Construction Law

Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7

The Supreme Court of Canada (SCC) released its decision in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District¹ (“Wastech Decision”) on Feb. 5, 2021. The Wastech Decision was heard together with the case of C.M. Callow Inc. v. Zollinger², and both are important elaborations on the manifestations of the organizing principle of good faith in contract enunciated in the SCC’s seminal decision of Bhasin v. Hrynew³. In particular, the court in the Wastech Decision was tasked with clarifying the basis and scope of the common law duty to exercise contractual discretion in good faith and the applicable standard against which to determine breaches.

Facts

The Appellant, Wastech Services Ltd. (“Wastech”), a British Columbia waste transportation and disposal company, was party to a long-term service contract with the Respondent, the Greater Vancouver Sewerage and Drainage District (“Metro”). Metro is a statutory corporation responsible for administering waste disposal throughout the Metro Vancouver Regional District⁴.

The contract between Wastech and Metro concerned the allocation, transportation and disposal of waste in the Vancouver region to three disposal facilities: the Vancouver Landfill, the Burnaby Waste to Energy Facility and the Cache Creek Landfill⁵. Wastech earned a rate premium on transport to Cache Creek, as it was relatively further away⁶; however, Metro was conferred “absolute discretion” to determine the amount of waste disposed at the Cache Creek site each year⁷. Wastech’s annual compensation was “structured around” a target operating ratio of 0.89, meaning Wastech’s operating costs represented 89 per cent of its total revenues, equating to an 11 per cent operating profit⁸. Although achievement of Wastech’s target operating ratio was not guaranteed under the contract, if Wastech’s actual operating ratio deviated from its target, the contract provided for an adjustment payment to be made from one party to another so as to equalize the financial consequences of the variable that caused such deviation⁹. One such change that could affect achievement of Wastech’s target operating ratio was Metro’s decision to reduce waste disposal at the Cache Creek facility, and this circumstance was contemplated by the parties during negotiation¹⁰.

In 2011, Metro re-allocated waste from the Cache Creek Landfill to the Vancouver Landfill, making it impossible for Wastech to achieve its target operating ratio, reducing Wastech’s revenue for that year and causing it to operate at a loss before the adjustment payments were made¹¹. Wastech commenced arbitration proceedings against Metro under the contract, claiming $2.8 million in damages for lost profits resulting from Metro’s discretionary re-allocation decision¹². Wastech argued Metro’s exercise of contractual discretion in this respect breached its duty of good faith under the contract.

The Supreme Court’s analysis and key takeaways

The SCC unanimously dismissed Wastech’s appeal and the arbitral award remained overturned; however, its reasons for doing so were split six justices to three. Justice Kasirer authored the majority’s reasons and Justice Brown authored concurring reasons.

The majority of the SCC enunciated the following key principles:

Contracting parties have a duty to exercise contractual discretion honestly¹³ and in good faith¹⁴. This duty, like the duty of honest performance, is a “general doctrine of contract law” that “operates in every contract irrespective of the intentions of the parties.”¹⁵

The duty to exercise discretion in good faith obligates contracting parties to exercise said discretion reasonably¹⁶, which means “connected to the purpose for which the contract granted the discretion.” Generally speaking, there will often be a range of legitimate, reasonable choices or exercises of discretion¹⁷ (and corresponding outcomes flowing therefrom) “in light of the purposes identified by the contract.”¹⁸ Thus, “good faith does not eliminate the discretion-exercising party’s power of choice…it simply limits the range of legitimate ways in which a discretionary power may be exercised in light of the relevant purposes.”¹⁹

The “touchstone” or standard that courts use to measure and evaluate whether a party has exercised their discretion reasonably and in good faith is the purpose for which the discretion was created and conferred according “to the bargain the parties had chosen to put in place,” which is the “first source of justice between the parties.”²⁰ Where the purpose or intentions of the parties with respect to the conferred discretion is not explicitly discernible from the text of the contract, the court must engage in contractual interpretation to ascertain same.²¹ In this way, judicial review of the reasonableness of a contracting party’s discretion remains grounded in the parties’ own contract and intentions, and it will be inappropriate for a court to evaluate a party’s choices based on its own view of whether the discretion was exercised fairly, morally or wisely (in a commercial sense, or otherwise).²² This approach avoids “ad hoc judicial moralism.”²³

A party will be in breach of the duty where they exercise contractual discretion in a manner that is not consonant with its underlying purposes, an example of which is “where the exercise of discretion is capricious or arbitrary.”²⁴ Further, a party will be in breach of the duty where their exercise of discretion “falls outside of the range of choices connected to its underlying purpose – outside the purpose for which the agreement the parties themselves crafted provides discretion.”²⁵ Discretionary power capable of “objective measurement” will have a “relatively smaller” range of reasonable outcomes²⁶, whereas powers not “readily susceptible to objective measurement” will have a relatively larger range of reasonable outcomes. Ultimately, a court’s evaluation of exercises of discretion is “highly context-specific,” and ultimately dependent on the “intention of the parties as disclosed by their contract.”²⁷

A party’s exercise of discretion that causes its contracting partner to “lose some or even all of its anticipated benefit under the contract,” or causes a “‘substantial nullification’ or ‘evisceration’ of the benefit of a contract,” is not determinative or a “necessary prerequisite” to finding a breach of the duty to exercise contractual discretion in good faith.”²⁸ Rather, such an outcome may be a relevant factor in the analysis of whether the choice leading to that outcome was connected to the animating contractual purposes.

The duty does not require the party exercising discretion to “subordinate its interests” to those of its contracting partner, or to confer a benefit on its contracting partner “that was not contemplated under the contract.”²⁹ This limitation ensures the duty does not confer an advantage or benefit on a party that was not provided for in the agreement.³⁰

Practically speaking, the Wastech decision makes clear that parties that “provide for discretionary power cannot contract out of the implied undertaking that the power will be exercised in good faith, i.e., in light of the purposes for which it was conferred.”³¹ Therefore, parties ought to consider expressly providing for, or identifying, their purposes and intentions behind the creation and conferral of all discretionary powers included in their contract in order to mitigate potential litigation.

What remains unclear in the wake of the Wastech decision is the applicable standard of review framework for appeals of commercial arbitral awards under provincial arbitration legislation. Pursuant to prior SCC precedents of Sattva Capital Corp. v. Creston Moly Corp.,³² and Teal Cedar Products Ltd. v. British Columbia³³, arbitral awards appealed under arbitration statutes are reviewed on the deferential standard of reasonableness, unless the questions raised are constitutional ones, or those of central importance to the legal system as a whole and outside the arbitrator’s expertise.³⁴ However, the SCC recently released its decision in Canada (Minister of Citizenship and Immigration) v. Vavilov,³⁵ (“Vavilov”) which established a revised framework for determining the applicable standard of review from administrative decisions. According to the majority in the Wastech decision, since Vavilov did not “advert to” those prior SCC precedents on the standard of review applicable to appeals of commercial arbitral awards, this question was most appropriately left to another day.³⁶ In contrast, the three minority justices in concurrence concluded that, post-Vavilov, the appellate standard of review framework (i.e., the correctness standard) should now apply to appeals of arbitral awards, given these awards are appealed pursuant to a statutory appeal mechanism and only on questions of law.³⁷ However, these comments are obiter and the impact of Vavilov on the applicable standard of review for appeals of arbitral awards remains to be resolved.

The outcome for Wastech

The SCC unanimously concluded Metro’s exercise of discretion to reduce the waste allocated to the Cache Creek Landfill, which had the effect of reducing Wastech’s profitability for the year and making it impossible for Wastech to achieve the target operating ratio, was not exercised in bad faith. Since the contract gave Metro absolute discretion to determine the amount of waste disposed at Cache Creek each year, the court engaged in contractual interpretation to discern the parties’ specific intention and purpose behind conferring this discretion on Metro in order to evaluate whether it was exercised reasonably, i.e., consonant with, and within the reasonable range of choices connected to, that purpose. Reading the contract as a whole, and particularly focusing on the recitals to the contract and the adjustable compensation structure in Wastech’s favour, the majority of the court concluded the purpose of the discretion was to enable Metro to allocate waste in a way that maximized efficiency and minimized costs, not to guarantee Wastech a certain level of profit. As such, Metro was found not to have breached its duty, as it exercised its discretion reasonably and consistent with the underlying purposes for which it was granted by allocating waste away from Cache Creek Landfill. Wastech’s appeal was ultimately dismissed with costs.

Implications of the Wastech decision on the construction industry

In light of the Wastech decision, stakeholders in the construction industry should remain mindful of all instances in which construction contracts confer discretionary powers to the parties, and ensure their actions are consistent with the purpose of the grant of discretion.

For example, if a contract confers discretion to an owner to accept or reject a contractor’s work (such as in a design-bid-build scenario), the owner must exercise such discretion in good faith such that approval is not unreasonably withheld if the contractor’s work product is consistent with the project specifications.

Conversely, if a contract provides broad design discretion to the contractor (such as in a design-build scenario), the contractor must ensure it exercises its discretion in good faith, and design the project in a manner consistent with the intentions of the parties in light of the overall contract. However, provided it does so, the owner’s ability to dictate particular design outcomes may be severely circumscribed.

Finally, the applicable standard of review for appeals of arbitral awards post-Vavilov will be closely monitored as this will impact those construction contracts with binding arbitration clauses. 

References

1. Wastech Services Ltd v Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, 454 DLR (4th) 1.
2. C.M. Callow Inc v Zollinger, 2020 SCC 45, 452 DLR (4th) 44.
3. Bhasin v Hrynew, 2014 SCC 71, [2014] 3 SCR 494 [Bhasin].
4. Wastech, supra note 1 at paras 8-9.
5. Wastech, ibid at para 10.
6. Wastech, ibid.
7. Wastech, ibid at para 13.
8. Wastech, ibid at para 11.
9. Wastech, ibid at paras 11-12.
10. Wastech, ibid at para 14.
11. Wastech, ibid at paras 15-17.
12. Wastech, ibid at para 17-18.
13. Wastech, ibid at para 54.
14. Wastech, ibid at para 58.
15. Wastech, ibid at para 91.
16. Wastech, ibid at paras 64-68.
17. Wastech, ibid at para 69.
18. Wastech, ibid at para 71, 75.
19. Wastech, ibid at para 75.
20. Wastech, ibid at paras 70, 75.
21. Wastech, ibid at para 72.
22. Wastech, ibid at paras 71-73.
23. Wastech, ibid at para 73.
24. Wastech, ibid at para 4.
25. Wastech, ibid at para 71.
26. Wastech, ibid at para 77.
27. Wastech, ibid at para 76.
28. Wastech, ibid at paras 83-84.
29. Wastech, ibid at para 6.
30. Wastech, ibid at para 7.
31. Wastech, ibid at para 94.
32. Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, [2014] 2 SCR 633.
33. Teal Cedar Products ltd. v British Columbia, 2017 SCC 32, [2017] 1 SCR 688.
34. Wastech, supra note 1 at para 45.
35. Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65, 441 DLR (4th) 1 [Vavilov].
36. Wastech, supra note 1 at paras 45-46.
37. Wastech, ibid at para 121.

If you have further questions about the implications of the Wastech decision, or other matters of contract drafting, advice or litigation, please do not hesitate to reach out to one of Miller Thomson’s experienced construction law lawyers. For inquires, contact Adrienne S. Funk, an associate in the Edmonton office, at afunk@millerthomson.com or, for any Saskatchewan construction inquiries, please contact Troy Baril, a partner in the Saskatoon office, at tbaril@millerthomson.com.

Disclaimer: This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

Competition Bureau’s updated guidelines for procurement processes

On Feb. 5, 2021, the Competition Bureau of Canada (the “Competition Bureau”) released “Competitive bidding processes in the public sector: Procuring good value for taxpayer money” (“Competitive Bidding Processes”). Competitive Bidding Processes represents the Competition Bureau’s most recent publication in the Competition Advocate in some time. Competitive Bidding Processes highlights the increased importance being placed on the framework for public procurement as governments across Canada enact stimulus measures in support of the country’s economic recovery and outlines best practices and offers guidelines that all levels of government should be aware of in government procurement processes. These practices and guidelines help ensure that government procurement processes are competitive and fair, and favour competitive bidding processes to protect public value when procuring goods and services. In this article, we provide a summary of Competitive Bidding Processes, which discusses the importance of competitive bidding, what constitutes bid-rigging and how to recognize it and measures to ensure that bid-rigging does not take place.

Why the need for competitive bidding?

In its report, the Competition Bureau indicates that there are many benefits that stem from competitive bidding, including lower prices, higher quality of goods and services being procured, incentivizing and increasing innovation and building a resilient economy. Public procurement processes can account for 15 per cent or more of a country’s GDP, in normal times. As Canada moves further along the COVID-19 recovery process, there are increased expectations that governments will need to urgently and substantially invest in designing and constructing large infrastructure projects to help stimulate the economy post-COVID.

Bid-rigging defined

Simply put, bid-rigging is collusion. Under s. 47 of the Competition Act (Canada), bid-rigging is a criminal offence. Bid-rigging occurs when, in response to a call for bids or tenders, two or more potential bidders:

Submit bids containing content that the bidders determined through agreement or arrangement
Agree that one or more parties will refrain from bidding or will withdraw a previously submitted bid

In earlier publications, the Competition Bureau discussed that bid-rigging can take many different forms, including:

• Cover bidding – where competitors agree upfront on who will win. Losing bidders tweak their submission to ensure it’s less attractive than the winner’s.
• Bid suppression – a competitor agrees not to bid or to withdraw a bid so a specific bidder is most likely to win
• Bid rotation – competitors agree to take turns at winning bids
• Market division – competitors agree to divide territory, customers or product markets among themselves instead of competing

The Competition Bureau notes that bid-rigging undermines the competitive bidding process because it allows suppliers, rather than market forces, to determine price and quality. The Competition Bureau claims that bid-rigging can increase the cost of multi-million dollar public procurements by over 30 per cent, which in turn diverts public funds to colluding bidders.

There are no monetary limits on the fines that can be issued for bid-rigging as such decisions are left up to the discretion of the courts. Anyone convicted of bid-rigging can face a jail term up to 14 years, they will also have a criminal record that will be registered with the Canadian Police Information Centre. In addition to the criminal charges and fines, perpetrators of bid-rigging can face civil action from victims.

How can you detect bid-rigging?

Bid-rigging inherently involves backroom discussions and deal-making, which makes it difficult to detect. The Competition Bureau has previously produced documents on detecting, preventing and reporting bid-rigging. Competitive Bidding Processes warns that public officials should be on the lookout for the following warning signs:

• Large price deviations between the winning bids and other bids
• Identical irregularities across independent bids
• Winning bidders refusing to accept a contract once awarded
• Once awarded, winning bidders subcontracting to losing bidders
• What can be done to deter bid-rigging?

In addition to its earlier publications about detecting, preventing and reporting bid-rigging, the Competition Bureau in Competitive Bidding Processes provides some guidance for all levels of governments to consider in their procurement processes that includes:

• Maximizing the pool of potential bidders
• Building an understanding of potential bidder capabilities
• Requiring disclosure regarding potential subcontractors and their pricing
• Requiring bidders to submit a certificate of independent bid determination similar to or based on the Bureau’s model certificate
• Conducting follow-up interviews with unsuccessful vendors to understand their rationale in respect of their bids

All of this suggests that potential bidders ought to avoid improper collaboration with their competitors, unless the parties are bidding as a joint venture. In that scenario, parties may wish to seek legal advice when considering any such collaboration or joint venture bids.

If anyone involved in the tendering process suspects that bid-rigging has or will take place, they should file a formal complaint with the Competition Bureau, participate in the Competition Bureau’s whistleblowing initiative or leave an anonymous tip by filing online or contacting the Federal Contracting Fraud Tip Line by phone.

Closing remarks

The adverse impact of COVID-19 on the economy will likely increase pressures on governments to expeditiously invest in public infrastructure and other publicly funded projects to stimulate and rebuild the economy. Competitive Bidding Process represents a signal to all levels of government and potential bidders that the Competition Bureau is acutely aware of these pressures and will be monitoring public procurement processes to ensure that all stakeholders act appropriately in the procurement process in order that Canada’s economic investments can be completed without anti-competitive conduct by participants. If bidders or government procurement officers have any questions regarding whether aspects of the procurement processes or bid submissions may be breach of the Competition Act (Canada), they should seek legal advice immediately. 

Disclaimer
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

How to draft construction contracts to avoid the anti-deprivation rule

In Chandos Construction Ltd v. Deloitte Restructuring Inc1 [“Chandos”], the majority of the Supreme Court of Canada (SCC) reaffirmed the common law anti-deprivation rule in Canada. The anti-deprivation rule voids contractual terms that apply upon a party’s insolvency and bankruptcy where the clause removes value from an insolvent person’s estate that would otherwise have been available for the insolvent person’s creditors. Anyone entering into construction contracts should avoid contractual provisions that may trigger the anti-deprivation rule and understand that if they are already in a contract, they may not be enforceable. However, despite the anti-deprivation rule, there are contractual provisions that can be used to protect parties where their contracting counterpart becomes insolvent or bankrupt.

Factual background

Chandos Construction Ltd. (Chandos) was a general contractor that entered into a subcontract with Capital Steel Inc. (Capital Steel). The subcontract provided that in the event of Capital Steel’s insolvency or bankruptcy, Capital Steel would forfeit 10 per cent of the contract price to Chandos “as a fee for the inconvenience of completing the work using alternate means and/or for monitoring the work during the warranty period” (the “Insolvency Clause”).

Capital Steel filed an assignment in bankruptcy prior to completing the subcontract work. Chandos argued that it was entitled to rely upon the Insolvency Clause and set-off 10 per cent of the subcontract price as a fee. The Trustee in Bankruptcy for Capital Steel applied to the Alberta Court of Queen’s Bench to determine whether the Insolvency Clause was valid.

Trial and appellate judgments

In Chandos, the Alberta Court of Queen’s Bench found the Insolvency Clause was valid because the Insolvency Clause was not an attempt to avoid the effect of bankruptcy laws.² The majority of the Alberta Court of Appeal reversed this decision, finding the Insolvency Clause to be invalid based on the common law anti-deprivation rule.³

The SCC agreed the Insolvency Clause violated the anti-deprivation rule and was void. The court articulated a two part test for invalidating a contractual provision based on the anti-deprivation rule as follows:

1. The relevant clause must be triggered by an event of insolvency or bankruptcy; and
2. The effect of the clause must be to remove value from the insolvent’s estate.

The SCC stated the test for the anti-deprivation rule was an effects-based test, meaning the ultimate effect of the clause should be examined in assessing the above criteria.

The SCC affirmed that set-off is generally allowed during the bankruptcy of a contracting party due to section 97(3) of the Bankruptcy and Insolvency Act.⁴ Set-off reduces the value of assets that are transferred to the insolvent’s estate, but it only applies to enforceable debts or claims. Since the anti-deprivation rule voided the Insolvency Clause, Chandos was unable to apply set-off against Capital Steel for the 10 per cent amount.

Key takeaways

Chandos urges parties entering into construction contracts to avoid clauses that are triggered by insolvency or bankruptcy and that remove value from the insolvent party’s estate. These clauses are invalid and unenforceable. Some contractual terms that are prohibited by the anti-deprivation rule include clauses where a party forfeits some or all of the contract price due to their insolvency or bankruptcy, or clauses where fees, charges or other amounts are payable solely upon insolvency or bankruptcy.

Other contractual terms can be employed to protect a party in the event of insolvency or bankruptcy by their contractual counterpart. For example, any clause triggered by events other than bankruptcy or insolvency are valid, including penalties that arise upon default of the contract.

Contracting parties can consider using clauses where property is removed from the insolvent party’s estate but no value is eliminated from the estate. For example, the anti-deprivation rule does not apply if a third party’s assets are forfeited upon bankruptcy or insolvency, since this term would not reduce the value of the insolvent party’s estate. Additionally, parties may be able to modify their security interests or enter into a credit default swap agreement (amending the nature or type of security) upon the insolvency or bankruptcy of their contractual counterpart without offending the anti-deprivation rule, provided these clauses do not increase the amount of security held over the insolvent party.⁵

Parties can also protect themselves in the event of an insolvency or bankruptcy by their contractual counterparts by taking security, acquiring insurance or requiring third-party guarantees when the contract is executed.⁶ Before entering into a security agreement, parties should verify whether any creditors already have priority charges against the assets which comprise of the security. In the case of guarantees, suitable guarantors may include a parent company, directors or officers of the contracting party. A guarantee causes the guarantor to become personally liable for the debts or contractual breaches of the subcontractor.

Suppliers and subcontractors can require a labour and materials payment bond at the time of entering into a contract.⁷ This bond guarantees that suppliers and subcontractors are paid for the work and materials that they supply, up to a specified amount. Additionally, parties may require a performance bond, which provides payment up to a specified amount if the contractor is unable to complete the project work or is in default of the construction contract. For the most project security (but usually at an additional cost to the price of the work), a contractor would have both a labour and materials payment bond and a performance bond in place for at least 50 per cent of the value of the contract.

Overall, when entering into construction contracts, contracting parties should consider contacting legal counsel to ensure their contracts are drafted with enforceable terms that do not offend the anti-deprivation rule. When drafting construction contracts, parties should also consider if they are appropriately protected should their counterparty become bankrupt or insolvent. 

Charles W. Bois is a partner in the Vancouver office of Miller Thomson LLP. Rachel Haack and Kayla Romanow are associates in the Regina office of Miller Thomson LLP. For inquiries, contact Charles at cbois@millerthomson.com, or for any Saskatchewan construction inquiries, please contact Rachel at rhaack@millerthomson.com, or Kayla at kromanow@millerthomson.com.

References

1. 2020 SCC 25.
2. Alta Q.B., Edmonton, 242169632, 17 March 2017.
3. 2019 ABCA 32.
4. RSC, 1985, c B-3. Set-off allows a creditor (who happens to also be a debtor) to reduce the amount they owe to the bankrupt by the amount they (as debtor) are owed by the bankrupt.
5. Belmont Park Investments Pty Ltd v. BNY Corporate Trustee Services Ltd, [2011] UKSC 38.
6. Supra note 1 at para 40.
7. See s. 81 of The Builders’ Lien Act, S.S. 1984-85-86, c. B-7.1 and s. 69 of The Construction Lien Act, R.S.O. 1990, c. C.30;