The ripples caused by the 2004 decision of Mr. Justice Cullity of the Ontario Superior Court in Serhan v. Johnson & Johnson (2004), 72 O.R. (3d) 396 (S.C.J.), aff'd  O.J. No. 2421 (Div. Ct.), have not dispersed. In fact, two recent judgments - one from British Columbia and another by Cullity J. in Ontario - are a clear indication that the issues raised by the Serhan case remain unresolved and are in danger of yielding different results in different provinces.
Ontario leaves door open
By Douglas Harrison and Neil Guthrie
Serhan is notable because it brought the somewhat obscure doctrine of "'waiver of tort" to the forefront for practitioners. Very briefly stated, and at the risk of over-simplification, the doctrine permits a plaintiff to forego tort damages in order to pursue a restitutionary remedy. The range of torts for which waiver is available and the types of remedies which may be obtained have been the subject of intense and inconclusive debate in the academic literature and the case law. It is also unclear whether waiver of tort is dependent on underlying tortious acts or constitutes a free-standing cause of action. If it is the latter, the advantage for a plaintiff (particularly in a class action) is obvious: proof of actual damages may not be a prerequisite to recovery, as long as there was wrongful conduct. Serhan concluded that it was premature, at the certification stage, to strike pleadings premised on waiver of tort, given the uncertain state of the law on these issues. The two cases that are the subject of this Update clearly illustrate - indeed compound - that uncertainty. The earlier of these, Reid v. Ford Motor Company, is discussed in greater detail in the article which appears below. Briefly stated, Madam Justice Gerow of the British Columbia Supreme Court was concerned in Reid that a claim founded on waiver of tort raised the possibility of recovery that bore no relation to actual losses. She also concluded that negligence is not a tort to which the waiver doctrine extends, being an "anti-harm" wrong that is adequately and properly addressed by compensatory damages. Restitutionary claims, in her view, depend on unjust enrichment of the defendant that (crucially) corresponds to a deprivation of the plaintiff, without juristic reason (as set out in Pettkus v. Becker,  2 S.C.R. 834).
In reasons released in early February in Heward v. Eli Lilly & Co., Mr Justice Cullity has revisited the issues raised by Serhan and also commented on the decision in Reid. Heward is a proposed class action arising from the alleged negligence of the defendants in manufacturing anti-psychotic drugs. Waiver of tort was also raised as a cause of action, in reliance on Serhan. Given what he regarded as developments in the law since (or, perhaps, as a result of) his earlier decision, Justice Cullity observed that it is probably unhelpful to dwell too much on whether waiver of tort is a separate cause of action, when the real issue is the nature of the remedy available to a claimant - specifically, whether disgorgement of profits from wrongdoing may be obtained, independent of any deprivation corresponding to the defendant's enrichment. Eli Lilly's counsel argued, on the basis of Reid, that negligence (as an "anti-harm," not an "anti-enrichment" tort) did not give rise to a restitutionary remedy and would, even if it did, require proof of the enrichment of the defendant at the expense of the plaintiff. Justice Cullity (correctly) noted the divergence of academic and judicial opinion on these issues, concluding that it was open to a trial judge to find, on the facts of Heward, that Eli Lilly had breached a duty of care in concealing the harmful side-effects of the drug at issue, intended to profit from this concealment, and had obtained profits that would not have been earned but for the breach of duty. As in Serhan, it was therefore premature to strike pleadings founded in waiver of tort at the certification stage. With respect to the claim in unjust enrichment, Justice Cullity found that the pleadings did not disclose a cause of action distinct from a claim based on waiver of tort, which would necessarily be predicated on the narrower view of restitution requiring deprivation of the plaintiff. Subject to some modifications to the statement of claim, the judge was satisfied that the other requirements for certification of the proceeding had been met.
In related news, the Supreme Court of Canada is now considering submissions in an application by Johnson & Johnson for leave to appeal the refusal of the Ontario Court of Appeal to hear the appeal in Serhan. It may be some time before any disposition of the matter, but it is to be hoped that the Court will provide some guidance on the thorny issues raised by Serhan and other recent Canadian cases on waiver of tort. In light of the divergence of opinion between trial-level judges in British Columbia and Ontario, and the important consequences for defendants and plaintiffs alike, further direction from an appellate court is urgently required.
B.C. Supreme Court shuts out "waiver of tort" manoeuvre
By Jonathan S. Mclean
For now, the door has been closed in British Columbia to plaintiffs attempting to plead "waiver of tort" in class action negligence or failure to warn cases, so as to avoid proof of individual damages. On May 3, 2006 Madam Justice Gerow of the B.C. Supreme Court issued reasons in the Reid case denying an application to amend the Statement of Claim to plead waiver of tort and unjust enrichment.
The case had been certified nearly three years earlier: 2003 BCSC 1632. The original claim was for damages for repairing an ignition switch on Ford, Lincoln or Mercury motor vehicles with a distributor mounted "TFI module." The cost of repairs to each individual claimant was modest.
At the time of certification, the action was framed in negligent design, negligent manufacture, failure to warn and the statutory cause of action of deceptive act or practice giving rise to damages, pursuant to the Trade Practice Act, R.S.B.C. 1996, c. 457, which has since been replaced by the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2.
At the certification hearing it was decided that the issue of whether a particular class member suffered a loss as a result of a TFI module defect was an individual issue to be determined at the individual issues trial.
The plaintiff applied to amend her Statement of Claim to plead waiver of tort. The proposed pleading claimed entitlement to a restitutionary award of benefits that accrued to the defendants as a result of their negligence and/or failure to warn with respect to the TFI modules. The benefits were said to include:
- the costs saved by not recalling the class vehicles;
- the costs saved by not replacing TFI modules in the class vehicles;
- the costs saved by not re-designing the ignition system in the class vehicles to overcome the defect; and
- revenues from the sale of replacement TFI modules.
The proposed pleading also claimed that the benefits that accrued to the defendants were unjust and that there was no juristic reason for such benefits, and sought a declaration of unjust enrichment. Madam Justice Gerow applied the usual amendment test that it must be "plain and obvious" that the pleading discloses no reasonable claim or defence before it will be disallowed.
Justice Gerow described the doctrine of waiver of tort as a restitutionary remedy based on the proposition that a wrongdoer should not be permitted to keep the gains acquired through wrongful conduct. The wrongdoer must account for the "ill-gotten gains" to the person impacted by the tort, even if the person has lost nothing or suffered no damage. This remedy has usually been applied in cases of intentional tort where the defendant has acquired a benefit through a wrongful act, for example, by misappropriation and sale of the plaintiff's goods.
Justice Gerow then turned to consider the essential elements in a case of negligence or failure to warn. One of those essential elements is loss or damage suffered by the plaintiff as a result of the defendant's negligence or failure to warn. If the pleading of waiver of tort was allowed to stand on the plaintiff's theory, it would eliminate the essential element of proving damages. This is of course one of the reasons why plaintiff's counsel wanted to amend the pleading: it would eliminate the need for an individual issues trial.
Madam Justice Gerow raised two concerns regarding this theory. The first was that the effect of a proposed plea of waiver of tort introduces strict liability for an alleged defective product. With respect, that analysis confuses the issue of damages with consideration of the appropriate standard of care. Concepts of strict liability arise in the context of considering whether the defendant acted reasonably or with due diligence.
Second, Justice Gerow raised the risk of indeterminate damages as discussed by the Supreme Court of Canada in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co.,  1 S.C.R. 85. Her concern was that the amount that the class members would recover would bear no relationship to any losses or damages they incurred. That may be a correct statement, but it does not arise because of the indeterminate nature of the damages. In the context of waiver of tort, the focus is on the benefit obtained by the defendant. If such a claim were to proceed, the defendant would be obliged to disclose documents and the court would be provided with evidence as to the amount of the "ill-gotten gains." In that way the amount available for recovery can be determined.
However, such a measure of recovery in a case like Reid may have no quantifiable relationship to the individual losses of the members of the class, and its application could lead to a windfall for plaintiffs who are participating in a single-jurisdiction class action. For instance, the alleged defect in Reid would be found in many different jurisdictions and it would be inappropriate to overcompensate plaintiffs in one jurisdiction to the potential detriment of other potential plaintiffs in other jurisdictions. Whether that risk could be alleviated under s. 34(5) of the Class Proceedings Act, which provides for the return of any overpayment, remains to be seen.
The discussion of indeterminate damages brings into focus the question of how much compensation should each individual plaintiff receive in the context of a waiver of tort remedy, where there has been no proof of individual loss or damage. Madam Justice Gerow's concern over the elimination of proof of individual damages is a valid one in this respect.
Justice Gerow then went on to consider waiver of tort and the "underpinning" of unjust enrichment of the defendant. The three necessary elements of an unjust enrichment claim, from the Supreme Court of Canada decision in Pettkus v. Becker,  2 S.C.R. 834, are:
- an enrichment;
- a corresponding deprivation; and
- no juristic reason for the enrichment.
Although the proposed pleading in Reid claimed unjust enrichment, there was no allegation of deprivation of the plaintiff. Hence, there could be no finding of unjust enrichment consistent with Pettkus v. Becker.
Two earlier B.C. cases, Networth Industries Ltd. v. Cape Flattery (The),  B.C.J. No. 3174 (S.C.) and Capilano Fishing Ltd. v. Quallicum Producer (The), 2001 BCCA 244, were also cited for the proposition that unjust enrichment claims do not arise in the context of negligence and nuisance claims.
In the result, Madame Justice Gerow concluded that the claim for waiver of tort could not be sustained on the facts as pleaded. It was plain and obvious to Justice Gerow that such a claim was bound to fail. The amendment was not allowed.
As a consequence of this decision, plaintiffs' counsel in B.C. cannot avoid the requirement to prove damages in negligence or failure-to-warn cases through the convenience of pleading waiver of tort as a remedy. The decision of Madam Justice Gerow will not be appealed and is currently the law in this province. Several months after this decision, the Reid case was settled, and the settlement approved by Madam Justice Gerow: 2006 BCSC 1454.
For further information, please contact your Stikeman Elliott representative or any of the authors listed above on www.stikeman.com.
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