In its recent decision in Atlantic Lottery Corp. Inc. v. Babstock, the Supreme Court of Canada overturned the lower courts’ decisions to certify a class action against the Atlantic Lottery Corporation Inc. (ALC), altering the law for waiver of tort and disgorgement of profits. The Court struck out the plaintiffs’ claims for gain-based remedies for waiver of tort, breach of contract, and unjust enrichment.
The key takeaways from this decision are:
- Neither waiver of tort nor disgorgement is a cause of action in Canada.
- The remedy of disgorgement is an exceptional, gain-based remedy.
- The duty of good faith contractual performance is not applicable to all contracts.
- The Court emphasized that the “culture shift” it called for in Hyrniak v. Maudlin, in the context of summary judgment motions, also applies to preliminary motions to strike for failure to disclose a cause of action.
The ALC operates lottery games, including Video Lottery Terminal games (VLTs), in Atlantic Canada. The plaintiffs commenced a class action alleging that the VLTs offered by the ALC are deceptive, harmful, and inherently addictive and that they contravene the Criminal Code. The causes of action alleged by the plaintiffs included: waiver of tort, breach of contract and unjust enrichment. The plaintiffs expressly disclaimed damages as a remedy and instead sought a gain-based award equal to the profit ALC earned by licensing VLTs. The Supreme Court of Newfoundland certified the claim as a class action and this decision was largely upheld by the Newfoundland and Labrador Court of Appeal.
The SCC Decision
The Supreme Court of Canada overturned the Court of Appeal decision. The majority struck out all of the causes of action with the result that the test for certification was not met.
- “Waiver of tort” is not a valid cause of action
The plaintiffs alleged that ALC breached a duty to warn of the inherent dangers associated with VLTs, including the risk of addiction. The plaintiffs argued that this supported their claim in waiver of tort, which they alleged to be an independent cause of action that gives rise to a gain-based remedy.
The Court disagreed. Both the majority and minority agreed that the term “waiver of tort” should be abandoned as it has “become a hollow and internally inconsistent doctrine”. The majority noted that this term was a misnomer as plaintiffs are not actually “waiving” the wrongfulness of the defendant’s conduct but are instead seeking a particular type of gain-based remedy, namely, disgorgement. The Court therefore concluded that waiver of tort should not be recognized as a cause of action in Canada.
- Disgorgement is not a cause of action and the availability of the remedy is limited
The majority similarly held that disgorgement should not be recognized as a novel cause of action in Canada; clarifying that disgorgement is an exceptional remedy. In doing so, the majority first clarified the difference between restitution and disgorgement:
- Restitution: a remedy awarded where the plaintiff’s deprivation corresponds to the defendant’s gain such that the defendant is compelled to restore that benefit.
- Disgorgement: a remedy calculated exclusively by reference to the defendant’s wrongful gain, irrespective of whether it corresponds to damage suffered by the plaintiff (and irrespective of whether damage is actually suffered).
The majority further clarified that although disgorgement is available for some forms of wrongdoing without proof of damage (such as breach of 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.” The majority therefore rejected disgorgement as a novel cause of action.
With respect to disgorgement’s availability as a remedy, the majority noted that while disgorgement for tortious misconduct was traditionally limited to the proprietary torts, such as conversion, deceit and trespass, its availability as a remedy for negligence remained unsettled. The majority determined that it did not need to resolve that question because in this case, there was no independent cause of action that grounded the claim for disgorgement. The plaintiffs did not properly plead the tort of negligence as they did not plead causation. While the plaintiffs alleged that ALC had a duty to warn of the inherent dangers associated with VLTs, those dangers were not alleged to have materialized. Therefore, the majority held that the plaintiffs’ claims had no reasonable prospect of success.
- Viability of breach of contract claim must be viewed in light of the remedies sought
The majority also rejected the claims based in contract because disgorgement was not available as a remedy in the circumstances of this case. The plaintiffs alleged that ALC had a contract with users of VLTs and that it was an implied term of this contract that ALC was required to provide safe games, to use reasonable skill and care in the provision of VLTs, and to act in good faith. The plaintiffs alleged that these terms were breached by the supply of deceptive VLTs.
The plaintiffs sought only non-compensatory damages, specifically disgorgement and punitive damages. However, both disgorgement and punitive damages are exceptional remedies and they are generally not available for breach of contract. Disgorgement is only available where other remedies, such as damages, injunction or specific performance, are inadequate. Here, where the loss was alleged to equal the defendant’s gain, but the plaintiffs simply preferred to pursue disgorgement, the majority determined that a gain‑based remedy is not appropriate.
Similarly, the majority held that punitive damages were not available for the breach of contract claim. Punitive damages may be awarded where the alleged breach of contract is an independent actionable wrong. The only remaining actionable wrong that had not yet been struck was the allegation that ALC breached an obligation of good faith owed under the alleged contract. However, the majority held that while the duty of good faith recognized in Bhasin v Hrynew, is an organizing principle of contract law, not every contract imposes actionable good faith obligations on contracting parties and the duty “is generally confined to existing categories of contracts and obligations”. Here, the pleaded contract neither fit within these existing categories, nor did the plaintiffs plead that the recognized categories should be expanded.
Although the majority recognized that the breach of contract claim could theoretically survive on the basis of a remedy of nominal damages, allowing this would amount to “a hollow cause of action that does not support any of the remedies they seek.” The majority wrote: “[w]hile… declaratory relief and nominal damages are available in theory as remedies for breach of contract, a reasonable claim is one that has a reasonable chance of achieving the outcome that the plaintiff seeks. That is not this claim.”
The Supreme Court’s decision lays to rest the doctrine of waiver of tort and with it, the confusion that had surrounded the doctrine for some time. The decision clearly establishes that waiver of tort and disgorgement are not valid causes of action in Canada. The Court clarified that the availability of disgorgement as a remedy is limited and affirmed that the duty of good faith contractual performance does not give rise to a claim in all contractual relationships.
As the majority emphasized:“[i]t is beneficial, and indeed critical to the viability of civil justice and public access thereto that claims, including novel claims, which are doomed to fail be disposed of at an early stage in the proceedings”. The Court has thus sent a strong message to lower courts, in the context of class actions and otherwise, to exercise a gatekeeping role, not only in summary judgment motions, but in motions to strike for failure to disclose a reasonable cause of action.
The timing of this decision coincides with the Ontario government’s proclamation of Bill 161, which will require that motions to dispose of proceedings be heard and decided prior to the certification motion, unless the court orders that the two motions be heard together. The importance the Supreme Court placed on disposing of claims at an early stage, combined with Ontario’s legislative changes, may mean a significant shift in the class action battleground, from certification to motions for summary judgment or motions to strike.