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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