“Acting Reasonably” in Contracts involving Municipal Discretion

Where private parties enter into contracts with municipalities, and particularly in the land development context, the terms agreed to will often contain language granting the municipal party broad discretion that would normally not be seen in a contract between two private parties. Where private parties might balance these contractual rights by adding a reasonableness requirement (“acting reasonably”), this revision often meets resistance from a municipal party. While this is, in part, a function of discrepancy in bargaining power, it may also be rooted in the powers conferred on municipalities by statute and common law. Parties’ agreement to include a reasonableness requirement may therefore depend on whether there is an implied limitation on this discretion, such that a contract with a municipality is to be read with an understanding that the municipality’s exercise of discretion thereunder must be “reasonable”.

Municipalities, as creatures of statute, must only exercise the powers conferred upon them by provincial statute,[1] and must only act for municipal purposes. Their actions and purpose may go outside the bounds of what is explicitly stated in their enabling statute and extends to what is compatible with the purpose and objective of the enabling statute.[2] Municipalities are afforded certain discretionary powers to fulfill their statutory mandates, which the courts have referred to as a “broad discretion” in public law.[3] A municipality has a duty to not fetter its discretion[4] – a “limitation on a municipality's legislative power is a very serious matter.” [5]

A municipality’s discretion is not, however, without limit; it must be exercised in a way that is related to the administration and enforcement of their enabling statute.[6] In Roncarelli v. Duplessis, the Supreme Court stated that “‘[d]iscretion’ necessarily implies good faith in discharging public duty; there is always a perspective within which a statute is intended to operate; and any clear departure from its lines or objects is just as objectionable as fraud or corruption.”[7] If a municipality acts outside the spirit of the enabling statute, it will thus run the risk of such actions being found to be outside its authority or in bad faith.