Exercise of contractual discretion (Wastech)

A franchisee meets this term when the agreement lets the franchisor approve, refuse or change something, and the franchisee disputes how that was done. The Supreme Court of Canada’s 2021 decision in Wastech Services v. Greater Vancouver Sewerage and Drainage District concerned a discretion over how waste was allocated, not a franchise.

The test

The Court held that where a party exercises its discretion unreasonably, that is, in a manner not connected to the underlying purposes of the discretion granted by the contract, its conduct amounts to a breach of the duty to exercise contractual discretionary powers in good faith. The question turns on the purposes the contract gave the power for.

What the franchise Acts add

Ontario’s Arthur Wishart Act, s. 3(1), says every franchise agreement imposes a duty of fair dealing in its performance and enforcement. British Columbia’s Franchises Act, s. 3(1), says the same, including in the exercise of a right under the agreement. Both say the duty includes acting in good faith and in accordance with reasonable commercial standards.

What to ask

• Which clause gives the franchisor the discretion, and what purpose it serves
• What reason the franchisor gave for its decision

See what happens if the franchisor refuses to approve a buyer and fair dealing duty.