Class Actions: Certification; Gaming

Atlantic Lottery Corp. Inc. v. Babstock2020 SCC 19 (38521)

“ALC, constituted by the governments of the four Atlantic provinces, is empowered to approve the operation of video lottery terminal games (“VLTs”) in Newfoundland and Labrador. The plaintiffs 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. The plaintiffs claim that VLTs are inherently dangerous and deceptive. Relying on three causes of action (waiver of tort, breach of contract and unjust enrichment), the plaintiffs seek a gain‑based award, quantified by the profit ALC earned by licensing VLTs.

ALC applied to strike the plaintiffs’ claim on the basis that it disclosed no reasonable cause of action, and the plaintiffs applied for certification of their claim as a class action. The certification judge dismissed ALC’s application, and further held that the plaintiffs had satisfied the requirements necessary for certification. The Court of Appeal substantially upheld the certification judge’s conclusions, and allowed the plaintiffs’ claims in waiver of tort, breach of contract and unjust enrichment to proceed to trial.”

The SCC (5:4, in part) allowed the appeals, set aside the certification order, and struck down the statement of claim in its entirety.

Justice Brown wrote as follows (at paras. 23-25, 27, 30, 34-35, 38, 46-49, 59-67, 69-71):”…the term “waiver of tort” is confusing, and should be abandoned. The concern is not for consistent terminology for its own sake, but rather for clarity of meaning: cases dealing with gain‑based remedies tend to employ inconsistent nomenclature that leads to confused and confusing results. Even the term “restitution” has been applied inconsistently, sometimes referring to the causative event of unjust enrichment and sometimes referring to a measure of relief (McInnes (2014), at pp. 10‑11). In my view, restitution properly describes the latter — meaning, 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. Further, restitution stands in contrast to another measure of relief, disgorgement, which 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, indeed, irrespective of whether the plaintiff suffered damage at all (McInnes (2014), at p. 11-12; see also L. D. Smith, “The Province of the Law of Restitution” (1992), 71 Can. Bar. Rev. 672; J. Edelman, Gain‑Based Damages: Contract, Tort, Equity and Intellectual Property (2002), at pp. 65‑93). While this Court’s decisions have occasionally referred to disgorgement variously as “restitution damages” or “restitution for wrongdoing”, the ambiguity inherent in such terminology calls for greater precision (see e.g. Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 25; Kingstreet Investments Ltd. v. New Brunswick (Finance), 2007 SCC 1, [2007] 1 S.C.R. 3, at para. 33).
In sum, then, restitution for unjust enrichment and disgorgement for wrongdoing are two types of gain‑based remedies (McInnes (2014), at pp. 144‑49; L. D. Smith, “Disgorgement of the Profits of Breach of Contract: Property, Contract, and ‘Efficient Breach’” (1995), 24 Can. Bus. L. J. 121, at pp. 121‑23; G. Virgo, The Principles of the Law of Restitution (3rd ed. 2015), at pp. 415-17; Burrows, at pp. 9‑12). Each is distinct from the other: 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 (most recently discussed by this Court in Moore), where there is correspondence between the defendant’s gain and the plaintiff’s deprivation (Edelman, at pp. 80‑86).

Here, the plaintiffs seek disgorgement, not restitution: they say that they are entitled to a remedy quantified solely on the basis of ALC’s gain, without reference to damage that any of them may have suffered. There are two schools of thought on where disgorgement fits in the overall legal structure of private obligations. The prevailing view is consistent with that which I have just stated. Disgorgement, as a gain‑based remedy, is precisely that: a remedy, awarded in certain circumstances upon the plaintiff satisfying all the constituent elements of one or more of various causes of action (specifically, breach of a duty in tort, contract, or equity).

…disgorgement should be viewed as an alternative remedy for certain forms of wrongful conduct, not as an independent cause of action. This view follows naturally from the historical origins of unjust enrichment and gain‑based remedies more generally.

Two points follow from this. First, and as this case demonstrates, the term waiver of tort is apt to generate confusion and should therefore be abandoned (Edelman, at p. 122). Secondly, and relatedly, in order to make out a claim for disgorgement, a plaintiff must first establish actionable misconduct.


The difficulty is not just normative, although it is at least that. The practical difficulty associated with recognizing an action in negligence without proof of damage becomes apparent in considering how such a claim would operate. As the Court of Appeal recognized, a claim for disgorgement available to any plaintiff placed within the ambit of risk generated by the defendant would entitle any one plaintiff to the full gain realized by the defendant. No answer is given as to why any particular plaintiff is entitled to recover the whole of the defendant’s gain. Yet, corrective justice, the basis for recovery in tort, demands just that: an explanation as to why the plaintiff is the party entitled to a remedy (Clements, at para. 7; Weinrib (2000), at pp. 1‑7). Tort law does not treat plaintiffs “merely as a convenient conduit of social consequences” but rather as “someone to whom damages are owed to correct the wrong suffered” (Weinrib (2000), at p. 6). A cause of action that promotes a race to recover by awarding a windfall to the first plaintiff who arrives at the courthouse steps undermines this foundational principle of tort law.

This is not the type of incremental change that falls within the remit of courts applying the common law (Salituro, at p. 670). It follows that the novel cause of action proposed by the plaintiffs has no reasonable chance of succeeding at trial.

…I respectfully disagree with Court of Appeal’s conclusion that the plaintiffs would not be “precluded from leading evidence that the breach of duty (assuming it can be proven) led to some form of injury” (para. 186). Again, causation of damage is a required element of the cause of action of negligence, and it must be pleaded. Here, not only have the plaintiffs not pleaded causation, their pleadings expressly disclaim any intention of doing so. The absence of a pleading of causation, they acknowledge, arises from an intentional litigation strategy to increase the likelihood of obtaining certification of their action as a class action by avoiding having to prove individual damage. This particular claim also has no reasonable chance of success.


While this Court has recognized that the statements of particular Members of Parliament cannot necessarily be taken as expressing the intention of Parliament as a whole (R. v. Heywood, [1994] 3 S.C.R. 761, at pp. 788-89), the statements recounted here were made by those directly responsible for introducing the three‑card monte prohibition, and as such provide relevant evidence of legislative purpose. They indicate that the phrase “similar to” was included in s. 206(2) to capture games that involve betting on the location of a particular object after a series of movements, regardless of whether the game is played with three playing cards.

The text of the provision and its surrounding context further suggest that the prohibition of games similar to three‑card monte was directed towards the game’s concrete attributes and not towards the abstract feature of deception. One would expect that, had Parliament sought to prohibit broadly deceptive gambling games, it would have straightforwardly done so (R. Sullivan, Sullivan on the Construction of Statutes (6th ed. 2014), at pp. 207-8). It defies logic that Parliament would choose to create such an offence by prohibiting three‑card monte. Moreover, three‑card monte is listed alongside other types of gambling games that are defined by their physical characteristics (punch boards, coin tables, and wheels of fortune). It would be anomalous to interpret the inclusion of three‑card monte in this list as an intention to prohibit all deceptive games (Sullivan, at pp. 230‑34).

All this leads me to conclude that games “similar to” three‑card monte involve, at a minimum, a player betting on the location of an object after a series of manipulations. Nothing in the pleadings describes VLTs as operating in this manner. Thus, the claim that VLTs are similar to three‑card monte has no reasonable chance of success.

 

At first glance, the plaintiffs’ breach of contract claim might merit different treatment than their claim in tort, since breach of contract — unlike the tort of negligence — does not require proof of loss as an element of the cause of action (Rogers & Rogers Inc. v. Pinehurst Woodworking Co. (2005), 14 B.L.R. (4th) 142 (Ont. Sup. Ct.), at para. 91). But that is of no moment here, since the plaintiffs have made it clear — both in their pleadings and at every level of court — that they seek only non‑compensatory remedies for breach of contract, namely disgorgement and punitive damages. Whether the plaintiffs’ breach of contract claim discloses a reasonable cause of action should be considered in light of the remedies the plaintiffs actually seek. The question to be decided here, then, is whether these remedies are available to the plaintiffs, assuming the truth of their pleadings.


Returning to the present case, and applying the standard articulated in Blake, the plaintiffs’ claim for disgorgement is plainly doomed to fail. I say this, first, because disgorgement is available for breach of contract only where, at a minimum, other remedies are inadequate. Circumstances of inadequacy arise when the nature of the claimant’s interest is such that it cannot be vindicated by other forms of relief. This may arise where, for example, the plaintiff’s loss is “impossible to calculate” or where the plaintiff’s interest in performance is not reflected by a purely economic measure (Inuit of Nunavut, at para. 80; see also Morris‑Garner, at paras. 39‑40; Burrows, at p. 676). Where, as here, the argument is that the quantum of loss is equal to the defendant’s gain, but the plaintiff would simply rather pursue disgorgement, a gain‑based remedy is not appropriate.

My colleague Karakatsanis J. suggests that compensatory damages may be inadequate here because VLTs do not create records for particular customers, and that ALC’s conduct may have contributed to the plaintiffs’ lack of evidence. But the plaintiffs do not make these allegations. More importantly, compensatory damages are not inadequate merely because a plaintiff is unwilling, or does not have sufficient evidence, to prove loss (Inuit of Nunavut, at para. 85; see also Morris‑Garner, at para. 90). Again, and as Inuit of Nunavut demonstrates, inadequacy flows not from the availability of evidence, but from the nature of the claimant’s interest. There, the claimant’s interest was in the Government of Canada’s agreement to develop a general monitoring plan to support collection and analysis of “information on the long term state and health of . . . the Nunavut Settlement Area” (para. 9). While the Government of Canada’s failure to do so resulted in an identifiable loss to the Inuit of Nunavut, it could not possibly be quantified in monetary terms. The Nunavut Court of Appeal therefore recognized that it would be appropriate to award gain‑based damages measured by the amount the Government of Canada saved by breaching the agreement. This is a far cry from the plaintiffs’ circumstances here. Their gambling losses are readily quantifiable and can be remedied through an award of compensatory damages.

Disgorgement for breach of contract is exceptional relief; it is not available at the plaintiff’s election to obviate matters of proof. And there is nothing exceptional about the breach of contract the plaintiffs allege. Once the allegations of criminal conduct are put aside (given that I determined that they should be struck), the plaintiffs’ claim is simply that they paid to play a gambling game and did not get exactly what they paid for. The plaintiffs cannot be said to have a legitimate interest in ALC’s profit‑making activity.

It follows that the plaintiffs’ claim has no reasonable chance of achieving disgorgement damages for breach of contract.

 

Punitive damage awards for breach of contract are also exceptional, but will be awarded where the alleged breach of contract is an independent actionable wrong (Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at para. 78). As this Court held in Whiten, the actionable wrong need not be tortious: punitive damages may also be awarded where the defendant breaches a contractual obligation of good faith (para. 79).

Having concluded that all of the plaintiffs’ other claims are bound to fail, the only remaining actionable wrong is the claim that ALC breached an obligation of good faith owed to the plaintiffs under the alleged contract. To that effect, the plaintiffs’ claim alleges:

  • [T]he nature of the contract between the parties and the vulnerability of the Plaintiffs implies a duty of good faith which requires the Defendant to consider the interests of the Plaintiffs as at least equal to its own and not to offer or supply an inherently dangerous service or product. The Defendant breached its implied duty of good faith by designing, testing, researching, formulating, developing, manufacturing or altering, producing, labeling, advertising, promoting, distributing, and/or selling VLTs which were inherently dangerous to users and which the Defendant knew or ought to have known would lead to dependency and addiction.

As this Court explained in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, however, not every contract imposes actionable good faith obligations on contracting parties. While good faith is an organizing principle of Canadian contract law, it manifests itself in specific circumstances. In particular, its application is generally confined to existing categories of contracts and obligations (para. 66). The alleged contract between ALC and the plaintiffs does not fit within any of the established good faith categories. Nor did the plaintiffs advance any argument for expanding those recognized categories.

Accordingly, the plaintiffs’ claim for punitive damages has no reasonable chance of success.

 

The remaining question on breach of contract is whether the plaintiffs’ claim should survive as a hollow cause of action that does not support any of the remedies they seek. In my view, it should not. While I agree with my colleague Karakatsanis J. that declaratory relief and nominal damages are available in theory as remedies for breach of contract, a reasonable claim is one that has a reasonable chance of achieving the outcome that the plaintiff seeks. That is not this claim. To be sure, the circumstances here are unusual. Not only did the plaintiffs plead only gain‑based relief and punitive damages, both of which I have concluded are unavailable in the circumstances the plaintiffs also expressly disclaimed remedies quantified on the basis of individual loss. At no point did the plaintiffs argue that their claim should survive because nominal damages are available. In my view, the plaintiffs’ breach of contract claim should be assessed on the basis of the questions put before the Court ⸺ namely, whether a gain‑based remedy or punitive damages are available in the circumstances. And on that basis, it is obvious that the plaintiffs’ breach of contract claim does not disclose a reasonable cause of action. To allow this claim to proceed to trial would simply be to delay the inevitable, and would not reflect a “proportionate procedur[e] for adjudication” (Hryniak, at para. 27).


The plaintiffs also rely on the principled unjust enrichment framework (or what the Court of Appeal referred to as “unjust enrichment simpliciter”). This claim requires establishing that ALC was enriched, that the plaintiffs suffered a corresponding deprivation, and that the enrichment and corresponding deprivation occurred in the absence of any juristic reason therefor (Moore, at para. 37). The appellants argue that this claim is bound to fail because, even if ALC has been enriched at the plaintiff’s expense, there is a juristic reason for the exchange.
The juristic reason element of the unjust enrichment analysis proceeds in two stages. First, the plaintiff must demonstrate that the defendant’s enrichment cannot be justified by any of the established categories of juristic reason. If none of the established categories of juristic reason are present, the plaintiff has a prima facie case for unjust enrichment. At the second stage, the defendant can rebut the plaintiff’s prima facie case by showing that there is a residual reason to deny recovery (Moore, at paras. 57-58).

Here, I do not have to go beyond the first stage of the analysis. The plaintiffs’ own pleadings allege that there was a contract between ALC and the plaintiffs under which the plaintiffs paid to play VLTs. A defendant that acquires a benefit pursuant to a valid contract is justified in retaining that benefit (Moore, at para. 57). Nothing in the pleadings, apart from perhaps the allegations of criminal conduct that I have determined are bound to fail, could serve to vitiate the alleged contract between the plaintiffs and ALC. It follows that I agree with the appellants that the plaintiffs’ unjust enrichment claim has no reasonable chance of success.”