In the last few years, the Supreme Court of Canada has described two existing doctrines as manifestations of the principle of good faith in Bhasin v. Hrynew, 2014 SCC 71, C.M. Callow Inc. v. Zollinger, 2020 SCC 45 and Wastech Services Ltd. v. Greater Vancouver Sewage and Drainage District, 2021 SCC 7: the duty to exercise a contractual discretion in good faith and the duty of honest performance of a contract.
Both of these doctrines were at the heart of an appeal recently heard by the Ontario Court of Appeal in Stericycle ULC v. HealthPRO Procurement, 2021 ONCA 878, in a public tendering context.
In 2019, HealthPRO, a group contracting organization that manages procurement and contracts on behalf of its member hospitals and health authorities across Canada, issued a request for qualification (an "RFQ") for a new national contract for biological waste management services. The purpose of the RFQ was to qualify potential suppliers for the forthcoming public tendering process (the "RFP").
One of HealthPro’s members on whose behalf the procurement process was conducted was British Columbia’s Provincial Health Services Authority (“PHSA”).
The plaintiff Stericycle responded to the RFQ and qualified to bid. So did Daniels, a competitor. Both Stericycle and Daniels also responded to the RFP.
Six years earlier, in 2013, HealthPRO had awarded Stericycle a contract for those services. As extended, the 2013 Contract had an expiry date of May 31, 2020 and contained the following provision referred to as the "Six Month Provision":
AWARDED SUPPLIER: Agrees to hold the then current contract pricing firm for committed members up to a period of six (6) months beyond the expiry date (or any option years exercised) to allow, if required, for the implementation of a new contract to a different supplier.
Unlike the 2013 Contract, which contemplated a single supplier, the RFP contemplated the award of 2020 Contracts to multiple eligible suppliers from which a HealthPRO member would select a "primary supplier" and could also designate a "secondary supplier" if more than one 2020 Contract was awarded by HealthPRO. A primary supplier would receive a committed volume of at least 80% of the business of the selecting HealthPRO member; a secondary supplier would be obligated to provide up to 20% of the business but had no guarantee of any volume of business.
At the time of tender, Daniels did not have established waste management facilities in British Columbia, but its RFQ included a statement to the effect that it would be fully committed and able to meet and exceed the service capabilities required for the HealthPRO membership by the 2020 start date of this contract.
HealthPro ended up awarding a 2020 Contract to both Stericycle and Daniels. Both contracts had a start date of June 1, 2020. On June 2, 2020, HealthPRO advised Daniels that it had been selected as the primary supplier.
Given that Daniels was not operational in British Columbia on June 1, 2020, PHSA insisted that Stericycle continue to provide all services under the 2013 “Six Month Provision”. Upon the expiration of the six months, Daniels commenced its work.
Before the application judge, Stericycle submitted that HealthPRO and PHSA had acted in bad faith and in breach of contract in awarding the primary supplier designation to Daniels. The application was dismissed.
The application judge held that the 2013 Contract was not spent on the award of the 2020 Contract, or on the start date of the 2020 Contracts, and that PHSA was entitled to insist that Stericycle continue to provide services for six months after June 1, 2020 under the 2013 Contract without such conduct amounting to selection of Stericycle as its primary supplier.
Second, the application judge held that the Daniels 2020 Contract did not require Daniels to commence the provision of services as of June 1, 2020.
The application judge then concluded that neither PHSA nor HealthPRO owed any duty of good faith to Stericycle in conducting the selection process or otherwise. She held that, in accordance with the analysis of contracts arising in respect of public tendering bids articulated in Double N Earthmovers Ltd. v. Edmonton (City), 2007 SCC 3,  1 S.C.R. 116, any duty owed by HealthPRO to Stericycle during the tendering process was extinguished on the award of the 2020 Contracts.
Stericycle appealed. In a unanimous decision, the Court of Appeal (Strathy C.J.O.; Zarnett J.A. and Wilton-Siegel J. (ad hoc)) dismissed the appeal. At the outset, the court dismissed Stericycle’s argument that it was not obligated to maintain 2013 pricing in the present circumstances on the plain language of the Six Month Provision. The court held that while the provision was indeed plain in its language, it was plain that it applied in the case of “implementation of a new contract to a different supplier”. In this case, PHSA implemented a new contract, the Daniels 2020 Contract, and selected a new supplier, i.e. Daniels. In so finding, the Court also rejected Stericycle’s argument that the standard of review was one of correctness based on the SCC decision in Ledcor Construction Ltd. v. Northridge Indemnity Insurance Co., 2016 SCC 37, rather than the palpable and overriding error standard of Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53.
With respect to good faith, the Court of Appeal addressed both the duty to exercise a contractual discretion in good faith and the duty of honest performance of a contract.
The duty to exercise a contractual discretion in good faith
With respect to Daniels’ inability to commence work in June, 2020, Stericycle identified a number of alleged breaches of the obligation to exercise the contractual discretion to select a primary supplier reasonably:
- a duty to hold suppliers to the commitments made in their RFQ and RFP responses, the breach of which Stericycle describes as allowing Daniels to "re-write" the start date and as permitting impermissible bid repair by Daniels;
- a duty not to select a supplier known to be unable to commence the provision of services on the start date of the 2020 Contracts; and
- a duty not to conscript Stericycle into helping Daniels buy time to allow Daniels to cure fundamental misrepresentations in the RFQ and RFP responses by which it won the Daniels 2020 Contract.
In essence, as summarized by the Court of Appeal, Stericycle's argument was that the application judge erred in failing to find that, in excusing Daniels from its obligation to commence providing services under the Daniels 2020 Contract on June 1, 2020, HealthPRO and PHSA breached a duty of good faith owed to Stericycle.
That argument was rejected for two reasons. First, since Stericycle was not a party to the Daniels 2020 Contract, it could not assert a breach of a duty of good faith in the performance of that contract. If HealthPRO and PHSA had waived any breach of Daniels' obligations in the Daniels 2020 Contract regarding the date of commencement of operations, that was a matter between them and Daniels. That decision was squarely in line with the Supreme Court decision in Double N Earthmovers Ltd. v. Edmonton (City), 2007 SCC 3.
Alternatively, even if Stericycle had standing to raise the good faith issue, there was nothing wrong with the lower court’s finding that there was no provision in either the RFQ or the RFP that imposed a mandatory date for the implementation of services, which precluded a finding of bad faith.
In summary, PHSA did not breach any obligation to Stericycle in refraining from requiring Daniels to begin providing service on June 1, 2020. Put positively, PHSA was entitled to select December 1, 2020 as the date of commencement of such services. PHSA did not breach any obligation to Stericycle in requiring it to continue to supply under the Six Month Provision until December 1, 2020.
The duty of honest performance of a contract
Stericycle's final ground of appeal was that the application judge erred in failing to find that HealthPRO and PHSA breached the duty of honest performance of its 2020 Contract.
Stericycle argued that HealthPRO acted dishonestly in providing information regarding the Six Month Provision to Daniels and in relying on the Six Month Provision to allow Daniels to delay its start date. Stericycle also alleged that PHSA acted dishonestly in not informing Stericycle much earlier than June 2, 2020 of its intended reliance on the Six Month Provision in its selection of Daniels as the primary supplier.
This final argument was also dismissed. The Court of Appeal held that none of those allegations involved lying or actively misleading Stericycle about a matter directly linked to performance of the Stericycle 2020 Contract or to the exercise of rights set forth therein.
The RFP did not prevent PHSA from obtaining the information that it required regarding proposed implementation of the 2020 Contracts by Daniels and Stericycle in order to make an informed selection of its primary supplier. HealthPRO was entitled to advise PHSA, as its member, of its rights under the 2013 Contract and, as discussed, PHSA was entitled to rely upon such rights. Nothing done here satisfied the test set out in C.M. Callow for demonstration of dishonest performance of the Stericycle 2020 Contract.