As published September 25, 2020 for Risk Management Counsel of Canada

In Atlantic Lottery Corp Inc v Babstock (Atlantic Lottery), the Supreme Court of Canada (SCC) recently ruled that "waiver of tort" is not an independent cause of action. Previously, plaintiffs pled waiver of tort in an effort to recover allegedly ill-gotten gains from defendants without having to prove that they suffered losses. Because prior jurisprudence was mixed on whether waiver of tort was an independent cause of action, it was difficult or impossible to have these claims struck early in the litigation; courts often ruled that the validity of a waiver of tort claim would be better determined by a trial judge. Atlantic Lottery clears the way for defendants to dispose of waiver of tort claims at an early stage.

WAIVER OF TORT BEFORE ATLANTIC LOTTERY

Waiver of tort derives its name from the idea that a plaintiff could elect to "waive" a tort, meaning that their damages would be based on what the defendant gained rather than what the plaintiff lost. Divergent lines of authority developed on whether a plaintiff pleading waiver of tort also had to prove the defendant's liability through an established tort such as negligence, which would typically require proof that the defendant caused the plaintiff to suffer a loss. Essentially, whether waiver of tort was an independent cause of action was an open question. In the most recent SCC decision on waiver of tort prior to Atlantic Lottery, Pro-Sys Consultants Ltd v Microsoft Corporation, the SCC deliberately left this question open.

A cause of action that does not require proof of loss is a boon to class action plaintiffs because loss typically must be handled as an individual issue rather than a common issue, adding delay and expense to a class action proceeding. Waiver of tort as a potentially independent cause of action also made it more difficult for defendants to resist certification of a class action. One of the requirements of certification is the existence of at least one valid cause of action. This is a low bar; because the question of whether waiver of tort was an independent cause of action had not been settled, many certification judges erred on the side of certifying waiver of tort claims as independent causes of action.

SUMMARY OF ATLANTIC LOTTERY

In Atlantic Lottery, the Plaintiffs applied to certify a class action against the Atlantic Lottery Corporation Inc. (ALC), an organization empowered to approve the operation of video lottery terminal games (VLTs) in Newfoundland and Labrador. The Plaintiffs asserted that VLTs are inherently dangerous and deceptive. They sought to have ALC disgorge the profit it earned from licensing VLTs on the basis of three causes of action: waiver of tort, breach of contract, and unjust enrichment.

A central issue in the case was whether waiver of tort permitted the Plaintiffs to "waive" the tort of negligence in favour of claiming the gains that ALC made from VLTs. This would mean that the Plaintiffs would not have to prove that they suffered a loss, as they would have to do to establish a claim in negligence. ALC applied to strike the Plaintiffs' prospective class action on the basis that it disclosed no reasonable cause of action.

Initially, the Supreme Court of Newfoundland and Labrador dismissed ALC's application to strike the claim and concluded that the plaintiffs had satisfied the elements necessary for certification. ALC appealed the decision.

The Newfoundland and Labrador Court of Appeal upheld the certification judge's decision and allowed the Plaintiffs' claims in waiver of tort, breach of contract, and unjust enrichment to proceed to trial. In the decision, the Court of Appeal concluded that waiver of tort could operate as an independent cause of action for the remedy of disgorgement.

On appeal to the SCC, Justice Brown for the majority held that the Plaintiffs could not rely on waiver of tort as an independent cause of action. Concluding that the term "waiver of tort" is confusing and should be abandoned, the Court clarified that disgorgement is a remedy that may be awarded when a plaintiff satisfies all the constituent elements of one or more of various causes of action such as breach of a duty in tort, contract, or equity.

The Court further explained that restitution and disgorgement are two types of gain-based remedies. Unlike restitution, which is awarded when there is an unjust enrichment by the defendant and a corresponding deprivation to the plaintiff, disgorgement only requires the defendant to have gained a benefit. In essence, the majority concluded that disgorgement as a gain-based remedy is only that - an alternative restitutionary remedy and not an independent cause of action.

In sum, the SCC found that the term "waiver of tort" is "apt to generate confusion and should therefore be abandoned" and "in order to make out a claim for disgorgement, a plaintiff must first establish actionable misconduct" (at para 30, emphasis in original).

CONCLUSION

The SCC has now clarified that waiver of tort is not an independent cause of action. To access the remedy of disgorgement, plaintiffs must first establish a valid cause of action against the defendant such as negligence or breach of contract. This clarity in the law will assist defendants in disposing of dubious claims at an early stage.

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