Southwind v. Canada2019 FCA 1712021 SCC 28 (38795)

“The Lac Seul First Nation (“LSFN”) is a Treaty 3 First Nation in Northern Ontario. Its reserve is located on the southeastern shore of Lac Seul. In 1929, a dam to power hydroelectricity generation to Winnipeg was completed pursuant to an agreement that Canada, Ontario and Manitoba had entered into. The project involved raising the water level of Lac Seul by 10 feet, or approximately 3 metres, to create a water reservoir. Canada was aware from the outset that flooding Lac Seul would cause considerable damage to the LSFN’s reserve. Despite repeated warnings about these impacts, the project advanced without the consent of the LSFN, without any compensation, and without the lawful authorization required. As a result of the project, almost one‑fifth of the best land on the LSFN reserve was permanently flooded. The damage was extensive and included the destruction of homes, wild rice fields, gardens, haylands, and gravesites.

The LSFN submitted a claim for flooding damages in 1985. In 1991, S, for himself and on behalf of the members of the Lac Seul Band of Indians, filed a civil claim against Canada in Federal Court for breach of Canada’s fiduciary duty and its obligations under the Indian Act  and Treaty 3. The trial judge concluded that Canada failed to meet its fiduciary duty to the LSFN in respect of its reserve land and that the appropriate remedy was equitable compensation. The LSFN proposed various models of compensation at trial, and led evidence regarding agreements with another First Nation in contemporaneous hydroelectric projects (“Kananaskis Falls Projects”), which the trial judge distinguished. The trial judge valued the flooded land as if it had been lawfully expropriated according to general expropriation law. In doing so, he excluded the value of the land for hydroelectricity generation. He also assessed other calculable losses and non‑calculable damages for a total award of $30,000,000. On appeal, the LSFN challenged the trial judge’s evaluation of equitable compensation for the loss of the flooded lands. The majority of the Court of Appeal dismissed the appeal. A dissenting judge would have allowed the appeal, agreeing that the value calculated for the flooded land should have taken into account downstream hydroelectricity generation and concluding that the trial judge also made a legal error in distinguishing the Kananaskis Falls Projects.”

The SCC (8:1) allowed the appeal and set aside the award for equitable compensation and returned to the Federal Court for reassessment.

Justice Karakatsanis wrote as follows (at paras. 10-13, 78-77, 83, 94-95, 98-100, 111 -118, 129, 145-147):

“The trial judge valued the flooded land based on its value in 1929, with 10 percent valued as waterfront land and 90 percent valued as bushland. He determined that because Canada was authorized to expropriate the land for a public work under the Indian Act  provisions in force at the time, the land should be valued based upon an expropriation in 1929. Thus, the trial judge concluded that the First Nation was not entitled to be compensated for any value that the land provided to the hydroelectricity project itself.

In my view, this approach to equitable compensation for breach of fiduciary duty is flawed. By looking solely at the amount the LSFN would have received if Canada had complied with the general law relating to expropriation, the trial judge gave no effect to the unique obligations imposed by the fiduciary duty. The trial judge improperly focused on what Canada would likely have done, as opposed to what Canada ought to have done as a fiduciary. While I agree with much of the trial judge’s analysis, this error tainted his assessment of equitable compensation.

The fiduciary duty imposes heavy obligations on Canada. The duty does not melt away when Canada has competing priorities. Canada was under an obligation to preserve and protect the LSFN’s interest in the Reserve. This included an obligation to negotiate compensation for the LSFN on the basis of the value of the land to the hydroelectricity project. Compensation must be assessed on that basis.

I would allow the appeal and remit the case back to the Federal Court for reassessment of the equitable compensation to include the value of the flooded land to the hydroelectricity project.

Canada argues that in valuing the loss the benefit of hindsight cannot mean that the beneficiary is put in a better position than it would have been in had the fiduciary observed its duty at the time of breach. This argument was explicitly rejected by this Court in Blueberry River, where McLachlin J. wrote that concern about “unexpected windfall” amounted to “bringing foreseeability into the fiduciary analysis through the back door” (para. 103). Similarly, in Guerin, compensation was assessed at a higher level than would have been possible at the moment of breach because the most valuable use of the asset between breach and date of trial was not foreseeable at the time of breach. Concerns about a “windfall” cannot therefore subtract from the “equitable approach of looking at what actually happened to values in later years” (Canson, at p. 551). Equity will not be limited by foreseeability, unless it is “necessary to reach a just and fair result” (Hodgkinson, at p. 443, per La Forest J.).

There are very good reasons why foreseeability does not apply to the Crown’s breach of fiduciary duty in this case. In Canson, La Forest J. held that it would not apply where a fiduciary has discretionary control over a beneficiary’s property (p. 578). Indigenous interests in land are quasi-proprietary in nature; they are at the heart of the Crown-Indigenous relationship and are central to Indigenous identity and culture (Wewaykum, at paras. 74 and 86; Osoyoos, at para. 46). Moreover, in Guerin, Wilson J. accepted that foreseeability would not apply to breaches of the Crown’s fiduciary duty towards Indigenous Peoples (pp. 360-62; see also Whitefish Lake, at paras. 52-55). The Crown’s fiduciary duty is grounded in the honour of the Crown and breaches of the duty are different in kind than private law breaches of contract or tort.

In summary, equitable compensation deters wrongful conduct by fiduciaries in order to enforce the relationship at the heart of the fiduciary duty. It restores the opportunity that the plaintiff lost as a result of the fiduciary’s breach. The trial judge must begin by closely analyzing the nature of the fiduciary relationship so as to ensure that the loss is assessed in relation to the obligations undertaken by the fiduciary. The loss must be caused in fact by the fiduciary’s breach, but the causation analysis will not import foreseeability into breaches of the Crown’s fiduciary duty towards Indigenous Peoples. Equitable presumptions — including most favourable use — apply to the assessment of the loss. The most favourable use must be realistic. The trial judge must be satisfied that the assessment reflects the value the beneficiary could have actually received from the asset between breach and trial and the importance of the relationship between the Crown and Indigenous Peoples.

In applying what Canada’s obligations to the LSFN required in this case, the trial judge focused on the fact that Canada could legally expropriate the land under s. 48  of the Indian Act  because the Project was a public work. This led the trial judge to improperly conclude that Canada’s fiduciary obligations required Canada to do no more than the minimum required in an expropriation of fee simple lands. As I shall explain, the fiduciary duty required more than compensation based upon expropriation principles in this case for three reasons. First, the presence of legal discretion to take or expropriate the land in s. 48  of the Indian Act  did not define the obligations imposed by Canada’s fiduciary duty. Second, the fact that the land was required for a public work did not negate the obligations imposed by Canada’s fiduciary duty. And third, the principles of expropriation law are fundamentally different than those underlying Indigenous interest in land. Instead, the fiduciary obligations in this case must reflect the nature of the interest, the impact of the loss on the First Nation, the importance of the fiduciary relationship, and reconciliation, which is the overarching goal of the fiduciary duty itself, based in the honour of the Crown.

Therefore, for reasons that follow, I conclude that even though the land was needed for a public work, the fiduciary duty still required Canada to first attempt to negotiate a surrender with the LSFN. If negotiations failed and Canada expropriated the land under s. 48 , it would at least have had to provide fair compensation reflecting the land’s use as water storage for hydroelectricity generation.

The effect of the trial judge’s reliance on the legal powers conferred in the Indian Act  also raises a question regarding the role of the presumption of legality in this case. The presumption of legality or lawfulness is an equitable presumption meant to prevent fiduciaries from reducing compensation by arguing that they would have broken the law (Whitefish Lake, at para. 69). It cannot be inverted and used instead to limit compensation by suggesting that the fiduciary is expected to do no more than what the law, not equity, requires. The trial judge placed great emphasis on what Canada would have done had it acted “legally” and equated this with what Canada should have done had it fulfilled its fiduciary duty (see, e.g., para. 358). However, correctly applied, the presumption of legality simply means that Canada is prevented from arguing that it would not have complied with the rules in the Indian Act  or Treaty 3. The presumption is of little assistance in determining either the fiduciary obligations or the assessment of loss in this case.

The trial judge’s reasons can also be read as relying on the legal powers conferred in s. 48  to improperly focus on the inequality of bargaining power between the LSFN and Canada, its fiduciary, as a factor to limit compensation. It is appropriate in assessing the lost opportunity to consider as one factor what third parties, such as Ontario or Manitoba, would have been willing to pay and what their relative bargaining power was. However, the trial judge should not consider the “little leverage” the First Nation had with its fiduciary in assessing compensation (para. 318). Obviously, Canada is not permitted to use its legal power over the beneficiary to force an unfair settlement on the beneficiary. Such reasoning effectively turns Canada’s fiduciary obligation on its head, allowing Canada to benefit from the very discretionary power over the LSFN which is the source of its fiduciary duty.

The legal authority of Canada to expropriate the land under s. 48  therefore does not define the fiduciary duty in this case.

Therefore, the trial judge’s description of the fiduciary obligations in this case was based on his narrow focus on legal discretion in s. 48 . Even though 11,304 acres, or 17 percent of the Reserve, would be flooded, the trial judge determined that s. 48  allowed Canada to take the land for its value under expropriation law — without regard to the value of the land to the Project — and that the fiduciary duty required no more. This is despite the fact that Canada was warned that the Reserve would be “ruined for any purpose [for] which it was set aside”. I disagree. The fiduciary duty set a higher bar than expropriation law given the sui generis interest in the Reserve land and the tremendous impact on the LSFN.

Instead, Canada ought to have first attempted to negotiate a surrender. Canada’s fiduciary obligations to preserve the LSFN’s quasi-proprietary interest, advance its best interests, and protect it from an improvident bargain required it to ensure the highest compensation possible. The LSFN’s interest in the Reserve land included an interest in its anticipated use — which was as land for hydroelectricity generation. Canada was under an obligation to secure compensation for this value if the Project was to go forward and the fact that the land was needed for a public work did not change this.

If negotiations for a surrender of the land by the LSFN under s. 50  of the Indian Act  were unsuccessful, Canada could have proceeded through a taking under s. 48 . However, given the impact of the flooding on the LSFN, Cabinet would have had to seriously consider how to fulfill Canada’s fiduciary duty in the context of an expropriation. In a memorandum from May 1929, Mr. Bury suggested that exclusive trapping rights would have to be given to the LSFN, at least for a period of time, while the Deputy Superintendent General suggested allocating hunting and fishing grounds elsewhere. Cabinet may have decided, for example, to set aside additional reserve land or fishing or harvesting rights for the LSFN in addition to providing financial compensation. Even in an expropriation, Canada was required to preserve the LSFN’s interest in the land to the greatest extent possible and should have secured compensation for the LSFN that reflected the nature of the interest, the impact on the community, and the value of the land to the Project.

In sum, the trial judge was correct that Canada’s fiduciary obligations to the LSFN included a duty of loyalty and good faith; a duty to provide full disclosure and to consult with the LSFN; a duty to act with ordinary prudence with a view to its best interests; and a duty to protect and preserve the LSFN’s proprietary interest in the Reserve from exploitation. If Canada pursued a negotiated surrender, it would have to advance the best interests of the LSFN and protect it from an improvident bargain. In an expropriation, Canada would also have to minimally impair the protected interest. However, the duty to preserve and protect the LSFN’s sui generis interest in the Reserve is not satisfied by the application of expropriation principles. Instead, given the nature of the interest and the harm to the LSFN, Canada was obligated to negotiate in order to secure compensation reflecting that impact and the value of the land for its anticipated use — hydroelectricity generation. It should have negotiated for the best possible compensation. Canada breached this obligation.

The value of the loss flows from the nature of the breach and the obligations that the fiduciary should have fulfilled. The valuation of the loss must reflect Canada’s obligation to negotiate compensation based upon the best price that could have been obtained for the land’s use for hydroelectricity generation.

Here, the trial judge valued the land as bushland and waterfront land. His assessment of equitable compensation flows from his conclusion that expropriation was permitted under the Indian Act  and that Canada would likely have compensated on the basis of expropriation law, excluding the value of the land as water storage for the Project itself. This improper conclusion underlies the trial judge’s rejection of the Appellant’s proposed methods of valuation at trial.

At trial, the Appellant primarily relied on the hypothetical of a revenue-sharing agreement as the best valuation, but its experts also put forward additional models for evaluating the lost opportunity, including contemporaneous agreements reached with another First Nation. Canada’s experts put forward evidence regarding the expropriation value. The trial judge rejected any valuation greater than a hypothetical flowage easement based upon the limited value that expropriation law would have permitted.

I have already determined that equitable compensation in this case should have been assessed on the basis that Canada was under an obligation to negotiate in order to obtain the best possible compensation based upon the value of the land to the Project. The question is how to assess this value.

In conclusion, the LSFN is entitled to compensation for the lost opportunity to negotiate a surrender of the flooded land based on its value to hydroelectricity generation. This requires the trial judge to presume that the Project would have moved forward and that Canada would have fulfilled its fiduciary obligation at that time by ensuring the best possible compensation for the LSFN based on the value of the land to the Project.

In conclusion, the assessment of the lost opportunity was flawed because it was based on an incorrect view of what the fiduciary duty required. By valuing the loss as the amount required under expropriation law, the trial judge failed to account for a fiduciary obligation to negotiate for compensation reflecting the LSFN’s interest in the Reserve land, impact on the community, and the value of the land given its intended use as water storage for hydroelectricity generation. As a result, the assessment of the value of the flooded land must be reassessed. The trial judge’s assessment of other losses were not challenged in this appeal. Similarly, I take no issue with the manner in which the trial judge brought forward historic losses to present value.

A hypothetical flowage easement at $1.29 an acre is not an appropriate measure of compensation in this case because it does not reflect the value of the land to the Project. The sole basis for this valuation is the conclusion that because the Project was a public work, and Canada could have expropriated the land, Canada was not expected to secure compensation for the LSFN reflecting the value of its land to the Project. I cannot agree. As I have explained, this approach is inconsistent with the unique nature of the Indigenous interest in reserve land and the devastating impact of the flooding on the LSFN. It does not reflect the honour of the Crown nor serve the overarching goal of reconciliation. The LSFN is entitled to equitable compensation for the lost opportunity to negotiate for an agreement reflecting the value of the land to the hydroelectricity generation Project.

The award for equitable compensation must be returned for reassessment in accordance with these reasons. I would allow the appeal with costs to the Appellant throughout. I would set aside the judgment of the Court of Appeal and the trial judge’s award of equitable damages and return that question to the trial court for reassessment.”