By a slim majority, the Supreme Court of Canada (“SCC”) has recently struck and dismissed a proposed class action brought against the Atlantic Lottery Corporation (“ALC”) with respect to the licensing of video lottery terminals (“VLTs”) in Newfoundland and Labrador, finding that the plaintiffs’ claims that VLTs are inherently dangerous and deceptive disclosed no reasonable cause of action.
The lead plaintiffs, Douglas Babstock and Fred Small, applied for certification of a class action against ALC, on behalf of any natural person resident in Newfoundland and Labrador who paid to play VLTs in that province in the six years preceding the class action, or on behalf of the estate of any such person. Relying on three causes of action: (1) waiver of tort; (2) breach of contract; and (3) unjust enrichment, the plaintiffs sought a gain-based award, quantified by the profit that ALC earned by licensing VLTs.
In a 5-4 decision, the SCC found that the plaintiffs’ claims for waiver of tort, breach of contract and unjust enrichment disclosed no reasonable cause of action, and set aside the certification order. A minority of the SCC disagreed with the majority’s position regarding breach of contract, and found that the class certification should be allowed for that aspect of the claim. Most notably, the SCC unanimously agreed that waiver of tort is not an independent cause of action for disgorgement under Canadian law and should be abandoned.
Waiver of Tort
With respect to the waiver of tort claim, the plaintiffs’ alleged that “ALC breached a duty to warn of the inherent dangers associated with VLTs, including the risk of addiction and suicidal ideation”, which justified an award based on disgorgement. Writing for the majority, Justice Russel Brown stated:
The plaintiffs say that a claim relying on waiver of tort as an independent cause of action for disgorgement has at least a reasonable chance of succeeding at trial. Before the [Newfoundland and Labrador] Court of Appeal’s decision in this case, however, no Canadian authority had recognized such a cause of action, although the plaintiffs rely on a line of class action certification decisions in which courts have refrained from finding that it is plain and obvious that such an action does not exist. The plaintiffs place significant emphasis on Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57,  3 S.C.R. 477 (“Microsoft”) where this Court, citing conflicting authorities on this point declined to resolve it (para. 97).
The SCC took this as an opportunity to clarify that the novel cause of action does not exist in Canadian law and that “the term “waiver of tort” is confusing, and should be abandoned. The SCC further clarified that disgorgement is not an independent cause of action, but rather, is an alternative remedy for certain forms of wrongful conduct. By pleading disgorgement as an independent cause of action, the plaintiffs’ sought to establish a new category of wrongful conduct – one that was akin to negligence but did not require proof of damage. Although disgorgement is available for some forms of wrongdoing without proof of damage (e.g. breach of fiduciary duty), the SCC found that plaintiffs are not entitled to pursue a remedy for disgorgement in cases that are akin to negligence where they cannot prove – or choose not to prove – resulting damage. On this basis, the SCC unanimously held that the novel cause of action pursued by the plaintiffs had no reasonable chance of succeeding at trial.
Breach of Contract
As with waiver of tort, the majority also found that the plaintiffs’ claim for breach of contract disclosed no reasonable cause of action, as there were no remedies available to them.
The plaintiffs alleged that ALC’s offer of VLTs to the public, and the plaintiffs’ corresponding acceptance by paying to play, constituted a contract. The plaintiffs further alleged that an implied term of said contract required ALC “to provide safe games that were fit for use and of merchantable quality, to use reasonable skill and care in its provision of VLT gaming, and to act in good faith.” According to the plaintiffs, ALC breached these terms by supplying deceptive VLTs.
The plaintiffs sought only non-compensatory damages, namely disgorgement and punitive damages. Accordingly, the majority approached the issue of whether the pleadings disclosed a reasonable cause of action by considering whether the remedies sought were actually available to the plaintiffs.
The majority acknowledged that disgorgement may be available for breach of contract, but “only where other remedies are inadequate, and only where the circumstances warrant such an award.” The majority concluded that the plaintiffs’ gambling losses were readily quantifiable, and as such, could be cured through an award of compensatory damages. In other words, alternate remedies to disgorgement were not inadequate. In coming to this determination, the majority noted that “compensatory damages are not inadequate merely because a plaintiff is unwilling, or does not have sufficient evidence, to prove loss”, and that disgorgement for breach of contract is not available where a plaintiff is merely attempting to avoid having to establish that they suffered damage.
In terms of punitive damages, the majority found that although the duty of good faith is an organizing principle of Canadian contract law, its application is generally confined to existing categories of contracts and obligations, and that the alleged contract in this case did not fit within any of these established categories. As a result, the majority concluded that the plaintiffs’ claim for punitive damages also had no reasonable prospect of success.
Writing for the minority, Justice Andromache Karakatsanis disagreed with the majority’s conclusion regarding breach of contract, and found that it was not “plain and obvious” that this claim was bound to fail. The minority was of the view that there were several remedies available to the plaintiffs based on their pleadings, including nominal damages, declaratory relief, disgorgement, and punitive damages, and that the issue of whether the plaintiffs’ were entitled to the benefit of any of these remedies, was a matter for the trial judge.
The SCC unanimously determined that the plaintiff’s claim for unjust enrichment failed to disclose a reasonable cause of action. The plaintiffs’ pleadings alleged that there was a contract between ALC and VLT users, and there was no evidence that the contract was void. ALC acquired a benefit pursuant to said contract, and therefore, was justified in retaining that benefit. In addition, the SCC rejected the plaintiffs’ argument that VLTs contravened the Criminal Code’s prohibition against gambling games similar to Three-card Monte, concluding that there was no indication that VLTs operated in the same manner.
The majority of the SCC held that each of the plaintiffs’ claims were bound to fail, because none of them disclosed a reasonable cause of action. Accordingly, the SCC ordered that the certification order be set aside and the plaintiffs’ claim be struck in its entirety.
This decision has definitively resolved the uncertainty surrounding the claim for waiver of tort and disgorgement, and will have a significant impact on the certification of class actions moving forward.
As Justice Brown wrote for the majority:
certification judges have had “little alternative but to affirm that the question of the doctrines availability is indeed a live issue for trial, which can and does result in certification to the detriment of the defendant, who is then practically compelled to pay a settlement to the plaintiff” (J.M. Martin, “Waiver of Tort: An Historical and Practical Study” (2012), 52 Can. Bus. L.J. 473, at para. 476 (footnote omitted); see also H.M. Rosenberg, “Waiving Goodbye: The Rise and Imminent Fall of Waiver of Tort in Class Proceedings” (2010), 6 Can. Class Action Rev. 37, at p. 38). Indeed, this Court’s decision to refrain from striking the waiver of tort claim in Microsoft has been taken as an affirmative statement that such claims are viable … Nothing is gained, and much court time and considerable litigant resources are lost, by leaving this issue unresolved.
Prior to this decision, plaintiffs would be able to plead this novel claim and ride a waive towards certification, while avoiding to have to prove individual damage. By clarifying this issue, the SCC has narrowed the doorway to certification and levelled the playing field.
See the decision here: https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/18425/index.do