Better late than never! Supreme Court ends “waiver of tort” controversy

For 15 years, plaintiffs have pleaded “waiver of tort” in an attempt to certify class actions in the absence of any proof of loss from individual class members. Plaintiffs relied on waiver of tort to assert that the defendants’ alleged misconduct had created a risk of loss to an entire class which justified disgorgement of the defendants’ ill-gotten gains regardless of the class’s actual damages. Reluctant to strike a novel cause of action at certification, lower courts routinely certified waiver of tort claims. After declining to do so a few years ago, the Supreme Court of Canada has now finally clarified that waiver of tort is not an independent cause of action and cannot be the basis on which a class action is certified. This should eliminate a significant nuisance for businesses who are subject to Canadian law.

What you need to know

  • Waiver of tort was an archaic remedial doctrine that was revived by the plaintiff class actions bar looking for ways to maximize potential damage awards by avoiding the need to prove that all class members had actually suffered losses.
  • Fifteen years ago, an Ontario court decided that, at the certification stage of a class action, it could not rule out the possibility that “waiver of tort” was a cause of action on the “plain and obvious” test that applies to certain aspects of certification1. That possibility led to certification in many cases on the basis of waiver of tort to the detriment of defendants who are “then practically compelled to pay a settlement to the plaintiff.”
  • Although the Supreme Court had declined to determine whether waiver of tort was an independent cause of action in Pro‑Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57, as a result of recent developments in the law of unjust enrichment and the Court’s decision to breathe fresh life into the motion to strike test, the Court has now definitively determined that “waiver of tort” is not an independent cause of action and thus cannot (without a cause of action) entitle a class to aggregate damages.
  • Because “waiver of tort” is not an independent cause of action, the 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.”
  • The Court clarified that disgorgement (commonly sought by plaintiffs in class actions to recover the defendants’ allegedly ill-gotten gains as a means to avoid proof of the class members’ losses) is an alternative remedy to compensatory damages for breach of contract. It is only available in “exceptional” circumstances where other remedies would be inadequate. It is not available at the plaintiff’s election to “obviate matters of proof.”

The debate over waiver of tort

The term “waiver of tort” arose from of a line of English case law allowing plaintiffs in tort cases to “waive the tort” and recover the defendant’s ill-gotten gains, instead of the plaintiffs’ losses. This unfortunate choice of terminology has led to confusion in the case law and among academics about what exactly waiver of tort is: is it a remedy, or is it an independent cause of action?

The distinction is an important one. If waiver of tort is a remedy, then before plaintiffs can “waive the tort” they must in fact establish the tort, or some other cause of action. If that tort is negligence, plaintiffs must prove they suffered damages as a result of the defendant’s conduct. But if waiver of tort is itself a cause of action, then a remedy might be available regardless of whether the plaintiff could prove damages. Class action plaintiffs have relied on the latter theory to support their claims that defendants’ conduct can be actionable if it put the class at risk of suffering damages, even if damages cannot be proved.

In the early 2000s, plaintiffs began to advance waiver of tort claims to claim “restitution” of benefits obtained by defendants as a result of allegedly risky behavior, without having to prove actual losses2. In 2004 the Ontario Superior Court concluded that motions judges “should be slow to strike novel causes of action or those in an area of the law that is unsettled” and certified a claim for waiver of tort. Many other cases followed suit, and courts, including the Supreme Court, declined opportunities to engage with the question of whether waiver of tort is a cause of action3. As a result, claims based on waiver of tort have been “commonly advanced but never fully tried.” With its decision in Atlantic Lottery Corp. Inc. v. Babcock4, the Supreme Court finally took the question on and gave an unambiguous answer: it is not a cause of action. It is a remedy.

The decision

In Atlantic Lottery, the plaintiffs applied for certification of a class action against the Atlantic Lottery Corporation in relation to video lottery terminals located in Newfoundland and Labrador. The plaintiffs were seeking to represent a class of individuals in that province who had used VLTs in the six years prior to the claim being filed. They alleged that ALC breached a duty to warn about the inherent dangers of VLTs, including risks of addiction and suicidal ideation. The plaintiffs argued waiver of tort is an independent cause of action that entitled them to disgorgement of the profits ALC had earned by licensing VLTs. The plaintiffs also alleged that ALC had breached an implied term of its contract with VLT users to provide safe games, and that ALC was unjustly enriched. The plaintiffs’ claim was certified by the Supreme Court of Newfoundland and Labrador, and an appeal to the Court of Appeal was dismissed by a 2-1 majority.

The Supreme Court allowed the appeal and, by a 5-4 majority, struck the action. It concluded that waiver of tort is not a cause of action, and the breach of contract and unjust enrichment claims suffered from fatal flaws as well. The plaintiffs’ action was therefore bound to fail. The dissenting judges agreed with the majority that waiver of tort claim was bound to fail and the unjust enrichment claim should be struck, but would have allowed the breach of contract claim to be certified and proceed to trial.

Justice Brown spent just 12 paragraphs reviewing the case law and disposing of a question that occupied lower courts for more than 15 years. He explained that because it is simply a remedy for wrongful conduct, a claim for disgorgement first requires a plaintiff to establish “actionable misconduct”: i.e., a cause of action. When the claim is about the creation of risk, that cause of action is negligence, and one of its elements is conduct that actually causes damage to a plaintiff. There is no such thing as negligence “in the air”; merely creating risk is not wrongful. Accepting the plaintiffs’ attempt to establish a cause of action without proof of damage “would result in a remedy ‘arising out of legal nothingness’,” Justice Brown also noted that there were practical problems with how such a remedy would operate, since this kind of disgorgement claim would be available to any plaintiff who was subject to the risk the defendant generated5. He was not prepared to accept a cause of action “that promotes a race to recover by awarding a windfall to the first plaintiff who arrives at the courthouse steps”6.

The majority and dissent disagreed about whether the breach of contract claim could proceed to trial. The majority considered the breach of contract claim in light of the remedy that the plaintiffs were seeking (i.e., only non-compensatory remedies of disgorgement and punitive damages). The majority held that disgorgement of a defendant’s profits for breach of contract will only be awarded in “exceptional” circumstances where compensatory damages are inadequate. In Justice Brown’s view, the contract claim here was simply that the class had paid to play a gambling game and did not get exactly what they paid for. This was not sufficient to obtain disgorgement of ALC’s profits7. A key feature of the plaintiffs’ claim was that they had expressly disclaimed remedies based on individual loss, presumably as a strategic choice to improve the likelihood of obtaining disgorgement. The majority was conscious of this strategy, confirming that “compensatory damages are not inadequate merely because a plaintiff is unwilling, or does not have sufficient evidence, to prove loss.”

The dissent would have permitted and certified a claim for nominal damages as a result of a breach. Justice Brown disagreed that the plaintiffs were actually seeking that remedy, but went further and noted that even if they were, such a claim would not meet the preferable procedure criterion for certification because it would not further the goals of class actions of judicial economy, behavior modification, and access to justice.

In confirming that waiver of tort is not a cause of action, this decision will likely have an immediate impact on class actions that had certified that issue, particularly where damages for the other certified causes of action depended on proof from individual class members, thereby making aggregate damages unavailable. The decision may also encourage judges hearing certification motions to decide these legal questions at the early stages of litigation. This would be a welcome change from the approach to date, which permits most claims, regardless of how speculative they might be, to proceed past certification.

_________________________

1 This decision was Serhan (Estate Trustee) v. Johnson & Johnson (2004), 72 O.R. (3d) 296 (Sup. Ct.).

2 Serhan Estate v. Johnson & Johnson, (2004) 72 O.R. (3d) 296 (S.C.J.), paras. 33 and 34.

3 For example, the Ontario Superior Court declined to wade into the question after a 138-day trial (2012 ONSC 3660), and the Supreme Court declined to resolve the question in Pro-Sys Consultants v. Microsoft Corporation, 2013 SCC 57.

4 2020 SCC 19

5 2020 SCC 19, para. 33.

6 2020 SCC 19, para. 34.

7 2020 SCC 19, para. 61.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2020 by Torys LLP.
All rights reserved.

Tags:

Get in Touch