Last Friday, the Supreme Court of Canada (“SCC”) released its decision in Atlantic Lottery Corp. Inc. v Babstock. The decision brings much-needed clarity to the remedial doctrines of waiver of tort, disgorgement, and restitution, and a sigh of relief to practitioners who have long struggled with the ambiguities in these areas of law.
In Babstock, two individuals applied for certification of a class action against Atlantic Lottery Corporation Inc. (“ALC”), the public regulator of video lottery terminal games (“VLTs”) in Newfoundland and Labrador, on behalf of any resident of Newfoundland and Labrador who paid to play VLTs in the province in the six years preceding the class action. The plaintiffs’ claims were, essentially, that VLTs are inherently dangerous and deceptive, and that ALC breached a duty to warn of these inherent dangers, including the risk of addiction and suicidal ideation. Relying on causes of action in “waiver of tort”, breach of contract, and unjust enrichment, the plaintiffs sought a gain-based award quantified by the profit ALC earned by licensing VLTs, rather than damages based on any alleged harm or loss.
The Supreme Court of Newfoundland and Labrador granted certification, and dismissed ALC’s application to strike the plaintiffs’ claim on the basis that it disclosed no reasonable cause of action. The Newfoundland and Labrador Court of Appeal substantially upheld the certification judge’s conclusions.
On further appeal, in a 5-4 decision, the SCC allowed ALC’s appeal, striking the plaintiffs’ statement of claim in its entirety on the basis that each pleaded claim was bound to fail because it disclosed no reasonable cause of action.
A key takeaway from the decision is the SCC’s finding that “the term ‘waiver of tort’ is confusing, and should be abandoned.” Traditionally, the term “waiver of tort” has been used to refer to circumstances where a plaintiff makes out a tort and opts to recover the defendant’s ill-gotten gains rather than pursuing compensatory damages, thereby “waiving the tort”. Confusion arises from the fact that a plaintiff making such a choice does not actually forgive or waive the defendant’s wrongful conduct; rather, the plaintiff elects to pursue an alternative, gain-based remedy. Further, until now, the law has been uncertain as to whether waiver of tort could constitute an independent cause of action.
The SCC preferred an approach based on the appropriate form of gain-based remedy. The Court clarified that “restitution” refers to an award granted in response to unjust enrichment, where there is correspondence between a defendant’s gain and a plaintiff’s loss. In contrast, “disgorgement” refers to awards calculated exclusively by reference to the defendant’s wrongful gain, such that it requires only that the defendant gained a benefit (with no requirement of proof of corresponding deprivation to the plaintiff). The Court held that disgorgement should be viewed as an alternative remedy for certain forms of wrongful conduct, and not as an independent cause of action. Treating disgorgement as an independent cause of action would problematically allow “the remedy tail [to] wag the liability dog” such that courts could grant disgorgement for negligence without proof of damage, despite that negligence “in the air” (i.e. the mere creation of risk, without proof of actual damage) does not amount to wrongful conduct in law.
The Court then considered the plaintiffs’ argument that VLTs are prohibited by s. 206 of the Criminal Code, which prohibits any game “similar to” three-card monte. The plaintiffs had made this argument in connection with their claims for unjust enrichment and breach of contract, asserting that the presence of criminal conduct would (a) remove any juristic reason for ALC’s enrichment, and (b) warrant exceptional relief for breach of contract. Considering the text, history, and surrounding context of the statutory provision, the SCC held that the prohibition of games similar to three-card monte was directed toward the game’s concrete attributes, and not toward the abstract feature of deception. The Court therefore found that this claim had no reasonable chance of success.
Turning to the plaintiffs’ claims in breach of contract and unjust enrichment, the SCC found that neither had a reasonable chance of success. With respect to the breach of contract claim, the Court held that disgorgement, the remedy sought by the plaintiffs, was “plainly doomed to fail”, as disgorgement is available for breach of contract only where, at minimum, other remedies are inadequate. Here, the plaintiffs’ gambling losses would be readily quantifiable, but they simply preferred to pursue disgorgement rather than prove loss, which was not an appropriate circumstance to grant the exceptional relief of disgorgement for breach of contract. With respect to the unjust enrichment claim, the plaintiffs’ own pleadings alleged the existence of a contract between ALC and the plaintiffs under which the plaintiffs paid to play VLTs. With no basis for vitiation of the alleged contract, the benefit acquired by ALC was pursuant to a valid contract, and could not constitute unjust enrichment.
The dissenting judges would have allowed ALC’s appeal only in part. They agreed that the term “waiver of tort” should not refer to a cause of action, that a claim for disgorgement cannot be grounded in a mere breach of duty in the absence of loss, that VLTs are not analogous to “three-card monte” as defined in the Criminal Code, and that the plaintiffs’ unjust enrichment claim must be struck. However, the dissent separated on their treatment of the breach of contract claim. In their view, the elements of a cause of action for breach of contract had been adequately pleaded; loss is not an essential element. Additionally, several remedies were open to the plaintiffs on their pleadings, including nominal damages, declaratory relief, disgorgement, and punitive damages. On the matter of disgorgement, the dissent took the view that whether disgorgement is an appropriate remedy for breach of contract in this case could not be resolved on the pleadings alone. The dissent would have certified the plaintiffs’ claim as a class action with respect to the breach of contract claim, punitive damages, and the appropriateness of a disgorgement remedy.
The SCC’s decision in Babstock will hopefully mark the final chapter of the confusing saga of waiver of tort. With the SCC’s guidance that there exists no independent cause of action for disgorgement, we can now move forward with the benefit of a more principled, coherent approach to gain-based remedies.