There has been an ongoing controversy in Canada’s courts over whether the doctrine of ‘waiver of tort’ was sufficient to create a cause of action on its own. The Supreme Court of Canada (SCC) had briefly considered the issue in Pro-Sys Consultants Ltd. v Microsoft Corporation, however, this decision did not end the debate, since the facts and circumstances of that case did not allow for them to do so.

Canada’s highest court has now had a chance to more thoroughly weigh in on the concept in their recent decision Atlantic Lottery Corporation Inc. v. Babstock. In the decision, the Court noted the contradictory and confusing law surrounding the doctrine. Now the SCC seems prepared to declare that the doctrine does not, in fact, create a cause of action in Canada.

The real remedy sought, as determined by the Court, was disgorgement of profit. It is a remedy the law fashioned early on when dealing with proprietary torts.

Plaintiffs Sought Profits Earned From Video Lottery Terminals

The Atlantic Lottery Corporation (ALC) provides video lottery terminal games (VLTs) to the public for gambling entertainment. A class action was commenced against the ALC, the proposed class being all persons in Newfoundland and Labrador who had paid to play the VLTs in the past six years. The remedy sought was to have any profit disgorged from the ALC. The argument was that VLTs are inherently dangerous and deceptive. The plaintiffs advanced three causes of action:

• waiver of tort;
• breach of contract; and
• unjust enrichment.

What is ‘Waiver of Tort’?

The concept of waiver of tort enables a plaintiff to seek the income or other benefit derived from a defendant’s wrongdoing rather than seeking the amount the plaintiff lost. For example, in the case above, the plaintiffs were not looking to recoup their investment in the VLTs, but rather were seeking to gain the revenue the ALC earned from the VLTs.

There has been controversy in the past about whether waiver of tort is an independent cause of action or simply a remedy available to a plaintiff who otherwise establishes a cause of action.

In the case at hand, the SCC was clear that waiver of tort is not a cause of action in Canada. The concept had only created confusion, not clarity. The real remedy the plaintiff sought was disgorgement. They sought a remedy measured by the defendant’s profit and not based on any proven or actual damages suffered by the members of the class. Disgorgement is a remedy only and its availability is circumstance-specific.

Whether it is a remedy available in a properly pleaded negligence claim is still to be decided. It was not here, as causation was not pleaded or relied on.

Disgorgement a Remedy Only in Exceptional Circumstances

The full court agreed that disgorgement can be a remedy in a breach of contract case but only in exceptional circumstances. That would be where the other usual remedies such as damages and specific performance are inadequate. 

In making that assessment, a court should consider what the contract is about, the purpose of the clause(s) alleged to have been breached, the facts surrounding the breach, and of course, the consequences of the breach. The majority, in this case, went a little further and wanted courts to also consider the motive of the plaintiff in seeking disgorgement. 

Here, there were no unusual or exceptional circumstances. The claims advanced by the plaintiffs would be impossible to assess in numbers or where the plaintiff’s interest in the clause’s performance is not a purely economic loss. Any claim in the case based on a breach of contract was doomed to fail when seeking this remedy.

The Dissent Would Have Allowed the Contractual Claim

A minority of four justices would have allowed the contractual claim to proceed. They disagreed with the majority’s willingness to strike it only because the remedy sought (disgorgement) could not be recovered here. The claim was properly pleaded and the court could award nominal damages, a declaration, disgorgement and punitive damages. Breach of contract is actionable without any damage so it always suggests at minimum, nominal damages.

They also found that the availability of the remedy of disgorgement could not be determined at this stage in the process, and could only be done by the trial judge.

Takeaways

1. The majority made it clear that disgorgement is not available as an alternative to proving the claims advanced. All claims must still be made out by the evidence. 
2. The majority made an early reference to its decision in Hryniak v. Mauldin repeating that a cultural shift was now occurring to allow courts to intervene earlier where claims or defences had no reasonable chance of success.

At Milosevic & Associates, our team of Toronto corporate commercial lawyers regularly represent clients in complex commercial litigation matters including contract disputes like the one described above. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself.  Call us at 416-916-1387 or contact us online to schedule a consultation.