Jennifer Taylor

The Supreme Court of Canada has finally put an end to the “waiver of tort” debate.

After years of uncertainty, a majority of the Court confirmed in Atlantic Lottery Corp Inc v Babstock that “waiver of tort” does not exist as an independent cause of action that could allow a plaintiff who has not suffered any loss to recover a defendant’s gains. While disgorgement of a defendant’s gains may be an appropriate remedy in some cases, the plaintiff must first prove a complete cause of action.

The Plaintiffs in Atlantic Lottery wanted to bring a class action on behalf of VLT players in Newfoundland and Labrador, alleging that the Atlantic Lottery Corporation (“ALC”) breached a duty to warn them that VLTs are “inherently dangerous and deceptive.”¹ Even though the Plaintiffs did not intend to prove that they suffered any loss or damage, they claimed entitlement to ALC’s profits from VLTs —relying on waiver of tort. Their class action was certified at the Supreme Court of Newfoundland and Labrador, and the certification order was upheld by the Court of Appeal (which became the first Canadian court to confirm waiver of tort as an independent cause of action, under the name “disgorgement for tortious wrongdoing”).

The Supreme Court, however, overturned the certification order. Justice Brown (a former tort law scholar), writing for himself and four other judges, found in favour of ALC and the VLT manufacturers and struck all of the plaintiffs’ claims. Justice Karakatsanis and three other judges agreed with the majority on waiver of tort. However, they dissented in part because they would have let the case proceed on a narrow contract issue.

The decision will be discussed further through the following FAQs:

Q. What *is* waiver of tort?

A. The story of waiver of tort goes back to the days when civil claims were made through narrow “forms of action” (or “writs”). A special form of the writ of assumpsit allowed plaintiffs to rely on an implied contract as a way to recover a defendant’s “ill-gotten gains.” Where the plaintiff went this route instead of suing in tort, they were “said to ‘waive the tort.’”²

In Atlantic Lottery, Justice Brown acknowledged that “waiver of tort” is a confusing term that “should be abandoned.”³

Q. What does this have to do with class actions?

A. More recently, plaintiffs in many class proceedings have relied on “waiver of tort” as an independent cause of action. Such claims have been certified in cases like Serhan (Estate Trustee) v Johnson & Johnson and Pro‑Sys Consultants Ltd v Microsoft Corporation, with courts — including the Supreme Court of Canada — suggesting that the true status of waiver of tort should be resolved at trial and not the certification stage. As Justice Brown put it, “courts have refrained from finding that it is plain and obvious that such an action does not exist.”⁴

This made it easier for proposed class proceedings to meet the test for certification, and some defendants chose to settle rather than risk losing on waiver of tort at trial.

On the facts of Atlantic Lottery, the Plaintiffs were not saying that ALC had caused them to suffer any loss. Instead, they argued that ALC’s breach of a duty to warn them about the dangers of VLTs was all they had to prove, in order to be “entitled to a remedy quantified solely on the basis of ALC’s gain, without reference to damage that any of them may have suffered.”⁵ (Basically, they were seeking a remedy for negligence without proving all the elements of negligence.) The certification judge and the Court of Appeal agreed that this was enough for the claim to proceed to trial.

The Supreme Court of Canada disagreed. Justice Brown noted that “failing to address whether an independent cause of action for waiver of tort exists will perpetuate an undesirable state of uncertainty.”⁶ For one, it would be inconsistent with the principle of proportionality to send a claim to trial when it’s doomed to fail. (This is some vindication for the late Justice Lax, who in the 2012 case of Anderson v St Jude Medical, Inc notably concluded that “deciding the waiver of tort issue does not necessarily require a trial.”)⁷

As Justice Brown said, “Nothing is gained, and much court time and considerable litigant resources are lost, by leaving this issue unresolved.”⁸

Q. Why did the SCC finally get rid of waiver of tort?

A. The majority identified two major difficulties with waiver of tort, one philosophical and one practical.

The philosophical problem was that the Plaintiffs’ claim did not align with the prevailing “corrective justice” theory of negligence, which considers why a particular claimant is entitled to a remedy from the particular defendant. Typically, the plaintiff’s loss provides the necessary link: where the defendant acted wrongfully and caused the plaintiff to suffer damage, the defendant is liable to correct the loss and make the plaintiff whole, as best as money can do.

But on the Plaintiffs’ theory in Atlantic Lottery, they could obtain a remedy (disgorgement of the Defendants’ profits) “without proof of damage.”

This “would be a radical and uncharted development” in tort law, according to Justice Brown.⁹

Moreover, it would present a significant practical problem — the proverbial race to the courthouse: “the first plaintiff who arrives at the courthouse steps” could be entitled to a windfall, regardless of whether they had suffered any damage caused by the defendant.

For these reasons, there was no basis to recognize waiver of tort as a cause of action.

Q. So what now?

A. The term “waiver of tort” should not be used anymore, and it cannot succeed as a cause of action. The concept of “disgorgement for wrongdoing” remains, but — as the term suggests — only as a remedy. This is because, “in order to make out a claim for disgorgement, a plaintiff must first establish actionable misconduct.”¹⁰

Justice Brown left open whether disgorgement could be available as a remedy for negligence (it has been granted as a remedy for some property-related torts, like conversion and trespass).

Turning to breach of contract, the majority concluded that disgorgement could be an available remedy in exceptional circumstances, where other remedies (like an injunction, damages, or specific performance) are inadequate, and usually where “the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity.”¹¹

That was not the case here, so the Plaintiffs’ breach of contract claim was also struck (along with their claim for unjust enrichment, and their claim that VLTs are illegal for being “similar to” three-card monte, which is prohibited in the Criminal Code).

Conclusion

Atlantic Lottery has brought some much-needed clarity to class actions law. Disgorgement may still be available as a remedy for certain misconduct, in class actions and other cases, and the limits of this remedy will have to be examined in future cases. But for waiver of tort, at least, it’s game over.

Stewart McKelvey lawyers Colm St. Roch Seviour, QC and Koren Thomson successfully represented the appellant Spielo International Canada ULC before the Supreme Court of Canada. Kara Harrington and Jennifer Taylor provided research assistance.

¹ See para 2.

² See paras 28-29.

³ See para 23.

⁴ See para 15.

⁵ See para 25.

⁶ See para 21.

⁷ See para 20.

⁸ See para 21.

⁹ See paras 32-34.

¹⁰ See para 30. At para 24, Justice Brown explained that disgorgement is distinct from restitution: “disgorgement requires only that the defendant gained a benefit (with no proof of deprivation to the plaintiff required), while restitution is awarded in response to the causative event of unjust enrichment …, where there is correspondence between the defendant’s gain and the plaintiff’s deprivation.”

¹¹ See para 53.

This article is provided for general information only.

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