A narrow majority of the Supreme Court of Canada recently struck and dismissed a proposed class action claiming the Atlantic Lottery Corporation (“ALC”) should disgorge their profits from video lottery terminals(“VLTs”).
The plaintiffs asserted the defendants had deceptively designed the VLTs to be addictive when they had an obligation to provide “safe games”. Instead of seeking damages for financial loss, the plaintiffs only pursued ALC’s profits from VLTs which they claimed to be in the range of $60-90 million annually.
In striking the claim, the SCC covered a wide swath. The Court addressed fundamental aspects of negligence, contract, unjust enrichment and the scope of available remedies for each. Notably, the Court concluded the so-called doctrine of waiver of tort should be abandoned. The plaintiffs argued they could rely on waiver of tort as independent cause of action allowing them to disgorge the profits of the defendants regardless of whether the plaintiffs had suffered any loss.
Restitution and Disgorgement
The Court explained the difference between restitution and disgorgement. Restitution is a remedy that addresses the situation where a benefit moves from the plaintiff to the defendant. The defendant is compelled to restore the benefit if restitution is ordered. Restitution is the hallmark of unjust enrichment.
In contrast, disgorgement is a remedy calculated exclusively by the gain of the defendant. Disgorgement is solely an alternative remedy for certain forms of recognized wrongful conduct such as fiduciary breach, but it is not an independent cause of action.
Waiver of Tort
The Court was unanimous on this point: waiver of tort is confusing terminology and should be abandoned. It has never been an independent cause of action and should not be recognized as such. The historical terminology referred to an election of remedy including the disgorgement remedy. However, the Court was clear that this remedial history was no basis to create a cause of action. The Court soundly rejected the plaintiffs argument for a principle based on disgorgement for any profit from anything that could be considered “wrongful” even if no harm to the plaintiff occurred.
The Court noted that one basis for tort liability in negligence is that harm must be experienced. Risky and negligent conduct is not wrongful at law resulting in liability unless it causes actual damage. Damage remains a constituent element of the tort of negligence and failing to plead it properly, as the plaintiff failed to do, will result in a dismissal for lack of a reasonable cause of action.
The Court considered it too far of a leap to allow for disgorgement premised on so- called wrongful conduct but where such wrongful conduct had not caused any harm to the plaintiff. This was not in keeping with only incremental expansion of the existing law.
Despite this only being at the stage of a motion to strike and certification application, the Court chose to resolve the debate over waiver of tort in part due to the importance of access to justice. The Court emphasized the need for a culture shift to promote timely and affordable access to the civil justice system. This in turn requires courts to resolve legal disputes promptly by striking novel claims if the court would not recognize the novel claim even if the pleadings are taken as true. This is in line with a general shift within the Court to emphasize resolving legal disputes earlier in proceedings and not push such matters to the eventual trial, which delays and increases the cost of the matter.
Breach of Contract
The plaintiff’s breach of contract claim expressly sought only non-compensatory damages – disgorgement and punitive damages. It was this framing decision that led to the majority striking the contract claim.
Disgorgement is not generally available for a breach of contract but in “exceptional cases”, it may be. One criteria for such exceptionality is that other remedies must be inadequate and unable to provide vindication for the plaintiff’s legitimate interest in that particular case. Cases where the nature of the case is such that quantification of a loss suffered is impossible might qualify. The majority noted guidance should be derived from past cases where gains based remedies had been awarded. They expressly declined to delineate all the possible circumstances of what could constitute the exceptional case where the only measure of vindication of the plaintiffs’ legitimate interest is to obtain the defendant’s profit. However, the majority did conclude that a quasi-fiduciary or near fiduciary like duty, as discussed in the English Blake decision is foreign to Canadian law and should not constitute an exceptional case.
It was this issue, whether to strike the claim based on breach of contract that the dissenting judges diverged from the majority. For the minority, the plaintiffs had a potentially valid claim as they had pled the required elements for breach of contract, namely a contract and a breach (loss is not a required element); therefore nominal damages and declaratory relief were available. The minority also took a broader view of both disgorgement and punitive damages, suggesting those matters were better left for trial.
Overall, Babstock provides valuable insight and clarification to the law of restitution, the availability of disgorgement as a remedy, and closes the door on a confused, troublesome anomaly that had been developing within the law. Waiver of tort as an independent cause of action is no more, we will all give it a good long waive goodbye. We will be providing a more in depth assessment of the Court’s rejection of waiver of tort in an upcoming blog.