Atlantic Lottery Corporation Inc v Babstock: SCC Rejects Waiver of Tort in Class Actions

Canadian courts have struggled with whether a “waiver of tort” stands as an independent cause of action for certification under the Class Actions Act, SNL 2001, c C-18.1 [CAA] and other provinces’ equivalent acts. A waiver of tort allows the plaintiff to forego damages and seek disgorgement of the defendant’s profits from wrongful conduct. Therefore, the Court would not award plaintiffs based on their losses but the benefits resulting from the defendant’s wrongful conduct.

Courts commonly award a waiver of tort as a remedy, but whether it can give rise to an independent cause of action was uncertain until now. An action based on a waiver of tort means that the defendant owed the plaintiffs a duty of care, breached this duty of care, and caused the plaintiff loss or harm as a result. However, the plaintiff would not need to provide proof of loss or harm.

Although the Supreme Court of Canada (“SCC”) was split 5-4 in Atlantic Lottery Corp Inc v Babstock, 2020 SCC 19 [Atlantic], the Court unanimously agreed that a waiver of tort should not be an independent cause of action, and certainly not one that can certify a class action. The majority and dissent disagreed on whether the breach of contract pleaded by the plaintiff constituted a cause of action.

Facts and Courts Below

The appellant, Atlantic Lottery Corporation Inc (“ALC”), operates lottery games in Atlantic Canada and is owned by the governments of the four Atlantic provinces. ALC’s operation of Video Lottery Terminals (“VLT”) generally features electronic versions of games such as slot machines. The plaintiffs, Douglas Babstock and Fed Small, applied for certification of a class action against ALC for anyone in the province of Newfoundland and Labrador who paid to play VLTs in the six years preceding the class action (Atlantic, para 1).

The plaintiffs claimed that ALC (paras, 2-6):

  • Violated s.206(1) of the Criminal Code RSC, 1985, c C-46 — which prohibits staking any money or valuable property on the results of games such as “three-card monte”;
  • Unjustly enriched themselves at the expense of the members of the class proceeding;
  • Breached a duty to warn of the inherent dangers associated with VLTs (waiver of tort); and,
  • Breached the contract established by ALC’s offer of VLTs to the public

In our previous article, Stacey Blydorp explained the reasoning of the courts below. In summary, the matter came to the certification judge in two forms at the Supreme Court of Newfoundland and Labrador in 2014. The first was ALC’s application to strike the plaintiffs’ claim for a lack of reasonable cause of action. The second was the plaintiff’s application for certification of their claims under the CAA (para 7). The Court dismissed ALC’s application and held that the plaintiffs satisfied the requirements for certification (para 8).

The Newfoundland and Labrador Court of Appeal upheld the certification judge’s conclusion. It allowed the plaintiffs to claim a waiver of tort, breach of contract, and unjust enrichment to proceed to trial (para 9). ALC appealed to strike the plaintiffs’ claims for no reasonable cause of action again (para 14).

Majority Decision

Justice Brown wrote the majority decision with Justices Abella, Moldaver, Côté, and Rowe concurring. At issue was whether the plaintiff’s reliance on the doctrine of waiver of tort was valid, whether s.206(1) of the Criminal Code prohibits VLCs, and whether the plaintiffs’ claims for breach of contract and unjust enrichment gave rise to a reasonable cause of action.

Waiver of Tort for Disgorgement

The plaintiff claimed that a waiver of tort as an independent cause of action for disgorgement had a reasonable chance of succeeding at trial (para 15) and therefore, the Court should allow their certification for a class action to proceed. Although accepted by the courts below, the SCC rejected this submission (paras 10 & 38).

When faced with a waiver of tort claim in Pro‑Sys Consultants Ltd v Microsoft Corporation, 2013 SCC 57 [Microsoft], the Court declined to support or reject this novel cause of action. Brown J. in Atlantic held that they could now come to a resolution of whether such a cause of action exists in Canadian law because:

  1. The laws around waiver of tort and restitution have advanced significantly since Microsoft and what was uncertain at that time is now clearer;
  2. The Court in Microsoft relied on a need for timely and affordable access to justice, where courts should resolve legal disputes promptly — but Brown J. found that this claim would not survive an application to strike because it was novel;
  3. Failing to address whether a cause of action for a waiver of tort exists would perpetuate uncertainty; and,
  4. A waiver of tort was not central to Microsoft, but it was to Atlantic.

Brown J. observed that the term “waiver of tort” was a misnomer — the plaintiff making this claim was not waiving the wrongfulness of the defendant but relying on the doctrine to pursue a gain-based remedy as opposed to a loss-based remedy (para 29).

Brown J. then explained disgorgement as an “alternative remedy for certain forms of wrongful conduct, not as an independent cause of action” (para 27). Disgorgement is available for some forms of wrongdoing without proof of damage. But Brown J. claimed it was 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” (para 32). Thus, a waiver of tort as an independent cause of action for disgorgement was not allowed.

Violation of s.206(1) of the Criminal Code and Unjust Enrichment

The plaintiffs claimed that s. 206(1) of the Criminal Code prohibited VLTs because the machines constituted the prohibited “three-card monte”, which is an outlawed gambling format. The presence of criminal conduct would warrant exceptional relief for the plaintiffs and would support the plaintiff’s reasoning for unjust enrichment (para 39).

Brown J. concluded that VLTs did not constitute three-card monte (para 48). He also did not find that there was unjust enrichment. ALC’s “enrichment” resulted from benefits pursuant to the contract between ALC and the plaintiffs (para 71).

Breach of Contract

The plaintiffs claimed that an implied contract existed where ALC would provide a safe gaming environment to VLC users and that ALC breached this contract. Similar to their tort claim, the plaintiffs sought non-compensatory remedies, such as disgorgement and punitive damages.

Disgorgement

Disgorgement is not available as compensation for a breach of damages, except for exceptional circumstances. Brown J. noted an English case, Attorney General v Blake, [2001] 1 A.C. 268 (H.L.), held that “disgorgement for breach of contract is available only where other remedies are inadequate and only where the circumstances warrant such an award.” (para 53). The Court further stated that disgorgement was an exceptional remedy and only allowed it where: (1) other remedies were inadequate and (2) a plaintiff had a legitimate interest in preventing a defendant’s profit-making activity (para 53).

Brown J. stated that there was “nothing exceptional about the breach of contract the plaintiffs alleged” (para 61). In this case, the plaintiffs paid for a gambling game and didn’t get what they paid for. Therefore, there is no reasonable chance for disgorgement.

Punitive Damages

Courts award punitive damages for breach of contract in exceptional circumstances and require an independent actionable wrong. The courts also grant punitive damage awards where the defendant breaches a contractual obligation in good faith (para 63).

Because Brown J. found earlier that the plaintiffs’ claims were bound to fail, they could only assess whether ALC breached an obligation of good faith (para 64). He found that the alleged contract between ALC and the plaintiffs didn’t fit within any of the established good faith categories and that punitive damages had no reasonable chance of success (paras 65-66).

Certification for Class Action

According to section 5 of the CAA, there are five requirements for certification of a class action:

  1. The pleadings must disclose a cause of action;
  2. There must be an identifiable class of two or more persons;
  3. The proposed representative must be appropriate;
  4. There must be at least one common issue;
  5. The class action must be the preferable procedure

Brown J. ultimately found that there was no proper cause of action disclosed in the plaintiffs’ proceedings. Therefore, the plaintiffs had failed to meet the requirements of a class action certification.

Dissenting Decision

Chief Justice Wagner and Justices Karakatsanis, Martin, and Kasirer dissented with Karakatsanis J. delivering the reasons. The dissenting judges agreed with much of the majority’s decision, including their statements relating to the waiver of tort, unjust enrichment, and the s. 206 of the Criminal Code. However, Karakatsanis J. reasoned that the plaintiffs’ reliance on breach of contract was a reasonable cause of action. Further, by allowing the breach of contract claim, Karakatsanis J. would have allowed the claim to proceed and remain certified as a class action (para 77).

Breach of Contract

The dissent departed from the majority’s reasoning in that they found several remedies available to the plaintiff for breach of contract, including disgorgement and punitive damages (para 103). Although Karakatsanis J. agreed with Brown J. that disgorgement was not an independent cause of action, she stated that the plaintiffs could plead it as a remedy for breach of contract (para 107).

The dissent further stated that the appropriateness of allowing a disgorgement depended on a non-exhaustive list of factors and not hard and fast rules. Karakatsanis J. noted several factors in the plaintiffs’ pleadings that could point to a disgorgement remedy, such as ALC’s breach being self-interested, deliberate, and in bad faith (para 124). Therefore, the dissent was not persuaded that there was nothing exceptional in this case that would allow for disgorgement (para 125).

Lastly, the dissent disagreed that there was no reasonable cause for punitive damages. In their view, ALC and the plaintiffs had implied terms of good faith in their contract. The fact that the plaintiffs claimed that the VLTs were “inherently deceptive”, “gave a false impression of the odds of winning”, etc…, and that ALC had full knowledge of this deception was evidence of breaching the implied terms of good faith (para 133). Karakatsanis J. concluded that there was no reason to find punitive damages unavailable to the plaintiffs.

Certification for Class Action

The dissent found that the breach of contract was a reasonable cause of action, and there was no dispute about whether the proposed representatives were appropriate (para 137). The dissent was also satisfied that the remaining three criteria were fulfilled. That is,

  1. There were two or more people to identify with using VLTs and a proposed definitive class that could use objective criteria to identify themselves (para 142);
  2. The class had common issues relating to the breach of contract and the reward for disgorgement and punitive damages (para 145); and,
  3. A class action was the preferable procedure since the contract’s contents entered and breached didn’t require individual assessments for each plaintiff (para 167).

Implications of Atlantic Lottery Corporation Inc v Babstock

Although the Court was split 5-4, both the majority and dissent agreed that a waiver of tort should not stand as an independent cause of action that can certify a class action proceeding. As a result, future plaintiffs have one less tool to use in class action proceedings. Prior class actions could have theoretically avoided proving that all class action members suffered a loss by relying on a waiver of tort.

This decision comes 16 years after the Ontario Superior Court in Serhan Estate v Johnson & Johnson, 2004 CanLII 1533 ruled that courts couldn’t rule out the possibility of a waiver of tort as a cause of action to a class action certification. In Microsoft, the SCC declined to specifically rule out that a waiver of tort was an independent clause, as it wasn’t the case’s central issue. Brown J.’s decision eliminated the existence of an independent cause of action for waiver of tort, reducing uncertainty for future courts.

Another result of this case, which was more controversial for the Court, was when a breach of contract could result in disgorgement. The majority stated that disgorgement was only allowed in exceptional circumstances, where other remedies were inadequate and the plaintiff had a legitimate interest in preventing a defendant’s profit-making (para 53). In contrast, the dissent stated that disgorgement was appropriate depending on a non-exhaustive list of factors and not hard and fast rules (para 123). The majority’s decision ultimately constrains future plaintiffs from claiming disgorgement where there is a breach of contract.

 

Adrian Zee

Adrian Zee

Adrian Zee is a second-year JD student at Osgoode Hall Law School. He graduated from Western University with a Bachelor of Arts in Management and in Writing Students in 2017. Adrian is currently a member of Osgoode Hall's Donald G. Bowman Tax Moot team and a Caseworker at both the Osgoode Venture Capital Clinic and at the CLASP Tax Dispute Clinic. His legal interests include tax, corporate, and commercial real estate, and outside of school, Adrian is a food photographer.

You may also like...

Join the conversation

Loading Facebook Comments ...