Part of our day job involves haggling over the scope of contractual rights and powers.  Often this is centred on whether a party should act reasonably.  While there will always be exceptions, shouldn’t people simply behave reasonably?  This logic is not shared by all.

Canada’s highest court recently confirmed a duty to act in good faith when exercising a contractual discretion.

The Supreme Court held that if your contract allows you a discretion (e.g. the power to decide or do something), you must that exercise that discretion reasonably.  That exercise will be reasonable where it aligns with the purpose for which the discretion was included in the first place.  If you exercise a discretion for arbitrary, capricious or irrelevant purposes (e.g. to punish the other side), you will breach your duty to act in good faith.

In Wastech Services Ltd v Greater Vancouver Sewerage and Drainage (GV), GV could direct waste to sites of its choosing.  Wastech was paid a different rate based on the chosen site.  When GV directed Wastech to send waste to a less profitable (for Wastech) site, Wastech sued for bad faith.  Wastech wasn’t successful (the court held GC’s discretion was included to give GC the flexibility to maximise efficiency and minimise its costs), the duty was confirmed and will go a long way to giving comfort to suppliers on how a customer may behave.

Of course, this involves looking at why a discretion was included in a contract in the first place.  But, in NZ, the courts already have broad rights to look at discussions behind the contract, so applying this duty in the NZ setting would fit well.

We’d love to see the decision followed by the NZ courts.  In the meantime, if the other side won’t to agree to act reasonably, think about clarifying in your contract the reasons why a discretion is included.  This may help to limit how it is exercised.