Commercial litigation typically concludes with a settlement agreement and a formal release intended to establish complete finality. However, when performance hinges on one party’s discretion—such as a clause requiring a counterparty to provide “satisfactory evidence” of compliance before a release becomes effective—the dispute risks reigniting.

For commercial property owners, corporate executives, and business operators, understanding how courts interpret contractual discretion is critical to protecting commercial interests. The British Columbia Court of Appeal clarified these legal boundaries in Dhanesar v. Pandher. While arising from a real estate contract, the court’s analysis directly governs commercial settlements, corporate releases, and high-value transactional agreements where discretionary performance clauses are commonplace.

The Strategic Dilemma of Discretionary Clauses

In commercial settlements, parties frequently include discretionary conditions. A landlord might agree to release a departing commercial tenant once the premises are restored to a state “satisfactory to the owner.” Similarly, a claimant might agree to settle litigation provided the defendant produces financial records “satisfactory to the claimant.”

These provisions create inherent operational exposure. If the party holding discretionary authority rejects performance arbitrarily or uses the clause as leverage to extract further concessions, the entire settlement collapses. Canadian contract law actively polices this exercise of power to prevent contractual opportunism.

The Canadian Framework: Good Faith and Discretion

The Supreme Court of Canada has established an overarching organizing principle of good faith in contract law. This principle mandates that parties perform their contractual obligations honestly and reasonably, refraining from arbitrary or capricious conduct.

Under this overarching doctrine, two distinct duties frequently govern settlement execution:

• The Duty of Honest Performance: Parties must not lie or knowingly mislead one another about matters directly linked to contractual performance.
• The Duty to Exercise Contractual Discretion in Good Faith: As articulated by the Supreme Court of Canada in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, even where an agreement purports to grant “sole” or “absolute” discretion, that power remains legally constrained.

Crucially, “reasonableness” under this doctrine does not mean a court will impose its own view of general commercial fairness. Instead, reasonableness is assessed by examining whether the discretion was exercised in alignment with the underlying purpose for which the contract conferred the power. If a party exercises discretion for a collateral purpose extraneous to the contract’s intent, that exercise constitutes bad faith.

• Read further on our previous blogs on: Navigating Breach of Contract Claims in Commercial Disputes

Judicial Review in Practice: Dhanesar v. Pandher

The decision in Dhanesar v. Pandher illustrates how Canadian appellate courts analyze discretionary failure when commercial performance breaks down.

The Factual Matrix

A buyer contracted to purchase a newly constructed property for $1.515 million, backed by a $75,000 deposit. The agreement designated substantial completion as a fundamental term, requiring the sellers to deliver an unconditional occupancy certificate or “other evidence satisfactory to the Buyer that construction is finished” by the closing date.

Municipal inspectors subsequently rejected the final inspection due to unfulfilled development obligations, including an outstanding retaining wall and required landscaping. While the municipality issued a provisional occupancy slip, it denied final clearance.

The general contractor informed the sellers that the provisional permit was “final” without disclosing the municipal rejection. The buyer discovered the municipal rejection independently. On closing, the sellers offered the provisional permit without explaining the deficiency. The buyer exercised her contractual discretion, declared the provisional permit unsatisfactory evidence of completion, and refused to close. The sellers sued for breach.

The Trial Court Ruling

The trial judge ruled for the sellers, awarding approximately $339,000 in damages. The trial court interpreted “evidence satisfactory to the Buyer” to mean evidence that would satisfy an objective “reasonable person.” It concluded that the buyer had exercised her discretion unreasonably by insisting on an unconditional certificate when the outstanding work was minor.

• Read our blogs on: Resolving Property Disputes in British Columbia

The Court of Appeal Decision

The BC Court of Appeal set aside the decision and ordered a new trial, identifying two core errors in the trial judge’s legal framework:

1. Conflating Good Faith with Contractual Interpretation: The duty of good faith is a general doctrine of law that limits how discretionary power is exercised; it is not a rule of construction used to rewrite the clear language of a contract.
2. Misapplying the Reasonableness Standard: The Court of Appeal emphasized that reasonableness in the good-faith context is not tested against a hypothetical “reasonable person.” Rather, it is evaluated strictly against the specific purpose for which the discretion was granted. If a party exercises discretion for a purpose aligned with the contract, courts will not override that decision simply because another party finds it stringent.

Strategic Implications for Commercial Litigants and Executives

When negotiating or enforcing settlement agreements, commercial parties must ensure that discretionary clauses are carefully structured:

• Objective Benchmarks vs. Subjective Standards: When a clause concerns matters capable of objective measurement—such as financial audits, technical compliance, or structural completion—the range of acceptable discretionary decisions is narrow. Where discretion involves subjective commercial judgment, the legal latitude is broader.
• Preventing Pretextual Rejections: Refusing to accept a counterparty’s performance under a discretionary clause cannot serve as a pretext to walk away from a deal or reopen negotiated terms. A rejection driven by ulterior motives constitutes bad faith and invites actionable exposure.
• Precision in Drafting: Settlement agreements should explicitly define the purpose and criteria governing discretionary approval. Clear recitals and operative conditions anchor judicial review to the parties’ true intentions, preventing courts from reinterpreting terms later.
• Read our blogs on: Drafting Enforceable Commercial Leases

Commercial Litigation Analysis: Settlement, Releases, and Discretion

May a party reject alternative proof of compliance provided under a settlement agreement?

If a settlement agreement permits “other satisfactory evidence,” the receiving party must evaluate alternative submissions in good faith. They cannot reject alternative proof arbitrarily. The decision to accept or reject must directly connect to the underlying purpose of the clause. Where alternative documentation fully satisfies the functional purpose of the agreement, a refusal driven by collateral motives may constitute bad faith.

Does a “sole discretion” clause protect a commercial party from legal challenge?

No. Canadian law does not recognize unfettered contractual discretion. Even under an explicit “sole discretion” clause, courts imply a legal limit requiring the power to be exercised honestly and in alignment with the contract’s purpose. Exercising “sole discretion” to achieve an ulterior outcome unrelated to the agreement constitutes a breach of the duty of good faith.

Can a party rely on a release if the counterparty misled them prior to execution?

The duty of honest performance prohibits parties from actively misleading or lying to one another about contractual fulfillment. If a party secures a settlement or release through active deception regarding material compliance, the underlying release may be subject to challenge under the doctrines of honest performance and good faith.

How do courts determine the “purpose” of a discretionary clause?

Courts determine purpose primarily through the text of the agreement. The purpose may be explicitly articulated within the specific clause or inferred by reading the provision within the context of the entire agreement. Commercial parties should ensure that the intended criteria for discretionary decisions are clearly reflected in the written contract.

Can parties contract out of the duty of good faith in a settlement agreement?

No. The duty to exercise contractual discretion in good faith and the duty of honest performance are legal doctrines established by common law. They apply automatically to commercial contracts in Canada and cannot be excluded or waived by agreement.

How does objective measurement differ from subjective judgment in commercial releases?

Discretionary provisions exist on a spectrum. Where a condition involves objective verification—such as regulatory approval, financial solvency, or exact technical specifications—the range of good-faith decisions is narrow and strictly bounded. Where discretion involves subjective commercial judgment, such as personal aesthetic preferences or corporate alignment, courts allow a broader range of outcomes, provided the decision remains free from bad faith or ulterior motives.

Contact Roland Luo for Modern Commercial Litigation Services in Vancouver

Navigating complex commercial disputes, settlement enforcement, and release drafting requires sophisticated legal execution. Roland Luo provides strategic representation for commercial property owners, corporate entities, and business litigants across British Columbia. We assist clients in untangling complex disputes in expeditious ways to determine the matters on their merits. 

Located in downtown Vancouver, Roland Luo proudly represents clients throughout British Columbia, as well as clients across Canada and the United States. To schedule a confidential discussion, contact us online (the most efficient method) or by phone at 604-800-4628.