Waiver Of Tort Is Lifeless, Lengthy Dwell Waiver Of Tort! – Company/Business Regulation

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

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Waiver of tort has long been a contentious subject in Canadian
law. Many, many courts have permitted waiver of tort claims to
proceed in
class actions. Yet no court had definitively ruled as to
whether waiver of tort in fact existed. It was for this reason that
the Supreme Court of Canada’s decision in Atlantic
Lottery Corporation v Babstock has been so highly
anticipated. Most expected that the Supreme Court would finally
answer whether a waiver of tort existed as an independent cause of
action under Canadian law. This in turn would have significant
consequences for many types of cases, including many types of class
actions.

As it turned out, the Supreme Court of Canada’s decision was
noteworthy for many reasons. Most importantly, the Court rejected
the existence of waiver of tort as a cause of action, while
potentially preserving it under a different name as a remedial
option. Yet the Court also commented on a number of other points
that are significant for both class action lawyers and the commercial litigation bar.

Background

My colleague,
Kelly Hayden,
previously commented on this case after leave to appeal was
granted by the Supreme Court of Canada, so I will not delve into
the underlying decisions in too much detail. In short, the
plaintiffs had brought a proposed class action against the
Government of Newfoundland and Labrador in respect of the operation
of video lottery terminals. The plaintiffs alleged that video
lottery terminals were inherently dangerous and deceptive. They
framed their claim primarily to seek a gain-based remedy quantified
by the profits that the Atlantic Lottery Corporation had earned by
licencing video lottery terminals. The claims advanced were for
waiver of tort, breach of contract, and unjust enrichment.

At first instance, the Atlantic Lottery Corporation applied to
strike the plaintiffs’ claim on the basis that it disclosed no
reasonable cause of action and sought certification of the claim as
a class action. At first instance, the claim was certified as a
class action, and the Atlantic Lottery Corporation’s
application to strike was dismissed. The Court of Appeal
essentially affirmed the application judge’s decision and
allowed the claims to proceed.

The Supreme Court of Canada unanimously rejected the viability
of the waiver of tort claims in this case, and they were also
unanimous in their analysis pertaining to waiver of tort. However,
as to some of the other claims, the Court split on the result. The
five-member majority held that none of the claims disclosed a
reasonable cause of action. The dissent, by contrast, accepted that
the claim did not disclose a reasonable cause of action in either
waiver of tort or unjust enrichment. However, the dissent felt that
the breach of contract cause of action was appropriate.
Consequently, those four members of the Court would have allowed
the claims to be certified as a class action only to proceed in
respect of the breach of contract claim.

Waiver of Tort is No More… As a Cause of Action, Anyway

The most important takeaway from the Court’s decision is
that waiver of tort is not an independent cause of action under
Canadian law. This resolved many years of judicial uncertainty
after Courts had repeatedly dodged the question.

For those not familiar with the concept of waiver of tort, I
will say at the outset that it is murky and complicated, I will not
pretend to do justice to the significant judicial and academic
commentary on the topic. However, at its most general, the basic
concept of waiver of tort is that a plaintiff could advance a claim
for some tortious wrongdoing by the defendant that would allow the
plaintiff to recover the defendant’s profits from that
wrongdoing. At a high level, there were two broad schools of
thought regarding what waiver of tort could be. One view was that
waiver of tort was essentially remedial, such that a plaintiff that
had established a particular cause of action could then “waive
the tort” and instead recover the defendant’s benefit. A
second view was that waiver of tort was a freestanding cause of
action that could allow a plaintiff to recover the defendant’s
gains from the misconduct, without evidence of the plaintiff
themselves having suffered any loss.

This second view of waiver of tort had been particularly popular
in class proceedings because the notion of a remedy based on the
benefits to the defendant could help obviate any need for
plaintiffs to prove class-wide loss to every member of the class.
This in turn could help plaintiffs seek certification of the class
as
class actions.

In its decision, the Supreme Court of Canada unequivocally
decided that waiver of tort was not an independent cause of
action.

The Court’s primary reasons for rejecting waiver of tort as
an independent cause of action were conceptual. The Court noted
that proof of damages is an essential element of negligence. The
Court held that it would be a fundamental transformation to the law
of negligence to allow a disgorgement-based claim in the absence of
any proof of damages. The Court accepted that while some causes of
action, such as breach of fiduciary duty, allowed for the
disgorgement of profits in the absence of proof of any damage to
the plaintiff, the Court held that this was not appropriate for
claims like negligence:

It is therefore important to consider what it is that makes a
defendant’s negligent conduct wrongful. As this Court has
maintained, “(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” (Clements v.
Clements, 2012 SCC 32, (2012) 2 S.C.R. 181, at para. 16).
There is no right to be free from the prospect of damage;
there is only a right not to suffer damage that results
from exposure to unreasonable risk (E. J. Weinrib, The Idea of
Private Law (rev. ed. 2012), at pp. 153 and 157‑58; R.
Stevens, Torts and Rights (2007), at pp. 44‑45 and
99). In other words, negligence “in the air” — the
mere creation of risk — is not wrongful conduct. Granting
disgorgement for negligence without proof of damage would result in
a remedy “arising out of legal nothingness” (Weber, at p.
424). It would be a radical and uncharted development,
“(giving) birth to a new tort over night” (Barton, Hines
and Therien, at p. 147).

The Court also noted there were practical difficulties
associated with an independent cause of action for waiver of tort.
It noted that if a plaintiff could claim a disgorgement without
having suffered any losses themselves, this would allow the first
plaintiff to get judgment to claim the entirety of that
disgorgement. The Court held this was not appropriate.

While the Court rejected the notion that waiver of tort could be
an independent cause of action, the Court did not rule out the
possibility that disgorgement could potentially be awarded as a
remedy for tortious conduct, where the elements of the tort are
made out. However, in this particular case, the Court held that
this theory was not available. The Court noted that
“(c)ausation of damages is a required element of the tort of
negligence”. Here, the plaintiffs did not plead that the
misconduct by the defendants had caused any injury to the
plaintiffs, so the Court held that they necessarily could not
establish negligence.

The Supreme Court of Canada’s decision definitively shuts
the door on waiver of tort as a cause of action, while leaving the
door open a crack for disgorgement-based remedies where negligence
is made out. In the class actions context in particular—where
waiver of tort was most often pursued for the reasons described
above—the implications of this more limited approach to
waiver of tort are significant. The Supreme Court’s decision
means that in order for a cause of action to be established on a
class-wide basis, damages will have to be established by all class
members. This may pose difficulties in certifying some cases as
class actions where damages are not common across all members of
the class.

The Other Implications of Atlantic Lottery Corporation v
Babstock

While the most significant implication of Babstock
relates to the Court’s rejection of waiver of tort as a cause
of action, the decision is remarkable for a number of other reasons
that are worth noting. Because each of these issues could be the
subject of a blog post in its own right, I do not intend to
exhaustively address each of them, but merely highlight the issues
that Atlantic Lottery Corporation v Babstock raises for
future consideration.

First, the Supreme Court made it clear that the motion to strike
should be a robust tool to weed out unmeritorious claims. Mostly
importantly, the Court held that “a claim will not survive an
application to strike simply because it is novel”. The key
part of the Court’s analysis here is at paragraph 19 of its
decision:

Of course, it is not determinative on a motion to strike that
the law has not yet recognized the particular claim. The law is not
static, and novel claims that might represent an incremental
development in the law should be allowed to proceed to trial
(Imperial Tobacco, at para. 21; Das v. George Weston
Ltd., 2018 ONCA 1053, 43 E.T.R. (4th) 173, at para. 73; see
also R. v. Salituro, (1991) 3 S.C.R. 654, at p. 670).
That said, a claim will not survive an application to strike
simply because it is novel. It is beneficial, and indeed critical
to the viability of civil justice and public access thereto that
claims, including novel claims, which are doomed to fail
be disposed of at an early stage in the proceedings. This is
because such claims present “no legal justification for a
protracted and expensive trial” (Syl Apps Secure Treatment
Centre v. B.D., 2007 SCC 38, (2007) 3 S.C.R. 83, at para. 19).
If a court would not recognize a novel claim when the facts as
pleaded are taken to be true, the claim is plainly doomed to fail
and should be struck. In making this determination, it is not
uncommon for courts to resolve complex questions of law and
policy. (emphasis added)

This is a significant shift in approach and may require a
greater degree of scrutiny in causes of action on motions to
strike.

Second, the Court made passing reference to the duty of good
faith in contract law. Since the Supreme Court’s decision in Bhasin v
Hrynew, contractual claims rooted in the duty of good
faith have proliferated. However, at paragraph 65 of the decision,
the Supreme Court of Canada makes clear that “not every
contract imposes actionable good faith obligations on contracting
parties”.

As this Court explained in Bhasin v. Hrynew, 2014 SCC
71, (2014) 3 S.C.R. 494, however, not every contract imposes
actionable good faith obligations on contracting parties. While
good faith is an organizing principle of Canadian contract law, it
manifests itself in specific circumstances. In particular, its
application is generally confined to existing categories of
contracts and obligations (para. 66). The alleged contract between
ALC and the plaintiffs does not fit within any of the established
good faith categories. Nor did the plaintiffs advance any argument
for expanding those recognized categories.

This suggests a potentially more constrained approach to the
duty of good faith than some lower courts have been applying since
Bhasin.

Third, the majority’s decision as it pertains to unjust
enrichment claims in class actions is interesting to note. The
Court held that it was plain and obvious that a pleading in unjust
enrichment would fail because the plaintiffs alleged there was a
contract between ALC and the plaintiffs. The Court noted that
“(a) defendant that acquires a benefit pursuant to a valid
contract is justified in retaining that benefit”.

This in itself is not new law: it is well established that
benefits given pursuant to a valid contract will not be subject to
claims for unjust enrichment. However, what this decision does
signal is that courts may be more willing to strike unjust
enrichment claims at an early stage. In particular, if the
pleadings plead there is a contract between the parties and there
are no reasonable grounds to believe that contract was invalid, it
suggests that claims for unjust enrichment may not be tenable.

Implications

There is a lot to grapple with in Atlantic Lottery Corp v
Babstock. The decision provides significant clarity to the law
of waiver of tort, although it raises several other questions the
Supreme Court will have to grapple with in future cases.

Broadly speaking, this decision will be favourable to parties
who find themselves as defendants in class actions. It will
undoubtedly mean that some claims that may have previously been
certified cannot be certified. It will also likely mean that, in
most cases, a defendant’s exposure in the case is likely
limited to the harm suffered to class members, rather than be
measured by the defendant’s benefit. However, the full
implications of Babstock remain to be determined in future
cases.

Originally published 24 July, 2020

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