreement]. [At para. 36; emphasis added.]

Finally, Metro submitted there was no basis to imply a duty of good faith as asserted by Wastech and that in any event, its actions met the relevant good faith standard. (At para. 37.)

Implied Term

[38]        The arbitrator addressed Wastech’s argument in favour of an implied term at paras. 65-77 of his reasons. Wastech relied in particular on the following principle from Canadian Contractual Interpretation Law (2^nd ed., 2012):

… based on the presumed intentions of the parties where the implied term must be necessary “to give business efficacy to a contract or as otherwise meeting the ‘officious bystander’ test as a term which the parties would say, if questioned, that they had obviously assumed. [At p. 149.]

The term Wastech sought to have implied in the Agreement was that:

… [Metro] cannot re-direct waste flow away from the [Cache Creek Landfill] to an extent that deprives Wastech of the possibility of achieving the Target OR (subject to reasonable performance of the services required of Wastech pursuant to the terms of the [Agreement]) without concurrently adjusting the Long Haul and Short Haul Rates or retroactively compensating Wastech for the consequential effect of that re-direction.

[39]        The arbitrator noted that the question of whether a term should be implied was “not immediately concerned” with the interpretation of the language of the Agreement, but that evidence of the factual matrix was helpful to, in the words of the Court in Sattva, “deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of the contract.” (At para. 57.) After considering the factual matrix described at para. 73 of his reasons, the arbitrator concluded:

In the present case, the evidence shows that when the contract was made both parties were aware that it did not contain a provision dealing with the subject-matter of the term that Wastech now seeks to imply. They were both aware that the possibility of including some form of provision in the CA addressing that subject matter had been discussed, and that they had made a decision not to include it. In the light of that evidence, I do not see how an officious bystander, in the position of the two contracting parties, could possibly conclude that the parties intended to include such a provision in the CA. Based on the evidence, if the parties had been asked when agreeing to the CA whether such a term should be included, they would have said “no”, just as they in fact did when the issue was actually raised. [At para. 74; emphasis added.]

He ruled, then, that there was no basis for implying the term sought by Wastech into the Agreement.

Breach of the Duty of Good Faith

[40]        Under this rubric, Wastech argued that Canadian courts recognize a duty of good faith in certain types of contracts and, in particular, where one party to a contract, through the exercise of a discretion accorded it in the contract, could nullify objectives of the contract or cause significant harm to the other party contrary to the parties’ original expectations. (See Mesa at para. 23 and para. 51 of Mannpar Enterprises v. H.M.T.Q. 1999 BCCA 239 (CanLII).) In Canada, ‘nullification’ in this context seems to have its origins in Gateway Realty Ltd. v. Arton Holdings Ltd. (No. 3) (1991) 1991 CanLII 2707 (NS SC), 106 N.S.R. (2d) 180 (S.C.T.D.), aff’d. (1992) 1992 CanLII 2620 (NS CA), 112 N.S.R. (2d) 180 (App. Div.); see also McCamus at 864.) In Wastech’s submission, Metro had breached an “imposed duty of good faith performance” when it exercised its discretion to redirect waste flow volumes away from Cache Creek in 2011 “to an extent that made it impossible for Wastech to achieve the Target OR”. (At para. 78.) Wastech relied on evidence of the surrounding circumstances to show that Metro’s conduct was so “fundamentally at odds” with Wastech’s legitimate contractual expectations that it “must be characterized as a breach of a duty of good faith.” (At para. 79; my emphasis.) The company cited Schluessel v. Maier 2001 BCSC 60 (CanLII), a decision of Mr. Justice Harvey, who in turn had referred to Mannpar and Mesa, supra. In Harvey J.’s analysis, these cases (all of which involved implying terms into contracts) illustrated the proposition that:

… a court will not willingly allow a party to act in a fashion to deny the benefits of a contract to the other contracting party…. … [per Hall J.A. in Mannpar.]

Therefore, as a matter of settled law in B.C., a party to a contract has a duty not to act in a manner that deprives another party to the contract of the bargained objective or benefit. [At para. 131; emphasis added.]

[41]        Both parties cited Bhasin, from which the arbitrator quoted extensively as I have above. The arbitrator noted in particular the following passage:

The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interest will vary depending on the context of a contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. [At para. 65; emphasis added.]

From this, Wastech argued that although Metro was not “barred” from allocating waste as it deemed fit, to the extent that its allocation denied Wastech the “opportunity to achieve the Target OR”, Metro was obliged by the duty of good faith to compensate Wastech for the value of that lost opportunity. Not having provided compensation, Metro was said to be in breach of its good faith duty and liable to pay damages. (At para. 83.)

[42]        For its part, Metro did not seriously dispute that the Target OR was a “central concept” underpinning the Agreement. However, it submitted that:

… there is no justification to add a good faith obligation to the [Agreement] to address the consequences of its waste allocation decisions because the [Agreement] already exhaustively deals with what is to happen if the Target OR is not achieved. Metro submits that after intensive negotiations with the aid of expert advisors the parties implemented a compensation system that allocates and manages the risks of variances from the Target OR in a mutually acceptable manner. The [Agreement] does not contain a guaranteed minimum volume of waste to be allocated to [Cache Creek Landfill], as certain predecessor agreements did. Metro submits (and Wastech agrees) that there is no promise in the [Agreement] that the Target OR will be achieved. To the contrary, the [Agreement] expressly contemplates that it may not be achieved from time to time. Metro submits that to import into the [Agreement] a further compensation obligation or a new limitation on Metro’s rights is, in effect, to re-write the [Agreement] to the benefit of Wastech and to the detriment of Metro. [At para. 84; emphasis added.]

The Arbitrator’s Analysis of the Duty of Good Faith

[43]        The arbitrator began his own analysis of Wastech’s claim that Metro had breached a duty of good faith, with the proposition that as a complex, long-term contract involving mutual co-operation, the Agreement fell within one of the types of relationships in which existing doctrines of contract law required Metro to have “appropriate regard” for Wastech’s “legitimate contractual interests” in the exercise of its (Metro’s) discretionary power. (At para. 85.) Having said this, the arbitrator agreed with Metro that the existence of the adjustment clauses in the Agreement and the absence of any guarantee that the OR would be met, were “circumstances to be taken into account” in assessing whether Metro had met its good faith obligation. In the arbitrator’s analysis, they supported the conclusion that routine changes in waste allocations should not be regarded as breaches of a good faith obligation, even if they had a negative financial impact on Wastech. However, the 2011 re-allocation decision had resulted in a “material” reduction in the waste allocated to the Cache Creek facility and a material increase in waste allocated to the Vancouver Landfill. These changes had “significant financial implications beyond those addressed by the [Agreement’s] adjustment mechanisms.” (At para. 86.)

[44]        The arbitrator accepted Metro’s evidence that its re-allocation decision for 2011 had been guided by the objectives of “maximizing the Burnaby Incinerator’s efficiency, preserving remaining site capacity at the [Cache Creek Landfill], and operating the system in the most cost-effective manner.” He also accepted evidence that declining waste volumes in 2009 had negatively affected Metro’s sole source of revenue – tipping fees paid by users at transfer stations – making it necessary for the District to use funds from its operating reserves to cover its operating costs. It was required to repay such funds within two years. Given these financial constraints, Metro had “focused” on the cost differences associated with different disposal options. If one viewed Metro’s conduct only from its perspective and without regard to the interests of Wastech, the arbitrator said, Metro’s conduct had been “both honest and reasonable. Metro was not obliged to put Wastech’s interests ahead of its own.” (At para. 88.)

[45]        In the arbitrator’s analysis, however, the issue raised by Wastech’s claim was whether Metro had shown “appropriate regard” for Wastech’s “interests” under the Agreement. (At para. 88.) Certainly Metro had expected that the diversion of 100,000 tonnes of waste to the Vancouver Landfill would cause “significant operational issues” for Wastech. In the event, the consequence of Metro’s reallocation was that it was “not possible” for Wastech to achieve the OR (after the adjustments required by the express terms of the Agreement had been made and the resulting amounts paid to Wastech). The arbitrator stated the following key conclusions:

I have considered very carefully the question of whether the law requires a finding that Metro acted dishonestly before there can be any finding of breach of a duty of good faith and, if so, what constitutes “dishonesty” in this context. In my view, although dishonest contractual performance in the form of half-truths, lies or deceit often leads to a finding of a breach of duty of good faith in the performance of contracts, and is now even more likely to do so in the wake of Bhasin, neither the existing doctrines nor the organizing principle of good faith recognized in Bhasin requires that in all cases there must be evidence of dishonesty of that kind. Inherent in the concept of an obligation to perform contracts in good faith is the proposition that the mere fact that the impugned act is expressly authorized by, or not prohibited by, the contract is not determinative. The circumstances in which the contractual right is exercised and the impact of its exercise on the other contracting party may be such as to preclude or limit the exercise of the right. The focus of the organizing principle 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. It seems to me that the good faith doctrine characterizes the exercise of even an acknowledged, bargained-for contractual right as “dishonest” where it is wholly at odds with the legitimate contractual expectations of the other party. No additional form of dishonesty is required to be shown. [At para. 90; emphasis added.]

(It is possible the arbitrator may have melded together the two branches of Bhasin here; but since Wastech relied only on the first branch, I do not propose to address the “new” duty of honest performance in these reasons.)

[46]         The arbitrator found that the fact the parties had made a conscious decision not to include an express provision constraining Metro’s allocation decisions or requiring compensation for their adverse effects, did not preclude the application of the good faith doctrine. In his words:

… Although in some cases the good faith obligation is described as an implied contractual term, Bhasin and the other jurisprudence defining the good faith doctrine do not require that the officious bystander test be applied. It is significant, in my view, that after observing that “the jurisprudence is not always very clear about the source of the good faith obligations found in these cases”, when describing the organizing principle Cromwell, J. did not import the requirements of the officious bystander test for implying a term. [At para. 91.]

[47]        In all the circumstances, the arbitrator ruled, Wastech had had a “legitimate contractual expectation” that Metro would not exercise its discretion with respect to the re-allocation of waste in such a way as would deprive Wastech of the opportunity, if Wastech performed its own obligations, to achieve the Target OR. Metro was obliged to have “appropriate regard” for Wastech’s interest. Although “appropriate regard” was inherently a question of degree, the arbitratorsaid, it was not necessary for him to decide whether Wastech was required to show that Metro’s  conduct had ‘gutted’ or ‘eviscerated’ the contract from Wastech’s point of view. As Bhasin had made clear, legitimate expectations must be “determined on a case by case basis” and “viewed in the context of the [Agreement] and the commercial relationship as a whole.” (At para. 93.) Again emphasizing the “material” nature of the re-allocation, the arbitrator wrote:

The good faith obligation that I have found to exist applies because there was a substantial reduction in the waste allocated to [Cache Creek Landfill] attributable not just to a decline in total volumes of waste but also to a material increase in the waste directed to [Vancouver Landfill], that had the effect of depriving Wastech of the opportunity to achieve the Target OR, even though Wastech performed its own obligations. In those circumstances, to satisfy its good faith duty Metro must provide Wastech with compensation for its lost opportunity. [At para. 96; emphasis added.]

He measured this compensation by the difference between the revenue Wastech had actually received and the revenue it would have received had the “opportunity” not been “lost” – i.e., using the formula by which the Target OR was defined and adjusted in certain circumstances under the Agreement. Wastech was therefore awarded damages for breach of the duty of good faith in the amount of $2,888,162. (At para. 97.)

Appeal to Supreme Court of British Columbia

Leave to Appeal

[48]        Metro sought leave to appeal to the Supreme Court of British Columbia on the following issues, which it characterized as questions of law:

1)         Did the Arbitrator err in law in failing to apply proper principles in holding that the exercise of a bargained-for right could be “dishonest” and an act undertaken in bad faith simply because it was wholly at odds with the expectations of the counter-party, which expectations were not embodied in the contract?

2)         Did the Arbitrator err in law by confusing the “organizing principle” stated in Bhasin with a free-standing obligation of contractual good faith, disregarding the applicable principle of good faith as found in the authorities?

Madam Justice Fitzpatrick granted leave for reasons indexed as 2016 BCSC 68 (CanLII). She found at para. 91 that the proposed issues had “arguable merit, whether from the standard of correctness or reasonableness” and that the other requirements of s. 31 of the Arbitration Act were met.

[49]        Wastech appealed Fitzpatrick J.’s order to this court, arguing in part that the two grounds of appeal as stated by Metro were not errors of law. (See para. 3 of this court’s brief reasons, indexed as 2016 BCCA 393 (CanLII).) Mr. Justice Frankel for the Court rejected this argument, dismissing Wastech’s appeal and allowing Metro’s appeal of the arbitrator’s award to proceed. Since s. 31(1) of the Arbitration Act permits an arbitral appeal only on a question of law, I agree with Mr. Nathanson that the division of this court must be taken to have found that the proposed grounds of appeal were questions of law and that the requirements of s. 31 of the Act were met. This conclusion is supported by the Supreme Court of Canada’s comment in Sattva that the Supreme Court of British Columbia in that instance had been bound by this court’s finding that leave had been properly granted, “including the determination that a question of law had been identified.” (At para. 35.)

The Chambers Judge’s Reasons

[50]        Metro’s appeal finally came before a judge in chambers in November 2017. He allowed it for reasons indexed at 2018 BCSC 605 (CanLII). Before starting his analysis, he noted a few cases, decided post-Bhasin, that have commented on the “organizing principle” of good faith in contract. The first was Moulton Contracting Ltd. v. British Columbia 2015 BCCA 89 (CanLII), lve to app. dism’d. [2015] S.C.C.A. No. 163, in which this court rejected the argument that the Province had acted “dishonestly, unreasonably, capriciously or arbitrarily” in failing to disclose to the respondent that a member of the Fort Nelson First Nation had threatened to disrupt logging under timber sale licenses purchased by the respondent from the Province. Madam Justice Levine for the Court stated that the respondent was reading the role of good faith as explained in Bhasin ”too broadly in application to this case….No issues of honest contractual performance, as discussed in Bhasin” arose. (At para. 76.) In Addison Chevrolet Buick GMC Limited v. General Motors of Canada Limited 2015 ONSC 3404 (CanLII), rev’d. on other grounds at 2016 ONCA 324 (CanLII), the Court quoted from para. 33 of Bhasin and then commented:

In suggesting this approach to the doctrine of good faith, Cromwell J. indicated that this “will bring a measure of coherence and predictability to the law and will bring the law closer to what reasonable commercial parties would expect it to be” (Bhasin, supra at para. 41). It would be ironic indeed if a ruling intended to bring coherence and predictability by underscoring the common sense minimum standards of honesty in the commercial context should be misconstrued as a pretext for injecting uncertainty and risk of arbitrary outcomes into the world of commercial agreements whose very raison d’être is the pursuit of predictability and certainty.

Bhasin is no authority for unbridled creativity in the creation from whole cloth of obligations in a contractual context which the parties have not provided for or have addressed in a fashion which one party regrets in hindsight. Good faith and honesty are the boundaries of the field on which the contractual relationship is negotiated and performed:

“Commercial parties reasonably expect a basic level of honesty and good faith in contractual dealings. While they remain at arm’s length and are not subject to the duties of a fiduciary, a basic level of honest conduct is necessary to the proper functioning of commerce” (Bhasin, supra at para. 62) .

[At para. 115; quoted by the chambers judge at para. 25; emphasis by underlining added.]

[51]        Finally, the chambers judge noted Empire Communities Ltd. v. Ontario 2015 ONSC 4355 (CanLII), in which the Court endorsed a passage from Data & Scientific Inc. v. Oracle Corp. 2015 ONSC 4178 (CanLII) and continued:

That is, the Supreme Court has rationalized, renamed and provided an overall framework for understanding several pre-existing aspects of duties of good faith that have been recognized by the law.… Nothing in Bhasin eliminated the pre-existing law of latent defects or the contractual interpretation principles enunciated just a few months earlier in Sattva…. Neither did it create a freestanding, ill-defined, and potentially arbitrary duty of good faith against which to measure all aspects of contractual performance. [At para. 26.]

Not surprisingly, Metro endorsed the foregoing “limitations on the reach of Bhasin”.

[52]        For its part, Wastech submitted that the first ground of appeal divided into two questions, namely whether the arbitrator had erred in holding that it was not necessary to find dishonesty in order to prove there had been a breach of good faith in the exercise of Metro’s discretion; and second, whether he had erred in law in finding that a “denial” of a party’s contractual expectations not dealt with in the contract could be the basis for a breach of a duty of good faith. On the latter question, the chambers judge noted the arbitrator’s finding that Wastech had had a legitimate contractual expectation that Metro would not direct waste flow volumes in a manner that would deprive Wastech of the opportunity to achieve the OR in 2011. (See paras. 90, 92 of the award.) As I understand it, the chambers judge was of the view that an inquiry into this question would “trespass on the fact finding jurisdiction of the Arbitrator” contrary to s. 31(1) of the Arbitration Act. (At para. 31.)

[53]        The chambers judge regarded the second ground of appeal as resting on the proposition that since the arbitrator had ruled against implying a “rate-reset term”, it was not open to him to find a duty of good faith (to do what the implied term would have required), and a breach thereof. (At para. 33.) Wastech’s response was that the arbitrator’s rejection of the implied term it had asserted, was “not inconsistent” with the good faith duty the arbitrator had found “on the terms and factual matrix” of the Agreement. In Wastech’s submission, Recital C(6), quoted earlier in these reasons, clearly reflected an expectation that the annual allocation of waste by Metro would maximize the annual volume going to Cache Creek. The chambers judge rejected this argument, observing that if the arbitrator had found that the recital did reflect a common intention of the parties to maximize the waste delivered to Cache Creek, he (the arbitrator) would have implied a term to that effect. (At para. 40.) (I also note that it is erroneous to elevate recitals to contractual obligations: see PUC Distribution Inc. v. Brascan Energy Marketing Inc. 2008 ONCA 176 (CanLII) at para. 31, lve. to app. ref’d (2008) 390 N.R. 398. Recitals are generally referred to only for the purpose of clarifying ambiguities: see Robb v. Walker 2015 BCCA 117 (CanLII) at para. 27.)

[54]        Wastech’s next argument was that unless a contract states clearly that one party’s discretion thereunder may be exercised without due regard for the other’s legitimate expectations (obviously a very unlikely term), “objectively reasonable constraints … must be imposed.” The chambers judge stated that this argument was directly contradicted by the decision of the Alberta Court of Appeal in Styles v. Alberta Investment Management Corp. 2017 ABCA 1 (CanLII), lve. to app. ref’d [2017] S.C.C.A. No. 76. Styles was a wrongful dismissal case in which the plaintiff had been dismissed without notice and without cause from his employment. He argued, and the trial judge found, that in dismissing him, the employer had exercised a “discretion” which it was obliged to exercise “reasonably” and with “appropriate regard” for his interests – wording taken from Bhasin. The trial judge ruled that the employer had had no right to withhold certain bonuses from the plaintiff that were payable to employees on a vesting date subsequent to the date of his termination, and that the duty of good faith required that they also be paid to the plaintiff.

[55]        A majority of the Court of Appeal strongly disagreed with the trial judge’s reasoning. Slatter and O’Ferrall JJ.A. began by referring to the duty of good faith adopted in Bhasin as not a “stand-alone concept but as explaining more specific rules that were applied in specific, established situations.” (At para. 44.) Applying the organizing principle of good faith was said to involve a “difficult balancing exercise” and, the majority continued:

Contracting parties are generally entitled to perform (and expect performance of) the contract in accordance with its terms. They are entitled to act in their own best interests: Bhasin at para. 70. But at some point they cannot perform certain contracts in a way that seeks to “undermine [legitimate contractual] interests in bad faith”: Bhasin at para. 65. The danger lies in imposing “legitimate contractual interests” that are contrary to the plain wording of the contract, or that involve the imposition of subjective expectations and interpretations on the contract. As a result, this “organizing principle” should only be applied to situations where it has previously been invoked, although there is a limited ability to extend the law: Bhasin at paras. 71, 93. [At para. 45; emphasis added.]

Employment law was one of the areas in which Cromwell J. had found that the principle of good faith has been commonly recognized in Canadian law, although that duty did not extend to an employer’s reason for terminating a contract of employment. On the other hand, the majority stated in Styles, Bhasin had recognized a common law duty to act honestly in the performance of contractual obligations. In Cromwell J.’s words at para. 73 of Bhasin, that duty meant simply that “parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract”. (See Styles at para. 47.)

[56]        The Alberta Court of Appeal directly rejected the proposition that there is a more general principle of “reasonable exercise of discretion” in contractual performance. In the majority’s analysis:

This radical extension of the law is unsupported by authority, and contrary to the principles of the law of contract.

The overall problem with the analysis in the trial reasons is that it quotes from several parts of the judgment in Bhasin without distinction. In some places the trial reasons rely on statements in Bhasin about the general “good faith” obligation, which was rejected by the Supreme Court as a universal principle, and identified as one that only manifests itself in certain discrete situations. Termination of employment is not one of those situations. Secondly, the trial reasons take the “honest performance” principle that was established in Bhasin, and then extend it not only well beyond the rejected “good faith” principle, but into a much broader and more problematic “common law duty of reasonable exercise of discretionary contractual power”.

Firstly, the Bhasin principle relates to the performance of the contract. It does not relate to the negotiation or terms of the contract. Bhasin does not invite the court to examine the terms of the contract and decide if they are “honest”, “capricious”, or negotiated in “good faith”, much less whether they are “fair and reasonable”.

…

The asserted organizing principle of a “common law duty of reasonable exercise of discretionary contractual power” is not only unsupported by Bhasin, it is inconsistent with it. Bhasin is not to be used as a tool to rewrite contracts, and award damages to contracting parties that the court regards as being “fair”, even though they are clearly unearned under the contract. The respondent contracted for Long Term Incentive Plan bonuses that would only vest if he stayed employed for at least four years, and nothing in Bhasin entitles him to anything more. The respondent did not earn the bonuses he claims, and he is not entitled to them.

…

Expanding the principle of good faith performance of contracts found in Bhasin into a principle of “reasonable” performance creates a clear danger of “reverse engineering” in reviewing the performance of contracts. If the court cannot identify what it considers to be a reasonable basis for the exercise of contractual rights, then it is presumed that there must have been arbitrariness, capriciousness or “bad faith” involved: Alberta v Alberta Union of Provincial Employees (Davis Grievance) at paras. 42-4. The important distinction between exercises of discretion and dishonest performance eventually disappears.

…

The trial reasons [in Styles] recognize that Bhasin does not support this new “common law duty of reasonable exercise of discretionary contractual power”, stating rather that it was a reasonable “manifestation of the general organizing [Bhasin] principle”. The concept, however, appears to assume that there is no room between capricious, arbitrary, and dishonest exercise of performance and “reasonableness”. The very concept of “discretion” presupposes that there is a wide range of possible methods of performance permitted by the contract. A contracting party is entitled to pick any one, and indeed is entitled to pick the least onerous one: Bhasin at para. 90; Hamilton v Open Window Bakery Ltd., 2004 SCC 9 (CanLII) at paras. 15-8, [2004] 1 SCR 303; Agribrands Purina Canada Inc. v Kasamekas, 2011 ONCA 460 (CanLII) at paras. 47-50, 106 OR (3d) 427. [At paras. 49-51, 54, 56, 58; emphasis by underlining added.]

[57]        The chambers judge did not state expressly whether he agreed with the  Court of Appeal’s clear rejection of a “common law duty of reasonable exercise of discretionary contractual power”, but counsel seemed to proceed on the basis that he did so agree. (Wastech asserted in its factum in this court that the arbitratorhad not found such a general, free-standing principle.)

[58]        I believe it is fair to infer that the judge did agree with Styles at least insofar as he rejected a “general principle of reasonable exercise of discretion in contractual performance.” (Styles at para. 49.) He then went on to examine Recital C(6), finding it not to be a contractual provision (at para. 46); and to note that one of the reasons for Metro’s decision to re-allocate waste in 2011 had been to maximize the remaining life of the Cache Creek Landfill. He also emphasized that the parties had considered and rejected the idea of a term dealing with a substantial re-allocation of waste. Then, having rejected any general principle of “reasonable exercise” of a discretion in contractual performance, he said that any such duty would have to be based on the terms of the contract itself.

[59]        Since the arbitrator had declined to imply a term to address the problem of an unexpected imbalance in the allocation of waste or of an unexpected decline in waste volumes (see para. 75 of his award), the chambers judge found that the arbitrator’s approach to good faith had been ‘negated.’ In this instance, two sophisticated parties had decided to ‘leave aside’ a term that might have addressed these problems. This was “not a situation in which the parties overlooked or failed to consider a provision; it was a situation in which they could not agree.” (At para. 57.) The arbitrator had reasoned that this fact did not “add anything” to the good faith analysis – a conclusion that left the arbitrator “with the problem of finding that Metro’s conduct was ‘dishonest’ only by reason that it was ‘at odds’ with the legitimate contractual expectations of Wastech.” This conclusion, however, could in the judge’s analysis only be reached by ignoring the contract:

If the contract has the weight that should be accorded to it, particularly the effort that was made to properly balance the interest of the parties, it is difficult to see how the principle of good faith can be applied to it in the light of the actual circumstances in which the [Agreement] was developed. [At para. 61.]

[60]        The judge recalled the comment at para. 70 of Bhasin to the effect that the principle of good faith must be applied in a manner consistent with the fundamental tenets of the common law of contract, including the freedom of contracting parties to pursue their self-interest and that doing so is “not necessarily contrary to good faith and in some cases has actually been encouraged by the courts on the basis of economic efficiency”. Cromwell J. had also acknowledged the concern that “any general notions of good faith in contract law will undermine certainty in commercial contracts.” He had suggested that the correct balance was struck by ’tying’ the organizing principle to the existing law. (At para. 71.)

[61]        In the circumstances of the case at bar, the chambers judge concluded that the arbitrator had attempted to “do what is fair, not as grounded in the [Agreement] but in a more general sense.” Noting that Bhasin was not authority for the proposition that contracts may be adjusted “to accommodate situations where one party regrets the contract in hindsight”, the judge allowed the appeal and set aside the arbitrator’s award.

On Appeal to This Court

[62]        The errors of law advanced by Wastech on appeal to this court are as follows:

 The chambers judge erred in concluding that the Arbitrator:

A.   Committed an express error of law by extending Bhasin to conclude there was a general duty of good faith in all contracts; and

B.   Committed a covert error of law by altering the stated legal principles when applying the law to his findings of fact. In regard to this error, the chambers judge erred because:

(a) The Arbitrator’s finding that there was a breach of the duty of good faith was a conclusion of mixed fact and law and thus not reviewable; and

(b) The chambers judge decided the issue on a correctness standard and substituted his own findings of fact, and interpretation of the contract.

As I understand the first ground, it is an assertion that the chambers judge viewed the arbitrator’s reasoning as based on a new “free-standing” rule of good faith in contract, when in fact, Wastech submits, the arbitrator merely applied “accepted principles” to the facts he found. It is not clear to me why this first ground is of more than academic interest. As will be seen below, Metro does not dispute that the Agreement, as a complex and “relational” contract, came within the “organizing principle” of good faith.

[63]        It is unfortunate that the chambers judge did not expressly answer the two questions of law that were before him. It is clear he believed the arbitrator had erred in finding that Metro’s conduct was “dishonest” (and thus in breach of the duty of good faith) by reason of its being “at odds” with Wastech’s expectations. (See para. 60.) But as we have seen, the judge added at para. 61 that it was hard to see how good faith could be applied in light of the parties’ efforts to “properly balance the interests of the parties”, presumably in formulating the terms of the Agreement. Wastech argues that the chambers judge here was applying a legal test – the terms of which are unclear – to the facts of the case, thus making a finding of mixed law and fact that lies outside the scope of an appeal under the Arbitration Act.

[64]        However, the main question posed when leave was granted was somewhat different and more nuanced – whether the arbitrator had failed to apply “proper principles” in holding that the exercise of a bargained-for right (i.e., the “right” or “discretion” to re-allocate waste annually) could be “dishonest” and thus be characterized as in “bad faith” because it was wholly at odds with Wastech’s expectations, which were not embodied in the contract. This question did not require that the terms of the Agreement be construed – to the contrary, it expressly assumed that the counterparty’s “expectations” were “not embodied” in it.

[65]        Perhaps it is because of the lack of clarity in the judge’s responses to the two issues of law raised by the arbitral award and approved by this court, that both parties devoted most of their oral and written arguments in this court to the arbitrator’s reasons and Bhasin itself. In the circumstances, I consider that we must address the two questions of law afresh. They were:

1)         Did the Arbitrator err in law in failing to apply proper principles in holding that the exercise of a bargained-for right could be “dishonest” and an act undertaken in bad faith simply because it was wholly at odds with the expectations of the counter-party, which expectations were not embodied in the contract?

2)         Did the Arbitrator err in law by confusing the “organizing principle” stated in Bhasin with a free-standing obligation of contractual good faith, disregarding the applicable principle of good faith as found in the authorities?

Since the questions overlap substantially, I will deal with them concurrently.

Analysis

[66]        I begin my analysis by re-emphasizing that Wastech did not rely on the ‘new’ duty of honest performance formulated in Bhasin; and that Metro accepted that the law of contract prior to Bhasin (and obviously continuing thereafter) recognized that a party who has a discretion under a contract may not exercise it so as to “nullify the benefits reasonably expected to be obtained from the contract by the other party.” (Mannpar at para. 51.) As seen earlier, this principle was adopted in Gateway Realty, where Kelly J. stated:

… in most cases, bad faith can be said to occur when one party, without reasonable justification, acts in relation to the contracts in a manner where the result would be to substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectation of the parties. [At 197; emphasis added.]

Kerans J.A. put it this way in Mesa:

The rule that governs here can, therefore, be expressed much more narrowly than to speak of good faith, although I suspect it is in reality the sort of thing some judges have in mind when they speak of good faith. As the trial judge said, a party cannot exercise a power granted in a contract in a way that “substantially nullifies the contractual objectives or causes a significant harm to the other contrary to the original purposes or expectations of the parties.” [At para. 22; emphasis added.]

As we have also seen, Harvey J. wrote in Schluessel:

It is however possible to endorse a related and somewhat narrower proposition – namely, that a party to [a] contract may not act in relation to the contract in such a way as to nullify the bargained objective or benefit moving to the other party under the contract. [At para. 130, citing Mannpar, supra; emphasis added.]

On occasion courts have used words such as “eviscerate” in place of “nullify”, but they describe the same result: see Transamerica Life Canada Inc. v. ING Canada Inc. (2003) 2003 CanLII 9923 (ON CA), 68 O.R. (3d) 457 (C.A.) at para. 53; Barclay’s Bank PLC v. Devonshire Trust 2013 ONCA 494 (CanLII) at para. 134; Northrock Resources v. ExxonMobil Canada Energy 2017 SKCA 60 (CanLII) at para. 31; Benfield Corporate Risk Canada Ltd. v. Beaufort International Insurance Inc. 2013 ABCA 200 (CanLII) at para. 120.

[67]        All the foregoing cases refer in one way or another to the legitimate contractual expectations or interests of the other party – a concept of central importance to this appeal. The Court in Bhasin stated:

The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner. While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. [At para. 65; emphasis added.]

Putting aside for the moment the reference to ‘seeking to undermine those interests in bad faith’, the question of law is whether it was open to the arbitrator in law  (“applying proper principles”) to find “dishonest” and hence “bad faith” conduct on Metro’s part by virtue of “expectations” that were not founded in the contract. As we have seen, the arbitrator had declined to find an implied term in the Agreement to the effect that Metro could not redirect or re-allocate waste “to an extent that deprives Wastech of the possibility of achieving the Target OR… without concurrently adjusting the Long-Haul and Short-Haul Rates or retroactively compensating Wastech for the consequential effect of that re-direction.” He concluded that if the parties had been asked whether such a term should be included, they would have said “no” just as they did when the issue was actually raised in their negotiations. (At para. 74.) As Mr. Nathanson pointed out, the term the arbitrator refused to imply was exactly the same as the duty he imposed under the rubric of good faith.

[68]        This being the case, what were the “legitimate contractual interests” or “expectations” of Wastech for which Metro failed to have “appropriate regard”? The arbitrator referred to contractual interests at many places in the key paras. 89-96 of his award, but as I read para. 96 (quoted above at para. 47), the obligation he “found to exist” arose solely because the reduction in waste allocated to Cache Creek was a “substantial” one that had the effect of depriving Wastech of the opportunity to achieve the OR – the “target” that was not the subject of a guarantee and was subject to adjustment only to the extent of the “Outside Band” provision. Since the arbitrator had rejected the implied term as something the parties had intentionally excluded, it seems to me that, with respect, he erred here in failing to apply the right test – namely whether Wastech had a legitimate expectation arising out of the Agreement that Metro would not exercise its discretion in the way it did. The answer to that question had to lie not in the financial effect of the re-allocation on Wastech, but in the Agreement. Only then could an expectation to this effect be described as “contractual”. (I note also that the Agreement contained an ‘entire agreement’ clause – a clause given some significance by Cromwell J. at para. 72 of Bhasin and at para. 47 of Transamerica; however, I do not wish to stray into the realm of contractual interpretation.)

[69]        I also note the arbitrator’s comment at para. 91 that the fact the parties had considered and rejected a provision like the implied term, did not “add anything” to the good faith analysis. Again, with respect, I believe the arbitrator erred: as a matter of law, this fact substantially took away from the argument in support of a breach of the duty of good faith. I acknowledge that, as Mr. Cowper pointed out, in formulating the “organizing principle” of good faith the Bhasincourt did not require that the ‘officious bystander’ test be applied; but it will also be recalled that Cromwell J. cited with approval the statement made by the Alberta Court of Appeal in Mesa that tied together the law regarding implied terms and the good faith duty. The Court’s recognition of an organizing principle instead of various pockets of “more specific doctrines” required something broader than the officious bystander test.

[70]        In my opinion, the foregoing errors of law are sufficient to lead to the conclusion that the first question posed for the Court should be answered in the affirmative and that Metro’s appeal from the arbitral award was therefore properly allowed. However, I believe another aspect of the arbitrator’s reasoning is also problematic – the fact that he found it unnecessary to decide whether, to come within the Gateway/Mesa/Schluessel principle, Wastech had to show the impugned conduct had “nullified” or “eviscerated” the Agreement “in the sense that it immediately deprived Wastech of all or substantially all of the benefit for which it bargained.” (At para. 93.) If the Court in Bhasin did not intend to change the principle of good faith substantially, nor to establish a new “free-standing” duty, it seems to me unlikely that it intended to suggest the duty of good faith would as a matter of law be breached whenever a party exercising a contractual discretion fails to have “appropriate regard” for the other party’s (contractual) interests. While I appreciate that read in isolation, para. 65 of Bhasin might be understood as supporting such a broad suggestion, Cromwell J. went on in the same paragraph to observe that the organizing principle:

… merely requires that a party not seek to undermine those [contractual] interests in bad faith. This general principle has strong conceptual differences from the much higher obligations of a fiduciary. Unlike fiduciary duties, good faith performance does not engage duties of loyalty to the other contracting party or a duty to put the interests of the other contracting party first. [Emphasis added.]

In my view, the earlier reference should not be taken out of context to create a stand-alone civil wrong of “disregard of contractual interests”. As noted at para. 49 of Styles, this would constitute a radical extension of the law – in the face of various comments to the effect that only “incremental” change was intended: see paras. 66, 68-70 of Bhasin.

[71]        This brings me to what I see as another error of law that is implicit in both questions of law that were posed for the Court. I refer to the arbitrator’s conclusion that:

… the good faith doctrine characterizes the exercise of even an acknowledged, bargained-for contractual right as “dishonest” where it is wholly at odds with the legitimate contractual expectations of the other party. No additional form of dishonesty is required to be shown. [At para. 90; emphasis added.]

Again with due respect to the contrary view, I read Bhasin as concerned substantially with conduct that has at least a subjective element of improper motive or dishonesty. I note that in Gateway, for example, Kelly J. stated that “good faith conduct” is breached “when a party acts in ‘bad faith’ – a conduct that is contrary to community standards of honesty, reasonableness or fairness.” (At 197.) In other areas of the law, both “bad faith” and “dishonesty” connote malice, untruthfulness, ulterior motive or, in the words of Mr. Justice Bastarache (as he then was) in Crawford v. New Brunswick (Agricultural Development Board)(1997) 1997 CanLII 9539 (NB CA), 192 N.B.R. (2d) 68 (C.A.), other “intentional conduct equivalent to fraud.” Bad faith is also made out where the conduct in question is so reckless that “absence of good faith can be deduced and bad faith presumed. The act, in terms of how it is performed, is then inexplicable and incomprehensible, to the point that it can be regarded as an actual abuse of power, having regard to the purposes for which it is meant to be exercised”: Finney v. Barreau du Quėbec 2004 SCC 36 (CanLII) at 39 per LeBel J. Thus in connection with a ministerial decision, the Court in Hinse v. Canada (Attorney General)2015 SCC 35 (CanLII) said this:

In sum, decisions of the Minister that are made in bad faith, including those demonstrating serious recklessness… on the Minister’s part, fall outside the Crown’s qualified immunity. Bad faith can be established by proving that the Minister acted deliberately with the specific intent to harm another person. It can also be established by proof of serious recklessness that reveals a breakdown of the orderly exercise of authority so fundamental that absence of good faith can be deduced and bad faith presumed. [At para. 53; emphasis added.]

[72]        In the employment context, reference may be made to the statement of McLachlin J., as she then was, in Wallace v. United Grain Growers Ltd. 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701, that employers should be “candid, reasonable, honest and forthright with their employees and should refrain from engaging in conduct that is unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive.” (At para. 98; emphasis added.) In another context – the law of commercial fraud – McLachlin J. said this for the majority in R. v. Zlatic 1993 CanLII 135 (SCC), [1993] 2 S.C.R. 29:

The fundamental question in determining the actus reus of fraud within the third head of the offense of fraud is whether the means to the alleged fraud can properly be stigmatized as dishonest:… In determining this, one applies the standard of the reasonable person. Would the reasonable person stigmatized what was done as dishonest? Dishonesty is, of course, difficult to define with precision. It does, however, connote an underhanded design which has the effect, or which engenders a risk, of depriving others of what is theirs. J.D. Ewart, in his Criminal Fraud (1986), defines dishonest conduct as that “which ordinary, decent people would feel was discreditable as being clearly at variance with straightforward or honourable dealings” (p. 99). Negligence does not suffice. Nor does taking advantage of an opportunity to someone else’s detriment, where that taking has not been occasioned by unscrupulous conduct, regardless of whether such conduct was wilful or reckless.…A use is “wrongful” in this context if it constitutes conduct which reasonable decent persons would consider dishonest and unscrupulous. [At 45; emphasis added.]

[73]        In Bhasin itself, the Court described the “organizing principle” of good faith as meaning “simply that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily” (at para. 63) and again, as “merely” requiring that a party not “seek to undermine” the other’s contractual interests “in bad faith.” The arbitrator in the case at bar made no finding that Metro had ‘sought to undermine’ Wastech’s interests or to do so in bad faith; and indeed he found as a fact that Metro’s decision to re-allocate waste away from Cache Creek was both “honest and reasonable” from Metro’s point of view. Subjectively, then, it appears he was satisfied Metro had acted honestly. As a matter of law, I doubt the Court in Bhasin intended that the principle of good faith would be extended so far as to attribute “dishonesty” (which, it will be remembered, carries a “stench”) to a party in the circumstances of Metro in this case.

[74]        For the foregoing reasons, I conclude that the questions posed for the Court must be answered in the affirmative and that more particularly, the arbitratorerred in law in:

(1) failing to address whether Wastech had a legitimate expectation, founded in the Agreement, that if Metro exercised its discretion as it did, it would compensate Wastech over and above the adjustments provided for in the Agreement;

(2) failing to consider the effect of his rejection of an implied term in his analysis of the duty of good faith;

(3) effectively concluding that the duty of good faith is breached whenever a contracting party fails to have “appropriate regard” for the other, in circumstances where the agreement has not been found to have been “nullified” or “eviscerated”; and

(4) finding “dishonesty” and thus a breach of the duty of good faith on Metro’s part without any subjective element of dishonesty, improper motive (under which I would include “seeking to undermine” the interests of the other party), or bad faith as understood in existing law.

These errors of law are clearly “extricable” and of importance to the parties and the legal system as a whole, involving as they do the scope and meaning of good faith in contract, as newly explained in Bhasin. Given the amount of money and the question of ‘dishonesty’ involved, I also believe a miscarriage of justice would occur were we to decline to interfere with the arbitrator’s conclusions. Applying the standard of correctness, I conclude the chambers judge was correct to allow the appeal, although I would have done so for different reasons than his. Even if the standard of reasonableness were to be applicable I would reach the same conclusions.

[75]        I would dismiss this appeal, with thanks to counsel for their able submissions.