Supreme Court of Canada – “Waiver of Tort” Is Not a Recognized Cause of Action

Today the Supreme Court of Canada published reasons for judgement finding that there is no recognized cause of action for “waiver of tort” in Canada.

In today’s case (Atlantic Lottery Corp. Inc. v. Babstock) the Plaintiff sought to certify a class action against the Defendants for damages from gambling after playing video lottery terminals.  Establishments that used the terminals had to be licenced by the Defendant.  Among the Plaintiff’s claims were that the gaming devices were dangerous and tricked players.

The plaintiff sought disgorgement of the Defendants profits relying on the concept of ‘waiver of tort’.  The Supreme Court of Canada overturned lower court decisions and found the purported class action should not be certified as it had no realistic chance of success.  In clarifying some confusion and confirming that ‘waiver of tort’ is not an independent cause of action in Canada but simply a potential remedy in appropriate circumstances where an established cause of action is made out the majority provided the following reasons:

[23]                          As I discuss below, the term “waiver of tort” is confusing, and should be abandoned. The concern is not for consistent terminology for its own sake, but rather for clarity of meaning: cases dealing with gain‑based remedies tend to employ inconsistent nomenclature that leads to confused and confusing results. Even the term “restitution” has been applied inconsistently, sometimes referring to the causative event of unjust enrichment and sometimes referring to a measure of relief (McInnes (2014), at pp. 10‑11). In my view, restitution properly describes the latter — meaning, restitution is the law’s remedial answer to circumstances in which a benefit moves from the plaintiff to the defendant, and the defendant is compelled to restore that benefit. Further, restitution stands in contrast to another measure of relief, disgorgement, which 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 (McInnes (2014), at p. 11-12; see also L. D. Smith, “The Province of the Law of Restitution” (1992), 71 Can. Bar. Rev. 672; J. Edelman, Gain‑Based Damages: Contract, Tort, Equity and Intellectual Property (2002), at pp. 65‑93). While this Court’s decisions have occasionally referred to disgorgement variously as “restitution damages” or “restitution for wrongdoing”, the ambiguity inherent in such terminology calls for greater precision (see e.g. Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 25; Kingstreet Investments Ltd. v. New Brunswick (Finance), 2007 SCC 1, [2007] 1 S.C.R. 3, at para. 33).

[24]                          In sum, then, restitution for unjust enrichment and disgorgement for wrongdoing are two types of gain‑based remedies (McInnes (2014), at pp. 144‑49; L. D. Smith, “Disgorgement of the Profits of Breach of Contract: Property, Contract, and ‘Efficient Breach’” (1995), 24 Can. Bus. L. J. 121, at pp. 121‑23; G. Virgo, The Principles of the Law of Restitution (3rd ed. 2015), at pp. 415-17; Burrows, at pp. 9‑12). Each is distinct from the other: disgorgement requires only that the defendant gained a benefit (with no proof of deprivation to the plaintiff required), while restitution is awarded in response to the causative event of unjust enrichment (most recently discussed by this Court in Moore), where there is correspondence between the defendant’s gain and the plaintiff’s deprivation (Edelman, at pp. 80‑86).

[25]                          Here, the plaintiffs seek disgorgement, not restitution: they say that they are entitled to a remedy quantified solely on the basis of ALC’s gain, without reference to damage that any of them may have suffered. There are two schools of thought on where disgorgement fits in the overall legal structure of private obligations. The prevailing view is consistent with that which I have just stated. Disgorgement, as a gain‑based remedy, is precisely that: a remedy, awarded in certain circumstances upon the plaintiff satisfying all the constituent elements of one or more of various causes of action (specifically, breach of a duty in tort, contract, or equity).

[26]                          Some scholars, however, see disgorgement as an independent cause of action, which addresses unjust enrichment but does not operate on the same basis as the principled unjust enrichment framework adopted by this Court (P. D. Maddaugh and J. D. McCamus, The Law of Restitution, vol. 1 (loose‑leaf), at pp. 3‑4 to 3‑7; see also J. Beatson, “The Nature of Waiver of Tort” (1978‑1979), 17 U.W.O. L. Rev. 1; D. Friedmann, “Restitution for Wrongs: The Basis of Liability”, in W. R. Cornish et al., eds., Restitution: Past, Present and Future: Essays in Honour of Gareth Jones (1998), 133). And a handful of them have suggested that it should be possible to pursue a remedy of disgorgement in cases that are akin to negligence, but where the plaintiff cannot prove — or chooses not to prove — resulting damage (McCamus; C. Jones, “Panacea or Pandemic: Comparing ‘Equitable Waiver of Tort’ to ‘Aggregate Liability’ in Cases of Mass Torts with Indeterminate Causation” (2016), 2 Can. J. of Compar. & Contemp. L. 301). The plaintiffs’ waiver of tort claim relies on this latter proposition.

[27]                          As I will explain, disgorgement should be viewed as an alternative remedy for certain forms of wrongful conduct, not as an independent cause of action. This view follows naturally from the historical origins of unjust enrichment and gain‑based remedies more generally.

[28]                          The modern law of unjust enrichment originated in the writ of assumpsit (Peel (Regional Municipality) v. Canada, [1992] 3 S.C.R. 762, at pp. 786‑88). Use of assumpsit allowed plaintiffs to avoid the limits imposed by other forms of action, which might have prevented their claim from advancing (McInnes (2014), at p. 34; Martin, at pp. 482‑84). While the writ was premised upon the defendant having undertaken to pay a sum of money to the plaintiff and having broken that promise, the specialized form of indebitatus assumpsit allowed plaintiffs to acquire the benefits of assumpsit where no such undertaking actually existed. It created the legal fiction of an implied contract, allowing plaintiffs to sue in assumpsit, “even where the imputation of a promise to pay was nonsensical, as when the defendant acquired a benefit through the commission of a tort.” (McInnes (2014), at pp. 34‑35; see also Martin, at pp. 489‑96).

[29]                          Where a tort was made out but the plaintiff chose to pursue a claim in assumpsit to recover the defendant’s ill‑gotten gains, the plaintiff was said to “waive the tort” (Edelman, at pp. 121‑22). Despite its early acceptance, however, the term waiver of tort was 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 (Edelman, at p. 122; see also United Australia, Ltd. v. Barclays Bank Ltd., [1941] A.C. 1 (H.L.), at pp. 13 and 18). The doctrine always operated as “nothing more than a choice between possible remedies”, and not as an independent cause of action (United Australia, at p. 13; Martin, at pp. 504‑5). That this is so is apparent from decisions of this Court, including Arrow Transfer Co. Ltd. v. Royal Bank of Canada, [1972] S.C.R. 845 where Laskin J. (as he then was), for the majority on this point, held that the plaintiff’s claim for a gain‑based remedy was dependent on the tort of conversion having been completed (p. 877).

[30]                          Two points follow from this. First, and as this case demonstrates, the term waiver of tort is apt to generate confusion and should therefore be abandoned (Edelman, at p. 122). Secondly, and relatedly, in order to make out a claim for disgorgement, a plaintiff must first establish actionable misconduct.

[31]                          Recognizing that disgorgement is simply a remedy for certain forms of wrongful conduct places the central issue in this case in context. By pleading disgorgement as an independent cause of action, the plaintiffs seek to establish an entirely new category of wrongful conduct — one that is akin to negligence but does not require proof of damage. Supporters of this type of claim assert that “there is simply no reason in principle why the rules for compensatory damages need to be identical to the rules for disgorgement” (McCamus, at p. 359) and that, given that the purpose of granting disgorgement is to deter wrongful conduct rather than to provide compensation, there is no reason to require proof of damage (p. 354).

[32]                          I acknowledge that disgorgement is available for some forms of wrongdoing without proof of damage (for example, breach of fiduciary duty). But 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. Determining the appropriate remedy for negligence, where liability for negligence has not already been established, is futile and even nonsensical since doing so allows “the remedy tail [to] wag the liability dog” (Haida Nation v. British Columbia (Minister of Forests), 2004 SCC 73 [2004] 3 S.C.R. 511, at para. 55). This observation applies with no less force to the plaintiff who seeks disgorgement, since the availability of gain-based relief lies in “aligning the remedy with the injustice it corrects” (E. J. Weinrib, “Restitutionary Damages as Corrective Justice” (2000), 1 Theor. Inq. L. 1, at p. 23 (emphasis added)).

[33]                          It is therefore important to consider what it is that makes a defendant’s negligent conduct wrongful. As this Court has maintained, “[a] defendant in an action in negligence is not a wrongdoer at large: he is a wrongdoer only in respect of the damage which he actually causes to the plaintiff” (Clements v. Clements, 2012 SCC 32, [2012] 2 S.C.R. 181, at para. 16). There is no right to be free from the prospect of damage; there is only a right not to suffer damage that results from exposure to unreasonable risk (E. J. Weinrib, The Idea of Private Law (rev. ed. 2012), at pp. 153 and 157‑58; R. Stevens, Torts and Rights (2007), at pp. 44‑45 and 99). In other words, negligence “in the air” — the mere creation of risk — is not wrongful conduct. Granting disgorgement for negligence without proof of damage would result in a remedy “arising out of legal nothingness” (Weber, at p. 424). It would be a radical and uncharted development, “[giving] birth to a new tort over night” (Barton, Hines and Therien, at p. 147).

[34]                          The difficulty is not just normative, although it is at least that. The practical difficulty associated with recognizing an action in negligence without proof of damage becomes apparent in considering how such a claim would operate. As the Court of Appeal recognized, a claim for disgorgement available to any plaintiff placed within the ambit of risk generated by the defendant would entitle any one plaintiff to the full gain realized by the defendant. No answer is given as to why any particular plaintiff is entitled to recover the whole of the defendant’s gain. Yet, corrective justice, the basis for recovery in tort, demands just that: an explanation as to why the plaintiff is the party entitled to a remedy (Clements, at para. 7; Weinrib (2000), at pp. 1‑7). Tort law does not treat plaintiffs “merely as a convenient conduit of social consequences” but rather as “someone to whom damages are owed to correct the wrong suffered” (Weinrib (2000), at p. 6). A cause of action that promotes a race to recover by awarding a windfall to the first plaintiff who arrives at the courthouse steps undermines this foundational principle of tort law.

[35]                          This is not the type of incremental change that falls within the remit of courts applying the common law (Salituro, at p. 670). It follows that the novel cause of action proposed by the plaintiffs has no reasonable chance of succeeding at trial.