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Bulletin

The Supreme Court Tightens The Rules For Disgorgement Or Gain-Based Remedies

Fasken
Reading Time 7 minute read
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Litigation and Dispute Resolution Bulletin

The recent decision of the Supreme Court of Canada ("SCC") in Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19 ("Babstock") is important for many reasons. One is that it finally resolved the uncertainties surrounding the doctrine of "waiver of tort". The class action bar had been waiting for a definitive ruling on this doctrine since the 2004 Ontario Superior Court decision in Serhan (Estate Trustee) v. Johnson & Johnson (2004), 72 O.R. (3d) 296, aff'd (2006), 85 O.R. (3d) 665 (Div. Ct.), which held that waiver of tort was potentially viable as a cause of action in respect of tortious conduct that does not cause provable losses. Since that time, waiver of tort had been pleaded as an independent cause of action almost routinely in class actions, as no Court had conclusively ruled on its viability. The SCC cited academic commentary opining that this uncertainty left certification judges with little choice but to certify such claims “to the detriment of the defendant, who is then practically compelled to pay a settlement to the plaintiff." In Babstock, the SCC unanimously ruled that waiver of tort is not an independent cause of action in Canadian common law; to the extent that gain-based remedies are available at all for tortious conduct, this will only be in cases where all requisite elements of the underlying tort are proven.

Background

The appeal arose from a proposed class action in Newfoundland and Labrador on behalf of residents who had played video lottery terminal ("VLT") games operated by the Atlantic Lottery Corporation ("ALC"). The central allegation was that VLTs were inherently dangerous and deceptive due to their addictive qualities. The plaintiffs asserted causes of action in breach of contract, unjust enrichment and waiver of tort. They pleaded that they could "waive" the tort of negligence and recover ALC's profits without the need to prove actual damages.

ALC resisted certification and brought a motion to strike the statement of claim on the basis that it disclosed no reasonable cause of action, with emphasis on the claim of waiver of tort. The Supreme Court of Newfoundland and Labrador declined to strike the statement of claim and granted certification. The decision was substantially upheld by the Newfoundland and Labrador Court of Appeal. ALC appealed both the certification and pleading decisions to the SCC.

SCC Decision

The SCC majority decision granted ALC's appeal. It determined that the statement of claim should be struck in its entirety and the certification order set aside. 

The majority opinion in Babstock has a number of wide-ranging implications for the class action bar, most notably:

  1. "waiver of tort" terminology should be abandoned because it is confusing; the concept should instead be referred to as a gain-based remedy for tortious conduct;
  2. there is no gain-based remedy for negligent conduct that does not cause provable losses;
  3. whether gain-based remedies are available for negligent conduct (as opposed to proprietary or intentional torts) that causes loss is a question left for another day;
  4. disgorgement of profits as a remedy for breach of contract is limited to exceptional circumstances that will rarely be present in an ordinary commercial or consumer contract; and
  5. while nominal damages are technically available for any breach of contract, such a claim, standing alone, does not satisfy the preferable procedure certification criterion. 

1. Waiver of Tort is Dead

The Court found that the term "waiver of tort" was confusing and, in fact, a misnomer that should be abandoned. The real issue to be determined was whether the doctrine was an independent cause of action or merely an alternative gain-based remedy predicated on certain forms of underlying actionable misconduct. The Court held that it was not an independent cause of action, and that where a plaintiff seeks to recover the defendant's profits as an alternative to compensatory damages, the language of disgorgement or gain-based remedy should be used.  

2. Provable Loss is a Prerequisite for Disgorgement for Negligence

The Court unanimously rejected the notion that waiver of tort is a standalone cause of action that enables a plaintiff to claim a gain-based remedy for negligent conduct that does not cause loss. While the Court acknowledged that certain forms of wrongdoing could give rise to disgorgement without proof of damage (e.g. breach of fiduciary duty), negligent conduct was not one of them. 

The Court made clear that negligence "in the air" is not actionable. The common law does not impose an abstract obligation to act with care, nor does it create a corresponding right to be free from careless behaviour. Rather, it imposes liability only where carelessness causes actual harm. As a result, negligent conduct without consequential injury or loss is not the type of wrongdoing that can support the remedy of disgorgement.

3. Can Loss-Causing Negligence Support Disgorgement?

The Court declined to address the question of whether, and in what circumstances, disgorgement might be available as an alternative remedy in instances where a plaintiff has proven all elements of the tort of negligence, including the constituent element of loss or injury caused by the defendant's conduct. The majority noted that disgorgement had historically been found to be available only for proprietary torts such as conversion, deceit and trespass, but acknowledged that there was some support for its availability in cases of negligence, at least among academic writers. However, because the Babstock negligence claim did not plead causation or loss, the Court found that the issue did not arise in the case before it. Accordingly, the question was left to be resolved in a future case where the availability of the remedy was genuinely in issue.

4. Disgorgement for Breach of Contract Only in Exceptional Circumstances

On the issue of whether disgorgement of profits is available for breach of contract, the majority held that this remedy - representing a departure from the presumptive measure of expectation damages - should be reserved for "exceptional circumstances" where the plaintiff has a legitimate interest in preventing the defendant's profit-making activity. It is not available simply because class members have not suffered loss, or where losses would be hard to prove. Other possible remedies must be inadequate, and disgorgement must represent the only means to vindicate the plaintiff's legitimate interest. Such an interest in preventing the defendant from earning a profit through its breach will rarely be legitimate in an ordinary contract between commercial parties, or parties to a consumer contract like the plaintiffs and defendant in Babstock.

5. Nominal Damages? No Certification.

Having found that the facts pleaded would not support a disgorgement remedy (or an award of punitive damages), the majority considered whether the breach of contract claim could survive for the sole purpose of pursuing recovery of nominal damages. The majority acknowledged that nominal damages and declaratory relief were available as contractual remedies in theory; however, neither form of relief had been pleaded by the plaintiffs. The necessary inference was that the plaintiffs were not seeking nominal damages or declaratory relief as some sort of public vindication of their contractual rights; rather, they were seeking non-nominal financial compensation, albeit by reference to the defendant's profits rather than the class members' losses. Since that claim was found not to be viable, it was plain and obvious that the breach of contract claim that the plaintiffs were actually asserting did not state a reasonable cause of action.

The majority went on to hold, in the alternative, that even if the contract claim for nominal damages satisfied the cause of action element of the certification test, it would necessarily fail the preferable procedure requirement. An action that, even if fully successful, would result in nothing more that symbolic, de minimis financial compensation would not further the class proceedings goals of judicial economy, behaviour modification and access to justice.

Conclusion

What appears to underlie the majority decision in Babstock is the need to discourage class proceedings on behalf of persons who have suffered no loss. As the Court had previously noted, class proceedings legislation serves the laudable goal of facilitating legal proceedings on behalf of a group of claimants whose losses, on an individual basis, are too small to justify the cost of litigation. However, the majority apparently saw Babstock as part of a troubling trend of actions in which the individual losses are not just small but in fact non-existent. In such an action, any recovery will represent a windfall, or if there is no recovery (e.g., the only result was nominal damages or a declaration), substantial resources on the part of both the parties and the Courts will have been spent for no salutary purpose. Accordingly, the majority seems to have tightened the rules for claiming gain-based remedies in both tort and contract so that, in the future, class actions will hopefully only be brought on behalf of persons who have suffered genuine compensable losses.

For more information on the subject of this bulletin, please contact the authors.

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