In July 2020, the Supreme Court of Canada released its highly anticipated decision in Atlantic Lottery Corporation Inc. v Babstock—Bennett Jones acted for ALC. The decision put to rest a 16-year-long debate about “waiver of tort”—a doctrine that class action plaintiffs have consistently alleged to be an independent cause of action that compels defendants to disgorge all profits earned as a result of a “wrongdoing”. Although the Supreme Court was split 5-4, it unanimously agreed that waiver of tort is not an independent cause of action under Canadian law.
In short, pleading waiver of tort as an independent cause of action allowed plaintiffs to seek a remedy quantified based only on a defendant's gain, without proof of their own loss or injury. Before Babstock, waiver of tort claims were consistently certified with no determination on whether the alleged cause of action exists. Because the law surrounding the doctrine was unsettled, certification judges were reluctant to find that it was “plain and obvious” that a waiver of tort claim would fail. In fact, in 2013, the Supreme Court of Canada in Pro-Sys Consultants Ltd. v Microsoft Corp., refused to strike a waiver of tort claim because it found that a pleadings motion was not the proper place to resolve the uncertainties surrounding the doctrine.
In 2018, the Newfoundland Court of Appeal strayed from the holding in Pro-Sys and the many certification appeals before it, recognizing waiver of tort as an independent cause of action. This decision effectively opened the door for the Supreme Court of Canada to provide a conclusive determination on the issue.
The plaintiffs in Babstock sought to certify a class action against ALC based on allegations that their video lottery terminals were inherently dangerous and deceptive. In fact, the plaintiffs alleged that the VLTs were so deceptive that they contravened the Criminal Code's prohibition of games like “three-card monte”. The plaintiffs relied on three causes of action: waiver of tort, breach of contract, and unjust enrichment, and sought disgorgement of the profits earned by ALC from operating the video lottery terminals. The trial court certified the plaintiffs' claims, which the Court of Appeal largely affirmed.
The majority of the Supreme Court of Canada allowed the further appeal. It found that none of the plaintiffs' three claims had a reasonable chance of success. The only point of disagreement between the majority and dissenting opinions was whether breach of contract constituted a reasonable cause of action in this case.
The majority held that the legal climate surrounding waiver of tort had developed since Pro-Sys, concluding that a claim should not survive an application to strike just because it is novel. It found that, where possible, legal disputes should be resolved promptly, rather than referred to a full trial.
The Supreme Court unanimously held that waiver of tort is a not a valid cause of action and should not be used to describe what is in effect, disgorgement. It clarified that disgorgement is a remedy that is only available upon a plaintiff proving all elements of a recognized cause of action. Further, granting disgorgement for negligence—without proof of damages—would lead to a remedy “arising out of legal nothingness”, and would be a radical shift in the law. The Court noted that the negligent conduct of a defendant is wrongful only when it damages the plaintiff. Without proof of damages, any one plaintiff would not be entitled to the full gain realized by a defendant.
The Supreme Court did not settle on whether disgorgement could be sought for the completed tort of negligence. It found that the plaintiffs' claim of negligence was inadequate as they did not plead causation, and disclaimed any intention of doing so. The Court acknowledged that this matter may need to be decided in the future in an appropriate case.
Babstock will have a momentous effect on future class action litigation in Canada. The decision takes away plaintiffs' ability to rely on waiver of tort as a means to certify actions that would otherwise not be certifiable because there is no proof of the plaintiff's loss. It also inspires a cultural shift in early determinations in the certification process. As a result of this decision, we predict that certification judges will be more inclined to resolve complex legal disputes at the pleading stage, allowing for quicker resolutions of class proceedings across the country.
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