A commonly pleaded cause of action in many class actions is “waiver of tort”. Not anymore. The longstanding debate as to whether waiver of tort is an alternative form of remedy or an independent cause of action has been settled by the Supreme Court of Canada in Atlantic Lottery Corp. Inc. v. Babstock, released on July 24, 2020.1 As the decision has now made clear, waiver of tort is not an independent cause of action.
History of the Debate
The debate surrounding waiver of tort was initially sparked by a 2006 decision, Serhan Estate v. Johnson & Johnson.2 Since then, claims under waiver of tort have been commonly advanced in the context of class actions, though they have never been fully tried. The result has been an “undesirable state of uncertainty” where conflicting lines of jurisprudence pushed certification judges to “affirm that the question of the doctrine’s availability (was) indeed a live issue for trial.” Consequently, certification was often granted and defendants were then compelled to pay settlements to the plaintiffs.3
Waiver of Tort Not an Independent Cause of Action
In Atlantic Lottery Corp. Inc., the Court held that waiver of tort does not exist as an independent cause of action. Rather, its underlying basis is to permit plaintiffs to elect to pursue an alternative, gain-based remedy in lieu of damages – but only in some circumstances.
As the term “waiver of tort” is prone to confusion by incorrectly implying a waiver of the defendant’s wrongful conduct, the Court held that it should be abandoned.4 Instead, reference should be made to the remedy of disgorgement, which offers an alternative remedy for certain forms of wrongful conduct.5
To make out a claim for disgorgement, a plaintiff must first establish actionable misconduct (specifically, breach of a duty in tort, contract or equity).6 However, even then, depending on the nature of the actionable conduct and underlying facts, disgorgement may not be an available remedy.
Disgorgement for Negligent Conduct
In circumstances where the alleged misconduct is based on a defendant’s negligent conduct, the Court observed that negligence depends on proof of causation of damage and individual damages. The conduct of a defendant in negligence is wrongful only to the extent that it causes damage.7 In this regard, the Court maintained its statement from an earlier decision that, “(a) defendant in an action in negligence is not a wrongdoer at large: he is a wrongdoer only in respect of the damage which he actually causes to the plaintiff.”8
Although disgorgement is available for some forms of wrongdoing without proof of damage (for example, breach of fiduciary duty), the Court held that, “it is a far leap to find that disgorgement without proof of damage is available as a general proposition in response to a defendant’s negligent conduct.” In addition, “granting disgorgement for negligence without proof of damage would result in a remedy arising out of legal nothingness, and would be a radical and uncharted development.”9 Hence, it will still be necessary for a plaintiff to show causation and individual damages before being able to claim disgorgement as an alternative remedy.
The reasons in Atlantic Lottery still leave unsettled whether disgorgement for tortious wrongdoing is also limited to only proprietary torts, including conversion, deceit and trespass, or has broader application to all forms of negligence.
Disgorgement and Breach of Contract
Unlike a claim in negligence, loss is not an essential element of a cause of action for breach of contract.10 The remedy for breach of contract is ordinarily an award of damages measured by the position the plaintiff would have occupied had the contract been performed.11 Correspondingly, the Court held that disgorgement is an available remedy for breach of contract only in exceptional circumstances where other remedies are inadequate and the circumstances warrant it.12
According to the Court, particular attention should be given to whether the plaintiff has a legitimate interest in preventing the defendant’s profit-making activity.13 This may arise where, for example, the plaintiff’s loss is “impossible to calculate” or where the plaintiff’s interest in performance is not reflected by a purely economic measure.14
Where the majority and minority of the Court differed was whether it should be left to the trial judge to determine if the circumstances in Atlantic Lottery are so exceptional as to support disgorgement. The minority of the Court was not persuaded that the trial judge will inevitably conclude that there is nothing exceptional about this case, or that the plaintiffs’ claim is simply that they paid to play a gambling game and did not get exactly what they paid for.15 Furthermore, the majority noted that disgorgement is not an appropriate remedy where a plaintiff would rather pursue disgorgement instead of claim damages because they are unwilling, or do not have sufficient evidence, to prove loss. On the other hand, the minority held that the plaintiffs’ decision not to prove individualized loss, personal injury, or specific claims based on addiction is not fatal, as loss is not a legal prerequisite for disgorgement.16 According to the minority, what ultimately matters is whether other remedies for breach of contract would be inadequate to vindicate and protect the plaintiffs’ contractual rights.17
Regardless of the differences between the majority and minority (5-4) decisions as to the pleadings necessary to survive a motion to strike where disgorgement is sought for breach of contract, the Court’s decision in Atlantic Lottery is clear in its implications for class action litigation. The strategy of pleading waiver of tort to avoid having to prove causation and individual damages for cases asserting negligent conduct has been put to an end. Further, the decision limits the use of disgorgement in breach of contract cases to all but the most exceptional instances.