On July 24, 2020, the Supreme Court of Canada brought clarity over a longstanding question in Atlantic Lottery Corp. Inc. v. Babstock,1 Waiver of tort as an independent cause of action that did not require proof of damages has been a concept up in the air, which has finally settled to the ground. All nine justices held that the plaintiffs had no independent cause of action under “waiver of tort”, nor had they pleaded any other reasonable causes of action. The Court reaffirmed the remedy of disgorgement as a possibility for negligence claims and breach of contract.
The defendant, Atlantic Lottery Corporation Inc. (“ALC”), is an organization constituted by the governments of the four Atlantic provinces and empowered to operate video lottery terminal games (“VLTs”). The plaintiffs represent a class of former customers that paid to play such VLTs,
The plaintiffs alleged that the defendant breached a duty to warn of the inherent dangers associated with VLTs, including the risk of addiction and suicidal ideation. The plaintiffs relied on waiver of tort, breach of contract and unjust enrichment as their three causes of action.
The defendant ALC moved to strike the plaintiffs’ claim on the basis that it disclosed no reasonable cause of action, and it was agreed that the certification judge would determine this as part of the first criterion for certification in s. 5 of the Class Actions Act.2 The certification judge dismissed the defendant’s application to strike and certified the action, finding that the pleadings disclosed a cause of action. The Newfoundland and Labrador Court of Appeal upheld the certification judge’s decision and held that waiver of tort could operate as an independent cause of action for disgorgement.
The defendant ALC and several third parties who were joined in the action appealed to the Supreme Court of Canada.
Issues on Appeal
Is waiver of tort an independent cause of action? Is disgorgement a remedy for breach of contract?
Waiver of tort does not exist as an independent action, but rather as disgorgement as a remedy. Disgorgement may be a remedy for breach of contract in extraordinary circumstances, of which this was not.
Waiver of Tort
As Justice Brown wrote for the majority, the “waiver of tort” concept arose to describe when a plaintiff surrenders the right to tort damages, and instead seeks a disgorgement of the defendant’s wrongful profits. This equitable doctrine is non-compensatory, and therefore distinct from the equitable claim of unjust enrichment, which requires unlawful profit but also corresponding loss by a plaintiff. However, the question of whether waiver of tort could be an independent cause of action has been longstanding, and in over 20 years of Canadian jurisprudence, no definitive answer has been laid down by the courts. Generally raised at certification, the issue often passed the “reasonable cause of action” test, as it has been explicitly noted that novel doctrine should not be a bar to certification, lest the law be prevented from development.
Justice Brown noted that there had been no history of a court positively affirming the doctrine of wavier of tort as an independent cause of action. Up to and including the SCC’s last serious consideration of the issue in Pro‑Sys Consultants Ltd. v. Microsoft Corporation,3 previous cases all explicitly refused to decide the matter, simply indicating that while they would not confirm its non-existence, neither would they confirm its existence.
In this case, with the question squarely at issue, Justice Brown found that the term “wavier of tort” was a misnomer and opted to refer to it instead as disgorgement. The focus was on its nature as a gain-based remedy, and for it to create an independent cause of action free from proof of damages was too serious a departure from the current common law. While the Court found disgorgement might be a potential remedy for certain negligence cases, it could not stand alone as a cause of action. As the plaintiffs did not plead causation, the tort of negligence had no reasonable chance of success.
Breach of Contract
While the ordinary form of monetary relief for breach of contract is an award of damages, the Court further considered disgorgement as a potential remedy. Justice Brown held that disgorgement may be available but only under exceptional circumstances. The Court declined to lay down comprehensive factors, but as a principle other remedies must be inadequate and a plaintiff must have had a legitimate interest in preventing a defendant’s profit-making activity.
As it was obvious in this case that there were other adequate remedies available, the plaintiffs’ claim for disgorgement was “doomed to fail”. A plaintiff’s lack in sufficient evidence to prove loss does not mean make a remedy inadequate. Examples of inadequate remedies are where a plaintiff’s loss is impossible to calculate or their interest in performance is not reflected purely by economic measure. As Justice Brown found that disgorgement was pleaded to obviate matters of proof, he found it had no reasonable chance of success.