On July 24, 2020, the Supreme Court of Canada released its much anticipated decision in Atlantic Lottery Corporation Inc. v Babstock, 2020 SCC 19. The Supreme Court in Atlantic Lottery took the opportunity to consider, and reject, the long-lingering suggestion that waiver of tort is an independent cause of action. The decision puts and end to the longstanding debate over whether or not there exists a reasonable cause of action in waiver of tort, without proof of damage, for certification purposes, and marks a further important step in the development of class action law in Canada.
Atlantic Lottery was a proposed class action against the Atlantic Lottery Corporation Inc., (“ALC”), the company which oversees the operation of video lottery terminal (“VLTs”) in Newfoundland and Labrador. The plaintiffs alleged that the VLTs were addictive and deceptive, and that they were prohibited under the Criminal Code. The plaintiffs advanced claims in waiver of tort, breach of contract, and unjust enrichment, and sought disgorgement of the profits ACL earned from its operation of the impugned VLT machines.
Significantly, the plaintiffs explicitly disclaimed any loss or damage as a result of the defendants’ conduct and instead attempted to rely on the doctrine of waiver of tort as the basis for a cause of action. The plaintiffs brought an application to certify the proceeding as a class proceeding, to which ALC responded with its own application to strike the statement of claim for failing to disclose a reasonable cause of action.
The concept of waiver of tort as an independent cause of action has had a tortured history. It has frequently been relied on by plaintiffs to argue they still have a cause of action even if they cannot prove they suffered harm or damage (or in what amount). Courts had previously been reluctant to strike the novel cause of action of waiver of tort at certification, and thus certified waiver of tort claims as disclosing a reasonable cause of action and allowed them to proceed.
The applications judge heard and dismissed ALC’s application to strike and certified the proceeding as a class action. The decisions were largely upheld by the Newfoundland and Labrador Court of Appeal, which did weigh in on the debate and concluded that waiver of tort was an independent cause of action.
On Appeal to the Supreme Court of Canada
Waiver of tort’s new image as an independent cause of action was short-lived. The defendants appealed to the Supreme Court of Canada, which allowed the appeals, set aside the certification order, and struck the plaintiffs’ statement of claim in its entirety on the basis that it did not disclose any reasonable cause of action. The Supreme Court finally took the opportunity not taken in prior cases to resolve the debate about waiver of tort, and overturned the holding that waiver of tort is an independent cause of action.
The decision clarifies the law on waiver of tort and disgorgement, confirms that plaintiffs cannot rely on waiver of tort as a freestanding cause of action at certification or otherwise, and demonstrates the Supreme Court’s continued willingness to determine legal issues at the pleadings stage. There are a number of key takeaways:
- Waiver of tort is not a valid cause of action and it should not be used to describe the remedy of disgorgement. The Supreme Court held unanimously that, “in order to make out a claim for disgorgement, a plaintiff must first establish actionable misconduct” (specifically, breach of duty in tort, contract or equity). The Supreme Court confirmed that there can be no liability for negligent conduct unless the plaintiff suffers actual damage, stating “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” (paras. 31-33).
- A 5-4 majority of the Supreme Court held that the plaintiffs’ claim for disgorgement as a remedy for breach of contract had no prospect of success because “disgorgement is available for breach of contract only where, at a minimum, other remedies are inadequate…. [w]here, as here, the argument is that the quantum of loss is equal to the defendant’s gain, but the plaintiff would simply rather pursue disgorgement, a gain-based remedy is not appropriate” (at para. 59). The Supreme Court also confirmed that disgorgement for breach of contract should be viewed as exceptional relief and should not be “at the plaintiff’s election to obviate matters of proof” (para. 61).
- The same 5-4 majority of the Supreme Court held that the plaintiffs could not maintain a claim for punitive damages on the ground that the defendants breached an obligation of good faith to the plaintiffs that required the defendants “to consider the interests of the Plaintiffs as at least equal to [their] own and not to offer or supply an inherently dangerous service or product” (para. 64). The majority noted that, the application of the “organizing principle” of good faith in Canadian contract law “is generally confined to existing categories of contracts and obligations” and “[t]he alleged contract between ALC and the plaintiffs does not fit within any of the established good faith categories” (para. 65). The plaintiffs did not argue that a new category of good faith should be recognized.
As the Supreme Court acknowledged in Atlantic Lottery, since the Ontario Superior Court’s 2004 decision in Serhan (Estate Trustee) v. Johnson & Johnson (2004), 72 O.R. (3d) 296 (Sup. Ct.), representative plaintiffs have commonly advanced claims for “waiver of tort” in an attempt to certify class actions in the absence of any proof of loss from individual class members. Lower courts’ prior reluctance to deny certification of waiver of tort claims was unfairly to the “detriment of the defendant, who is then practically compelled to pay a settlement to the plaintiff” (paras. 19-21).
By confirming that waiver of tort is not a valid cause of action, the Supreme Court’s decision in Atlantic Lottery is an important step towards clarifying the law on certification and otherwise. The decision confirms that loss is an element that must be proven as part of a claim in negligence, and it properly confined waiver of tort to what it historically encompassed – an election as to damages only once the plaintiff has made out all the elements of a claim. Removing this debatable cause of action may now pave the way for streamlining certification motions and potentially limiting certain class actions by ensuring that only claims that disclose a viable cause of action can advance.
The Supreme Court’s decision in Atlantic Lottery also delivers a strong message that a claim should not survive an application to strike (or be certified) simply because it involves a novel cause of action. Rather, the majority emphasized that, “it 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” (para. 19). The majority’s messaging is consistent with the “culture shift” the Supreme Court articulated in its earlier decision, Hryniak v. Mauldin, 2014 SCC 7 and encourages judges – particularly judges hearing certification motions – to make efforts to determine these legal questions at the early stages of litigation.