By Eric Appelt
Last week, the Supreme Court of Canada issued its decision in Atlantic Lottery Corp. Inc. v Babstock, 2020 SCC 19 (“Atlantic Lottery”). The Court considered – and ultimately rejected – a doctrine known as the “waiver of tort”, and in doing so closed the chapter on an inconsistent line of recent Canadian jurisprudence.
In Atlantic Lottery, two individuals applied for certification of a class action against the Atlantic Lottery Corporation Inc. (the “ALC”). The ALC is responsible for overseeing the operation of video lottery terminal games (“VLTs”) in Newfoundland and Labrador. The class action was pursued on the basis that VLTs administered by the ALC were inherently dangerous and deceptive, and that players should have been warned of addiction, suicidal ideation, and other risks allegedly associated with VLTs.
A general, underlying principle of tort law is that a plaintiff must establish actual loss in order for compensation to follow. The individuals in Atlantic Lottery, however, sought compensation based in part on the doctrine of waiver of tort. Waiver of tort provides a plaintiff with the option of waiving traditional tort compensation (measured by the plaintiff’s loss) in favour of compensation through “disgorgement” (measured by the defendant’s gain). In this sense, the plaintiffs in Atlantic Lottery did not allege having suffered actual damages, but instead sought a gain-based award of damages, quantified by the profit earned by the ALC through licensing VLTs. These profits were claimed to be in the range of $60-90 million annually.
In response, the ALC applied to strike the plaintiffs’ Statement of Claim for disclosing no reasonable cause of action. The ALC contended that, even when assuming the facts pleaded to be true, it was plain and obvious that the plaintiffs’ action had no reasonable prospect of success. While some Canadian courts had chosen to recognize waiver of tort as an accepted cause of action, others had shown reluctance.
In a narrow majority, the Court allowed the ALC’s appeal and struck the plaintiffs’ Statement of Claim in its entirety. In doing so, the Court held that “waiver of tort has become a hollow and internally inconsistent doctrine, leaving judges and litigants confused…”.
The Court went on to conclude that the phrase “waiver of tort” should be abandoned. It was also confirmed that the concept underlying the notion of waiver of tort – disgorgement of a defendant’s ill-gotten gains, irrespective of whether the plaintiff suffered harm – continues to exist in Canadian law as a remedy for certain types of misconduct, but not as an independent cause of action. Granting disgorgement without proof of liability, the Court held, was akin to allowing “the remedy tail [to] wag the liability dog”.
In addition to waiver of tort, the plaintiffs in Atlantic Lottery made two alternative claims. First, the plaintiffs advanced the somewhat creative argument that a contract was formed by the ALC’s offer of VLTs to the public, and the plaintiffs’ acceptance by paying to play. However, disgorgement for breach of contract is only available where other remedies are proven to be inadequate, such as where the plaintiff’s loss is impossible to calculate, or where their interest is not purely economic. Those circumstances were not present in this case.
The Court also rejected the second alternative claim of the plaintiffs, being that the ALC had been unjustly enriched. The Court found that the claim of unjust enrichment failed on the basis that any such enrichment was justified by the “contract” alleged by the plaintiffs.
Prior to Atlantic Lottery, Canadian courts had approached the doctrine of waiver of tort in a confusing and often contradictory manner. The Supreme Court’s decision provides both clarity and finality in this respect.
The majority’s rejection of waiver of tort as an independent cause of action is not entirely unexpected. To rule otherwise would have both (a) opened the door to a potential super-compensatory regime in which “windfalls” to plaintiffs were more common, and (b) violated the foundational principle underlying tort law that a plaintiff must establish actual loss in order for compensation to follow.
While it remains the law that a defendant should not be able to profit from its own misconduct, disgorgement of ill-gotten gains in the hands of a defendant will still be granted where some other cause of action is established.
McLennan Ross LLP has years of experience and a strong reputation in a variety of practice areas, including commercial and class action litigation. If you or your company have questions regarding waiver of tort, disgorgement of profits, or any other litigation-related issue, please do not hesitate to contact DonMcGarvey, Q.C. or Eric Appelt in the commercial litigation practice group.
