The Supreme Courtroom Of Canada Ends The Debate – Waiver Of Tort Is Not An Unbiased Trigger Of Motion: Atlantic Lottery v. Babstock – Litigation, Mediation & Arbitration

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Waiver Of Tort Is Dead, Long Live Waiver Of Tort! - Corporate/Commercial Law

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On July 24, 2020, the Supreme Court of Canada released its
decision in Atlantic Lottery Corp. Inc. v. Babstock, 2020
SCC 19. The Court allowed the appeals, and struck the
plaintiffs’ claims on the basis that they disclosed no
reasonable cause of action.

Background

Atlantic Lottery Corporation (“ALC”), which is
constituted by the four Atlantic provinces, approves the operation
of video lottery terminal games (“VLTs”) in Newfoundland
and Labrador (“NL”). The plaintiffs alleged that VLTs are
inherently dangerous, deceptive and harmful. They sued ALC and
advanced claims based on: misrepresentation under the
Competition Act, R.S.C., 1985, c. C-34; breach of the
Statute of Anne, 1710; breach of the Criminal
Code‘s prohibition against games similar to three-card
monte; failure to warn of the dangers of VLTs; breach of contract;
unjust enrichment; and waiver of tort. For most of these claims,
the plaintiffs sought disgorgement of the profit that ALC earned
from VLTs.

ALC applied to strike the action for failing to disclose a
reasonable cause of action, and the plaintiffs sought certification
as a class proceeding. The judge dismissed ALC’s motion to
strike, and certified a class action. On appeal, all judges of the
Newfoundland and Labrador Court of Appeal agreed that the claims
based on the Competition Act and the Statute of Anne,
1710 should be struck. As for the other claims, the majority
allowed them to stand, while the dissenting judge would have struck
those claims as well. More importantly, the majority ruled, for the
first time in Canada, that waiver of tort (renamed disgorgement for
wrongdoing) is an independent cause of action providing a remedy of
disgorgement, without proof of damage.

The Power to Strike Hopeless Claims

Because this was largely an appeal of a motion to strike, the
Supreme Court of Canada described the applicable test as follows:
“whether it is plain and obvious, assuming the facts pleaded
to be true, that each of the plaintiffs’ pleaded claims
disclose no reasonable cause of action” (para. 14). Citing
its decision in Hryniak v. Mauldin, 2014 SCC 7, the Court
stressed the importance, where possible, of resolving “legal
disputes promptly, rather than referring them to a full
trial” (para. 18), and it reaffirmed its statement in R.
v. Imperial Tobacco Canada Ltd., 2011 SCC 42, that the power
to strike “hopeless claims” is “a valuable
housekeeping function essential to effective and fair
litigation” (para. 18).

This approach, however, had been notably absent when it came to
waiver of tort, which resulted in “an undesirable state of
uncertainty” (para. 21), particularly evident in the context
of class actions (where the first requirement for certification is
that the pleadings disclose a cause of action). For 16 years,
beginning with Serhan (Estate Trustee) v. Johnson &
Johnson (2004), 72 O.R. (3d) 296 (Sup. Ct.), claims for waiver
of tort have been certified, and they advanced without any eventual
determination as to whether the alleged cause of action exists.
Despite an earlier opportunity to do so, the Supreme Court of
Canada, in Pro‑Sys Consultants Ltd. v.
Microsoft Corporation, 2013 SCC 57, declined to decide the
issue. Now, with the benefit of much academic commentary, a
comprehensive discussion and a determination of the issue by the
Newfoundland and Labrador Court of Appeal, and with waiver of tort
as a central issue in the action against ALC, the question was ripe
for a conclusive determination.

Waiver of Tort is Not an Independent Cause of Action

To oversimplify, waiver of tort refers to a doctrine where a
plaintiff is said to waive the tort committed by a defendant.
Instead, the plaintiff proceeds on the basis of an implied
contract, and seeks disgorgement of the benefit acquired by the
defendant through the commission of the tort. Largely forgotten, it
was revived by plaintiffs in class actions where the emphasis on
the defendant’s gain, rather than any individual losses of
the plaintiff, made for an attractive claim for certification.

As noted by the Supreme Court of Canada, however, waiver of tort
is a “misnomer”. “Rather than forgiving or
waiving the wrongfulness of the defendant’s conduct, plaintiffs
relying on the doctrine were simply electing to pursue an
alternative, gain‑based, remedy” (para. 29). As such,
the term “is apt to generate confusion and should therefore
be abandoned” (para. 30).

In any event, by pleading waiver of tort as an independent cause
of action, the plaintiffs in this case essentially advanced a claim
akin to negligence, but ostensibly without the need to prove
resulting damage. They instead claimed disgorgement of ALC’s
profits, while at the same time disclaiming any intention of
proving any loss. This was a claim for disgorgement as a cause of
action.

Before deciding if such a claim could be advanced, the Supreme
Court of Canada explained the difference between restitution and
disgorgement, two forms of gain-based relief. The former applies
where “a benefit moves from the plaintiff to the defendant,
and the defendant is compelled to restore that benefit”
(para. 23) (i.e. unjust enrichment). In contrast, disgorgement
“refers to awards that are calculated exclusively by
reference to the defendant’s wrongful gain, irrespective of
whether it corresponds to damage suffered by the plaintiff and,
indeed, irrespective of whether the plaintiff suffered damage at
all” (para. 23). Most significantly, the Court held that
disgorgement is an alternative remedy (not a cause of action),
available only “upon the plaintiff satisfying all the
constituent elements of one or more of various causes of
action” (para. 25).

Furthermore, while disgorgement may be available for some forms
of wrongdoing without proof of damage (such as breach of a
fiduciary duty), “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” (para. 32).
The Court noted that while disgorgement for wrongdoing was
initially only available for proprietary torts (such as
conversion), it later found broader application. But whether
disgorgement is available as an alternative remedy for negligence
is unsettled.

This was of no consequence in this case where the plaintiffs,
according to the Court, had failed to properly plead a claim in
negligence. The Court said: “causation of damage is a
required element of the cause of action of negligence, and it must
be pleaded. Here, not only have the plaintiffs not pleaded
causation, their pleadings expressly disclaim any intention of
doing so” (para. 38). The Court described this tactic as an
“intentional litigation strategy” designed to increase
the likelihood of certification by avoiding any need to prove
individual damage. While the strategy initially worked for
certification, it left the plaintiffs with a claim that had
“no reasonable chance of success” (para. 38).

Exceptional Remedies for Breach of Contract

With regards to the alleged breach of contract, the plaintiffs
did not seek the ordinary form of monetary relief (i.e.
compensatory damages measured by their position had the contract
been performed). They sought only non-compensatory damages, namely,
disgorgement and punitive damages.

As for disgorgement, the Court confirmed that it is available
only “where other remedies are inadequate and only where the
circumstances warrant such an award” (para. 53). According to
the Court, the claim for disgorgement for breach contract was
doomed to fail. The plaintiffs’ losses were quantifiable and
could be remedied by an award of compensatory damages. Overall, the
Court held: “Disgorgement for breach of contract is
exceptional relief; it is not available at the plaintiff’s
election to obviate matters of proof. And there is nothing
exceptional about the breach of contract the plaintiffs
allege” (para. 61).

With regards to punitive damages, they can be awarded
“where the alleged breach of contract is an independent
actionable wrong” (para. 63). A tortious wrong is not
required. The breach of a contractual obligation of good faith can
suffice. But, the Court noted, “not every contract imposes
actionable good faith obligations on contracting parties”
(para. 65). The obligation arises in special circumstances, and the
alleged contract between ALC and the plaintiffs did not fit within
any of the established good faith categories. Accordingly, the
plaintiffs’ claim for punitive damages was bound to fail.

Unjust Enrichment

The Court promptly rejected the claim for unjust enrichment as
the plaintiffs themselves showed that there was a juristic reason
for ALC’s enrichment: the alleged contract between ALC and the
plaintiffs. Furthermore, because, according to the Court, the
allegation of criminal conduct (that VLTs were similar to
three-card monte) had no chance of success, there was nothing that
could serve to vitiate the alleged contract as a legal
justification for ALC’s gain.

Key Takeaways

  • Where possible, courts should resolve
    legal disputes promptly, without a full trial. Striking hopeless
    claims promotes effective and fair litigation. Novel claims that
    advance incremental developments in the law should proceed, but
    claims will not survive merely because they are novel.
  • Waiver of tort is a confusing term,
    and it should be abandoned. More importantly, neither waiver of
    tort, nor disgorgement, is an independent cause of action.
    Disgorgement is an alternative remedy for certain forms of
    wrongdoing, but it requires proof of actionable misconduct. Whether
    disgorgement is available as an alternative remedy in negligence is
    unsettled, and has been left for another day.
  • In negligence, a defendant’s
    conduct is only wrongful if it causes harm. The mere creation of a
    risk (sometimes referred to as negligence “in the air”)
    is not actionable. Causation of damage remains a required element
    of negligence.
  • Disgorgement for breach of contract
    is only available in exceptional cases where other remedies are
    inadequate, and where the plaintiff has a legitimate interest in
    preventing the defendant’s gain.
  • Not every contract imposes good faith
    obligations. Good faith is an organizing principle that arises in
    specific circumstances. It is generally limited to existing
    categories of contracts and obligations.
  • Actions in which the plaintiffs only
    seek nominal damages may face hurdles to class certification. Such
    claims do not advance the goals of class actions: judicial economy,
    behavior modification, and access to justice.

Jorge P. Segovia, of Cox & Palmer, St. John’s,
successfully represented one of the appellants in this
case.

Originally published 06 August, 2020

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