June 11, 2019

Supreme Court of Canada to weigh in on waiver of tort

One of the seemingly foundational principles of tort law is that the plaintiff must prove they have suffered loss in order to establish a defendant’s liability. Plaintiffs are entitled to be compensated for the loss they have suffered, and only for the loss they have suffered—or so we thought. In Atlantic Lottery v Babstock, the Newfoundland and Labrador Court of Appeal capped off a developing line of authority in the class actions context that recognizes the possibility of an independent cause of action in “waiver of tort”.  Under this doctrine, claimants would be able to sue tortfeasors for disgorgement of profits gained through wrongdoing, without demonstrating that they themselves have suffered loss from such wrongdoing. This bold decision has attracted the attention of the Supreme Court of Canada, which in May 2019 granted leave to appeal to the defendant Lottery Corporation. Now all that’s left to do is to place your bets.

By way of background, two individual plaintiffs in Newfoundland and Labrador commenced an action against the Atlantic Lottery Corporation (the “Lottery Corporation”), claiming that the video lottery terminals (“VLTs”) they operate are inherently deceptive, breach the Criminal Code, the Competition Act and the Statute of Anne (Gaming Act) 1710, and constitute a breach of contract and tortious misconduct resulting in unjust enrichment. One of the causes of action alleged is waiver of tort as an independent cause of action: the claimants say that they are entitled to disgorgement of the profits earned by the Lottery Corporation through unjust enrichment by wrongdoing, by operating VLTs which are unsafe and lead to addiction and dependency. The class was certified on February 1, 2017, and includes residents of Newfoundland and Labrador who paid the Lottery Corporation to gamble on VLT games.

Before certification, the Lottery Corporation unsuccessfully brought an application to strike portions of the statement of claim. The Lottery Corporation sought leave to appeal that decision to the Court of Appeal. The leave application was heard at the same time as the appeal. One of the issues raised by the Lottery Corporation was the application of waiver of tort, and specifically whether the plaintiffs’ claims for wrongdoing per se absent any proof of damages to class members constituted an independent cause of action. Although each individual claimant may not be able to prove addiction or dependency, they claimed an entitlement to the profits earned by the Lottery Corporation in exposing them to such risks.

The application judge was of the view that although claims based on waiver of tort had an “uncertain legal foundation”, it could not be said that a claim based on waiver of tort either as an independent cause of action or a “derivative doctrine” was certain to fail.

Justice Green, writing for the 2-1 majority of the Court of Appeal, allowed the appeal in part—striking the claims based on the Statute of Anne and the Competition Act, but allowing all remaining claims to proceed, including the claims based on waiver of tort.

In a lengthy and academic decision, Justice Green reasoned that the law had progressed to a point to allow him to conclude that a court could, on the facts pleaded, find actionable disgorgement based on unjust enrichment—albeit somewhat creatively:

There is much in the caselaw of the past decade or so and in the academic writing in the area that provides a foundation for describing a cause of action based on fundamental principles rather than on the facts of individual cases. This involves, in my view, incremental development that recognizes and reorganizes the developing jurisprudence on the basis of underlying principle with a view to defining the parameters of the recognized cause of action by reference to that principle rather than by reference only to outdated and terminologically inappropriate historical precedent.

Justice Green held that each claim must be considered on a case-by-case basis, having regard to the nature of the wrongful conduct and the degree and seriousness of the breach—an analysis which must take place after the pleading stage. Ultimately, Justice Green decreed that “The time has come to jettison the terminology of waiver of tort and to recognize that a cause of action exists that, in principle, allows for the disgorgement of profits acquired as a result of the commission of a tortious wrong.” 

The building blocks underlying the decision are interesting and will undoubtedly attract fans as well as critics. In addition to a principled analysis on causation (if enrichment is brought about by the commission of a wrong, the tortfeasor has acquired a benefit he would not otherwise have been able to acquire, but for the breach), Justice Green’s decision contains significant discussion on the policy reasons behind allowing waiver of tort: “A broader concept of deterrence might be appropriate especially where as a result of negligent or other conduct persons have been exposed to significant risk of harm”.

In so holding, Justice Green recognized the potential difficulties inherent in this approach, including how to resolve how much compensation any one individual plaintiff is entitled to. But, as Justice Green concluded, this is in reality no different than what currently exists in the compensation regime (as a number of plaintiffs may separately launch claims against one defendant—with the pot of money shrinking each time). He also commented that the class actions procedure is well suited to ensuring that all class plaintiff receive an appropriate share. Moreover, as plaintiffs are all necessarily receiving a windfall, they cannot claim entitlement to a better windfall.

As part of his analysis, Justice Green provided some helpful guidance on terminology, and proposed to distinguish between two types of unjust enrichment as follows:

  1. Restitution: “situations where the remedy includes the reversal of a transfer of wealth from the defendant to the claimant”.
  2. Disgorgement: “remedy that involves the award to the claimant of a benefit acquired by the defendant from a source that does not necessarily include a deprivation to the claimant”.

In a dissenting judgment, Justice Welsh allowed the appeal in its entirely, holding that the claim did not disclose a cause of action. Specifically, Justice Welsh held that the class had not pleaded facts which would support a cause of action based on wrongdoing by the Lottery Corporation, as the class representatives has not pled that they became addicted to VLTs or were misled by the Lottery Corporation in respect of the VLTs. In her view, allegations of wrongdoing without supporting facts in the pleadings were not sufficient to meet the requirement in section 5(1) of the Class Actions Act.

Like it or not, it appears that Atlantic Lottery v Babstock has provided the Supreme Court of Canada with the opportunity it needs to provide some guidance on whether an independent cause of action for “disgorgement of profits acquired as a result of the commission of a tortious wrong” is available in law.