Commercial Litigation and Dispute Resolution Blog

In Atlantic Lottery Corp. v. Babstock, 2020 SCC 19 (Babstock), released July 24, 2020, the Supreme Court of Canada (SCC) unanimously confirmed that “waiver of tort” is not an independent cause of action for disgorgement. To make out a claim for disgorgement, a gain-based remedy, a claimant must first establish actionable misconduct. Further, according to the majority of the SCC, disgorgement for breach of contract is exceptional relief and is available only where, at a minimum, other remedies are inadequate, such as when the nature of the claimant’s interest is of a kind that it cannot be compensated by other forms of relief (the loss is “impossible to calculate” or the plaintiff’s interest in performance “is not reflected by a purely economic measure”).

Overview of Proceedings

Babstock was a proposed class action, in which the claimants alleged that video lottery terminal (VLT) games offered to the public by providers authorized by the Atlantic Lottery Corporation (ALC) are deceptive, harmful and inherently addictive. The claim alleged three causes of action – “waiver of tort”, breach of contract and unjust enrichment. The claimants sought a gains-based remedy, namely disgorgement of the profits ALC earned by licensing VLTs. The ALC, which is both a business corporation and the regulator of gaming in the Atlantic Provinces (including Newfoundland and Labrador), applied to strike the claims of the proposed representative plaintiffs, Douglas Babstock and Fred Small.

The Supreme Court of Newfoundland and Labrador dismissed ALC’s application and certified the class action. The majority of the Court of Appeal struck two of the claims, but allowed the rest to proceed as a class action. The SCC allowed ALC’s appeal and set aside the certification order, striking the statement of claim in its entirety on the basis that each claim was “bound to fail” because it disclosed no reasonable cause of action. The minority, dissenting in part, would have allowed the appeal in part, certifying as a class action the claim based on breach of contract, punitive damages and the appropriateness of a disgorgement remedy.

Waiver of tort is not an independent cause of action

Traditionally, the doctrine of “waiver of tort” allows a plaintiff claiming a tort to recover benefits the defendant obtained through its wrongdoing, instead of the monetary damages measured by the plaintiff's loss. To “waive the tort” does not mean that a plaintiff waives the wrongfulness of the defendant’s conduct, but rather, that the plaintiff is electing to pursue an alternative, gain-based, remedy, not compensation for the plaintiff’s actual losses.

Particularly in the context of class actions, there has been considerable debate over whether waiver of tort exists as an independent cause of action in restitution, or is merely a remedial alternative once a plaintiff a establishes an actionable wrong. In this context, defendants to class actions that allege waiver of tort usually applied to strike pleadings or challenged certification. They did so arguing that waiver of tort is not an independent cause of action, because if it were, the existence of an independent cause of action would obviate the requirement for the plaintiff class members to prove loss or damage as a result of the alleged wrongful conduct. Until Babstock, the issue remained unresolved. In most cases, the lower courts did not determine whether waiver of tort could be asserted even if no underlying tort could be proven, instead sending the cases forward, ostensibly to trial, where the issue could be resolved on a “full factual record”.

In Babstock, the SCC expressly overturned the lower court’s ruling that a waiver of tort claim is independent (rather than derivative) and its finding that, as a result, it is not necessary for the plaintiff to establish loss when seeking disgorgement of profits secured by negligent misconduct. According to the SCC, the term “waiver of tort” is confusing and should be abandoned.

Restitution and disgorgement are different remedies

The SCC in Babstock clarified that restitution for unjust enrichment is distinct from disgorgement for wrongdoing, although both are gain-based remedies. “Restitution is the law’s remedial answer to circumstances in which a benefit moves from the plaintiff to the defendant, and the defendant is compelled to restore that benefit.” Disgorgement “refers to awards that are calculated exclusively by reference to the defendant’s wrongful gain, irrespective of whether it corresponds to damage suffered by the plaintiff and … whether the plaintiff suffered damage at all.”

The SCC held that to make out a claim for disgorgement, a plaintiff must first establish actionable misconduct. Pleading disgorgement as an independent cause of action would establish an entirely new category of wrongful conduct, akin to negligence, but which does not require proof of damage. As Justice Brown wrote:

[I]t is a far leap to find that disgorgement without proof of damage is available as a general proposition in response to a defendant’s negligent conduct. Determining the appropriate remedy for negligence, where liability has not already been established, is futile and even nonsensical since doing so allows ‘the remedy tail [to] wag the liability dog.’

The SCC agreed that disgorgement may be available for negligence in certain circumstances, but that the Babstock plaintiffs had not adequately pleaded their claim in negligence. The SCC reiterated that causation of damage is a required element of the tort of negligence – the conduct of a defendant in negligence is wrongful only to the extent that it causes damage. In Babstock, not only had the plaintiffs not pleaded causation, they expressly disclaimed any intention of doing so.

Disgorgement as a remedy for breach of contract

The ordinary form of monetary relief for breach of contract is an award of damages, measured according to the position which the plaintiff would have occupied had the contract been performed. The Babstock plaintiffs sought only non-compensatory remedies for breach of contract, namely disgorgement and punitive damages. Justice Brown held that disgorgement for breach of contract is exceptional relief, available only where other remedies are inadequate and where the plaintiff has a legitimate interest in preventing the defendant’s profit‑making activity. Because disgorgement for breach of contract is exceptional relief, the plaintiffs’ claim for disgorgement was doomed to fail, as there was “nothing exceptional” about the breach of contract alleged. On this point, the minority of the SCC disagreed, taking the view that the determination of whether the circumstances of the case are exceptional is a determination for the trial judge alone.

How trial and appellate courts apply this new clarification from the SCC on claims asserting the appropriateness of disgorgement is the next chapter in the development of this remedy. Stay tuned.