Supreme Court of Canada provides clarity for class actions

A recent Supreme Court of Canada decision definitively settles longstanding uncertainty about whether the doctrine of waiver of tort operates as an independent cause of action. The decision has important implications for defending certification applications in class action lawsuits.

Background

Douglas Babstock and Fred Small, two Newfoundland residents, commenced a proposed class action against Atlantic Lottery Corporation (ALC) on behalf of all Newfoundland residents who paid to play video lottery terminal games (VLTs) in Newfoundland during the six years preceding the lawsuit. ALC is the body that approves the operation of VLTs in Newfoundland and Labrador. Babstock and Small alleged that VLTs are inherently dangerous, deceptive, and associated with an increased risk of addiction and suicidal ideation. They asserted ALC breached common law and contractual duties by providing VLTs to the public. 

The plaintiffs pleaded three causes of action: “waiver of tort,” breach of contract, and unjust enrichment, and sought a gain-based disgorgement remedy quantified by the profit that ALC had earned by licensing VLTs.

Waiver of tort not an independent cause of action

The Newfoundland Supreme Court granted the plaintiffs’ application to have the action certified as a class action. That decision was upheld by the Newfoundland Court of Appeal, which specifically held that the doctrine of waiver of tort could operate as an independent cause of action for disgorgement where it would serve to deter wrongful conduct. 

The Supreme Court of Canada disagreed with the lower courts, set aside the certification order, and struck the plaintiffs’ claim in its entirety. The Supreme Court held that waiver of tort does not exist as an independent cause of action in Canada, in so doing settling longstanding uncertainty in Canadian jurisprudence.

Waiver of tort was generally construed as a doctrine that allows a plaintiff to disgorge a defendant's gains from tortious conduct rather than recover his or her own loss. There has been uncertainty in Canada regarding whether waiver of tort operates as an independent cause of action for disgorgement, or whether the doctrine operates as an election of remedy and may only be invoked where all the elements of the underlying tort have been proven. Under the first theory, a plaintiff could claim the benefits that accrued to the defendant as a result of the defendant’s wrongful conduct, even if the plaintiff suffered no harm. Under the second theory, a plaintiff could only invoke waiver of tort where all of the elements of the underlying tort have been proven, including damage to the plaintiff if that is an element of the tort. 

No Canadian authority has recognized waiver of tort as an independent cause of action. However, in the class actions context, several certification judges have refused to deny certification on the basis that a novel claim in waiver of tort is bound to fail. As stated by the court in Babstock, “courts have refrained from finding that it is plain and obvious that such an action does not exist.” Subsequent courts have interpreted those refusals as “an affirmative statement that such claims are viable.”

In this case, the Supreme Court ended the debate and held that disgorgement is a remedy for certain forms of wrongful conduct, not an independent cause of action. To have concluded otherwise would have established “an entirely new category of wrongful conduct — one that is akin to negligence but does not require proof of damage,” which would represent a “radical and uncharted” development.  

However, the court left open the question of whether, and in what circumstances, a disgorgement remedy may be available for negligence. While the court acknowledged that, “Disgorgement for tortious wrongdoing was initially applied only in the context of proprietary torts, including conversion, deceit, and trespass,” the court noted the remedy had recently been applied more broadly and stated the issue of whether the remedy could ever be available for negligence would “have to be decided in an appropriate case.”

The court also provided much-needed clarity on the terminology used to describe gain-based remedies. First, the court concluded that the term “waiver of tort” is confusing and should be abandoned entirely. Second, the court delineated and defined two distinct gain-based remedies: “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 … where there is correspondence between the defendant’s gain and the plaintiff’s deprivation.” 

Implications

Babstock removes a longstanding and significant hurdle in defending certification applications in relation to ostensible waiver of tort claims. As noted by the court, the persistent uncertainty regarding whether an independent action lies for disgorgement has left certification judges with “little alternative but to affirm that the question of the doctrine’s availability is indeed a live issue for trial, which can and does result in certification to the detriment of the defendant, who is then practically compelled to pay a settlement to the plaintiff.” 

Now, in light of the court’s decision in Babstock, plaintiffs in class actions can no longer argue that waiver of tort is a novel claim that should survive certification and be allowed to proceed to trial.