Waiver Of Tort Is Useless, Lengthy Reside Disgorgement (Perhaps) – Company/Industrial Legislation

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

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In Atlantic Lottery Corporation Inc. v Babstock1
released on July 24, 2020, the Supreme Court of Canada unanimously
held that “waiver of tort” was not a cause of action, and
that this term was a misnomer that should not be used.  In
addition, the Court provided some guidance as to the availability
of disgorgement as a remedy.  The differences of opinion
between the majority and the dissent may also indicate a loosening
of the rules applicable to motions to strike, in light of the
majority’s willingness to reverse the lower courts’
decisions and strike all of the causes of action pleaded by the
plaintiffs.

Background

The plaintiffs commenced a proposed class action against
Atlantic Lottery Corporation (“ALC“) on
behalf of all persons in Newfoundland and Labrador who paid to play
video lottery terminal games (“VLTs“) in
the province in the six years preceding the action.  The
plaintiffs claimed that VLTs were inherently dangerous and
deceptive, and sought a gain-based award quantified by the profit
that ALC earned by licensing VLTs.  By the time their case
reached the Supreme Court of Canada, the plaintiffs relied on three
causes of action: waiver of tort, breach of contract and unjust
enrichment.

Waiver of Tort

In 2013, in Pro-Sys Consultants Ltd. v Microsoft
Corporation,2 the Supreme Court declined to strike
a cause of action based on waiver of tort.  After reviewing
the contradictory law on the issue, the Court stated at the time
that “this appeal is not the proper place to resolve the
details of the law of waiver of tort, nor the particular
circumstances in which it can be pleaded.”3

Seven years later, the Court was ready to decide whether the
novel cause of action of waiver of tort existed in Canadian
law.  After referring to Hryniak v Mauldin4 and
the need for a “culture shift” to promote timely and
affordable access to the civil justice system, the majority stated
that, where possible, courts should resolve legal disputes
promptly, rather than referring them to a full trial.5 
While acknowledging that novel claims that might represent an
incremental development in the law should be allowed to proceed to
trial, the majority warned that a claim should not survive a motion
to strike simply because it is novel.  Writing for the
majority, Brown J. stated:

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.6

The Court held that the term “waiver of tort” was
confusing, had led to confused and confusing results and should be
abandoned.7  What the plaintiffs were
really seeking was disgorgement – their claim was that they
were entitled to a remedy quantified solely on the basis of the
ALC’s gain, without reference to damage that any of the class
members may have suffered.  The Court held that while
disgorgement was an alternative remedy for certain forms of
wrongful conduct, it was not an independent cause of action.8 

Disgorgement as a Remedy for Tortious Wrongdoing

According to the Court, while disgorgement for tortious
wrongdoing was initially applied only in the context of proprietary
torts, it found broader application in the late 20th
century, and the issue of whether disgorgement is available for
negligence in certain circumstances remains unsettled.  The
Court held, however, that it was unnecessary to resolve the
question in this case as the plaintiffs had not adequately pleaded
a claim in negligence.  In explaining why this was the case,
Brown J. emphasized the importance of pleading causation when
alleging negligence:

Causation of damage is a required element of the tort of
negligence.  As I have explained, the conduct of a defendant
in negligence is wrongful only to the extent that it
causes damage (Clements, at para. 16). 
While the plaintiffs allege that ALC had a duty to warn of the
inherent dangers associated with VLTs, including the risk of
addiction and suicide, those dangers are not alleged to have
materialized.  The plaintiffs do not allege that proper
warnings would have caused them to spend less money playing VLTs or
to avoid them altogether.

It follows that I respectfully disagree with (the) Court of
Appeal’s conclusion that the plaintiffs would not be
“precluded from leading evidence that the breach of duty
(assuming it can be proven) led to some form of injury” (para.
186).  Again, 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.  The
absence of a pleading of causation, they acknowledge, arises from
an intentional litigation strategy to increase the likelihood of
obtaining certification of their action as a class action by
avoiding having to prove individual damage.  This particular
claim also has no reasonable chance of success.9

Thus, it remains to be determined whether disgorgement may be
ordered as a remedy in a negligence case where all the necessary
elements of the cause of action have been pleaded and, if so, the
circumstances in which such a remedy may be appropriate.

Disgorgement for Breach of Contract

Relying on the House of Lords’ decision in Attorney
General v Blake,10 both the majority and the dissent
agreed that disgorgement may be available for breach of contract in
certain exceptional circumstances, where other remedies (such as
damages, specific performance and injunction) are inadequate.11  The circumstances that
should be considered by the court include the subject matter of the
contract, the purpose of the contractual provision that has been
breached, the circumstances in which the breach occurred, the
consequences of the breach, and the circumstances in which relief
is being sought.12  The majority also emphasized
that courts should in particular consider whether the plaintiff had
a legitimate interest in preventing the defendant’s
profit-making activity.13  According to the majority,
“(w)hile the circumstances in which a gain-based award will be
appropriate cannot be clearly delineated in advance (…), one
would expect future legitimate interests protected by a gain-based
award to resemble those interests that have been protected in the
past.”14 

The majority concluded that the plaintiffs’ claim for
disgorgement for breach of contract was plainly doomed to
fail.  This was not a case where other remedies were
inadequate.  Brown J. stated:

Circumstances of inadequacy arise when the nature of the
claimant’s interest is such that it cannot be vindicated by
other forms of relief.  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 (…).  Where, as here, the
argument is that the quantum of loss is equal to the
defendant’s gain, but the plaintiff would simply rather pursue
disgorgement, a gain-based remedy is inadequate.15

Brown J. further stated that disgorgement is not available at
the plaintiff’s election to obviate matters of proof. 
Compensatory damages are not inadequate merely because a plaintiff
is unwilling, or does not have sufficient evidence, to prove
loss.  It is the nature of the claimant’s interest, not
the availability of evidence, that can establish the inadequacy of
other remedies.16

The majority concluded that there was nothing exceptional about
the breach of contract alleged by the plaintiffs, and that the
plaintiffs could not be said to have a legitimate interest in the
defendant’s profit-making activity.  As a result, the
plaintiffs’ claim had no reasonable chance of achieving
disgorgement for breach of contract.

The majority also found that the plaintiffs’ claim for
punitive damages had no reasonable chance of success, and stated
that the alleged contract did not fit within any of the established
categories of contracts that impose good faith obligations.

In response to the dissent’s view that the claim for breach
of contract should not be struck, the majority relied on the
unusual nature of the plaintiffs’ pleading, referred to
Hryniak and argued that the Court should not “delay
the inevitable”:

The remaining question on breach of contract is whether the
plaintiffs’ claim should survive as a hollow cause of action
that does not support any of the remedies they seek.  In my
view, it should not.  While I agree with my colleague
Karakatsanis J. that declaratory relief and nominal damages are
available in theory as remedies for breach of contract, a
reasonable claim is one that has a reasonable chance of achieving
the outcome that the plaintiff seeks.  That is not this
claim.  To be sure, the circumstances here are unusual. 
Not only did the plaintiffs plead only gain-based relief and
punitive damages, both of which I have concluded are unavailable in
the circumstances the plaintiffs also expressly disclaimed remedies
quantified on the basis of individual loss.  At no point did
the plaintiffs argue that their claim should survive because
nominal damages are available.  In my view, the
plaintiffs’ breach of contract claim should be assessed on the
basis of the questions put before the Court – namely, whether
a gain-based remedy or punitive damages are available in the
circumstances.  And on that basis, it is obvious that the
plaintiffs’ breach of contract claim does not disclose a
reasonable cause of action.  To allow this claim to proceed to
trial would simply be to delay the inevitable, and would not
reflect a “proportionate procedure(e) for adjudication”
(Hryniak, at para. 27).17

The Court also found that the plaintiffs’ claim for unjust
enrichment was bound to fail as there was a juristic reason, i.e. a
contract, pursuant to which the defendant was justified in
retaining the benefit.

Having found that all the claims pleaded by the plaintiffs were
bound to fail because they disclosed no reasonable cause of action,
the majority struck the statement of claim in its entirety. 
While it was unnecessary to deal with the issue of certification,
the majority indicated that it disagreed with the dissenting judges
that the plaintiffs’ breach of contract claim, standing alone,
would satisfy the preferability requirement for certification.18

The Dissent’s View

Writing for the dissent, Karakatsanis J. emphasized the high
threshold to strike a claim, and stated that the question to ask on
a motion to strike was whether the pleadings, as they stand or may
reasonably be amended, disclose a question that is not doomed to
fail.19  She then found that the
plaintiffs had pleaded the necessary elements for a claim of breach
of contract.

Karakatsanis J. articulated as follows her disagreement with the
majority:

Brown J. concludes that the cause of action for breach of
contract, as framed, must fail because it is plain and obvious that
there are no available remedies for this claim.  As I
elaborate below, I cannot agree that there is no valid cause of
action for breach of contract on the basis that there is
no available remedy.  In my view, there are several
remedies that are open to the plaintiffs on their pleadings,
including nominal damages, declaratory relief, disgorgement, and
punitive damages.20

Karakatsanis J. pointed out that because breach of contract is
actionable without proof of loss, it always implies nominal
damages, which do not need to be pleaded.21  Further,
she found that whether disgorgement could be an appropriate remedy
in this case could not be resolved on the pleadings alone, and was
a matter for trial.  She noted that the plaintiffs’
pleading included several factors that, if established at trial,
could point to a disgorgement remedy, including bad faith and
vulnerability.  She concluded as follows on this point:

Thus, though I agree with Brown J. that disgorgement can only be
awarded in exceptional circumstances for breach of contract, in my
view, whether the circumstances of this case are exceptional is
clearly a determination for the trial judge alone.  I am 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.  The plaintiffs pleaded that
ALC, a corporation charged with managing a profit-making lottery
scheme offered to the public, intentionally deceived those playing
members of the public by knowingly providing an unfair game and
putting them at risk of gambling addiction in order to turn a
profit.  They specifically pleaded that they had a legitimate
interest in ALC’s performance of its contractual obligation to
provide safe games and that remedies other than disgorgement would
be inadequate to deter ALC from misconduct.  In assessing
whether other remedies would be inadequate to protect their
contractual rights, a trial judge may also find that ascertaining
the actual amount lost is impracticable since VLTs are designed for
players to have the opportunity to “win small cash prizes in
exchange for small frequent cash bets” and not to create
records of who uses them or how much money they have lost. 
The trial judge may even conclude that ALC’s conduct in
approving such designs may have, purposefully or not, contributed
to that impracticability, such that the plaintiffs were not simply
unwilling to prove their loss.  These are matters for
the trial judge.22

Karakatsanis J. also held that the plaintiffs had pleaded a
sufficient basis to support a claim for punitive damages as their
allegations of reprehensible conduct and deception in the
performance of the contract had put the duty of honest performance
in issue.23

The dissenting judges concluded that there was no basis to
strike the claim for breach of contract, and that the
plaintiffs’ claim could be certified as a class action on the
common issues of breach of contract, punitive damages and the
appropriateness of a disgorgement remedy.

Conclusion

It will be interesting to see how this decision is applied by
lower courts and how the law develops with respect to the
availability of disgorgement as a remedy for both negligence and
breach of contract.  The majority’s decision to deny the
availability of disgorgement appears to be based on the unusual
facts of the case, particularly the plaintiffs’ express
disclaimer with respect to remedies quantified on the basis of
individual losses and their decision to plead their case in a
particular way.  The inclusion of the boilerplate language
usually found in statements of claim, requesting “such further
and other relief as to this Honourable Court may seem just”,
and the pleading of some damage or detriment may have been
sufficient to lead to a different result.

It will also be interesting to see whether, despite the unusual
facts of this case, lower courts will rely on the majority’s
decision and the need for a “culture shift” to expand the
rules applicable to motions to strike in order to eliminate more
actions at the pleadings stage and not “delay the
inevitable”.

Footnotes

1 2020
SCC 19 (“ALC“).

2 2013
SCC 57.

3
Ibid. at para. 97.

4 2014
SCC 7 (“Hryniak“).

5
ALC, supra note 1, at para. 18.

6
Ibid. at para. 19.

7
Ibid. at para. 23.

8
Ibid. at para. 27.

9
Ibid. at paras. 37-38.

10
2001 1 AC 268 (HL).

11
ALC, supra note 1, at paras. 52-53, 110.

12
Ibid. at paras. 52-53, 113.

13
Ibid. at para. 53.

14
Ibid. at para. 58.

15
Ibid. at para. 59.

16
Ibid. at paras. 60-61.

17
Ibid. at para. 67

18
Ibid. at para. 68.

19
Ibid. at para. 90.

20
Ibid. at para. 103.

21
Ibid. at paras. 105-106.

22
Ibid. at para. 125.

23
Ibid. at para. 129.

The information and comments herein are for
the general information of the reader and are not intended as
advice or opinion to be relied upon in relation to any particular
circumstances. For particular application of the law to specific
situations, the reader should seek professional
advice.

Originally published July 27, 2020.

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