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No cause of action in class suit against Atlantic Lottery over video lottery terminals, SCC rules

SCC overturns Nfld. court decision recognizing waiver of tort as cause of action in disgorgement

No cause of action in class suit against Atlantic Lottery over video lottery terminals, SCC rules
Kirk Baert of Koskie Minksy LLP represented the respondent plaintiffs who paid to play video lottery terminals.

A waiver of tort as an independent cause of action for disgorgement does not exist in Canadian law, the Supreme Court of Canada ruled today in striking down plaintiffs’ class-action claims against the Atlantic Lottery Corporation over its use of video lottery terminals.

In a 5/4 decision in Atlantic Lottery Corp. Inc. v. Babstock the Supreme Court found there was no reasonable cause of action in the proceeding for waiver of tort, breach of contract or unjust enrichment, and set aside the certification order. A minority of the court disagreed on the cause of action for breach and would have allowed the class certification on that claim.

The appellant Atlantic Lottery Corporation is constituted by the governments of the four Atlantic provinces, and has the authority to approve the use of video lottery terminals (VLTs). It remits profits to the province in the range of $60 to $90 million each year.

The proposed class action was brought by two residents of Newfoundland, who alleged harm by VLTs that offered line games similar to slot machines. They brought the class action on behalf of any natural person in Newfoundland or Labrador who paid to play a VLT in the province (estimated to be up to 30,000 people) in the six years preceding the action being launched in 2012.

The causes of action before the Supreme Court were waiver of tort, breach of contract, and unjust enrichment. For the first, waiver of tort, the plaintiffs claimed the ALC had breached a duty to warn players of the inherent dangers of VLTs, including addiction and suicidal thoughts, and so were entitled to a remedy quantified on the basis of ALC’s alleged ill-gotten gains, but without proving damage that any one of them would have suffered.

On the second cause of action, breach of contract, the plaintiffs said there was a contract between those who play the VLTs and ALC, the implied terms of which was that the ALC would provide “safe games” and act in good faith. They claimed the ALC breached those contractual terms, and that VLTs contravene the Criminal Code’s prohibitions against games similar to Three-card Monte, in which a player bets on the location of a card after they have been quickly rearranged by the dealer.

Although showing a breach of a statute is not a cause of action in common law, if a contravention of the Criminal Code is shown it would buttress the plaintiffs’ argument for breach of contract. The plaintiffs claimed disgorgement — meaning the repayment of ill-gotten gains, or a gains-based award — as a remedy. Recently courts have accepted disgorgement as available for breach of contract, but in exceptional circumstances.

On the third cause of  action, unjust enrichment, the plaintiffs claimed the ALC was unjustly enriched, at their expense, because VLTs contravene Criminal Code prohibitions against Three-Card Monte and similar games.

The Supreme Court of Newfoundland and Labrador refused a motion to strike and certified the class action, and a majority of the Court of Appeal affirmed the certification except for claims under the Competition Act and Statute of Anne, 1710. A dissenting justice would have allowed the appeal, set aside the certification order, and struck the claim in its entirety.

“A central issue in this case arises from the plaintiffs’ reliance on the doctrine of waiver of tort,” Mr. Justice Russell Brown wrote in today’s decision.

“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, [2013] 3 S.C.R. 477 (“Microsoft”) where this Court, citing conflicting authorities on this point, declined to resolve it (para. 97).”

Nor can a mere breach of duty of care ground a claim for disgorgement, the court found, and the term “waiver of tort” should not be used to refer to a cause of action.

“[T]he term waiver of tort is apt to generate confusion and should therefore be abandoned,” wrote Justice Brown.

For the majority, the claim for disgorgement for breach of contract was doomed to fail and there was no remedy available. Disgorgement for breach of contract “may be appropriate in exceptional circumstances, but only where, at a minimum, the remedies of damages, specific performance, and injunction are inadequate.” In this case there was nothing exceptional about what the plaintiffs alleged, the majority of the court found; they had paid to play a gambling game and didn’t win.

Punitive damages for breach of contract are also exceptional, and, as the Supreme Court noted in its decision in Bhasin v. Hrynew, 2014 SCC 7, not every contract imposes actionable good faith obligations on contracting parties.

“The alleged contract between ALC and the plaintiffs does not fit within any of the established good faith categories,” Justice Brown wrote. “Nor did the plaintiffs advance any argument for expanding those recognized categories.”

On unjust enrichment, the court found that ALC acquired a benefit pursuant to a valid contract with VLT users, and there was nothing in the pleadings to show that the contract was void. The court also set aside the argument that VLTs contravene the Criminal Code’s prohibitions against games similar to Three-card Monte, finding there was nothing in the pleadings that described VLTs as operating in the same manner.

A minority of the court found that it was not “plain and obvious” that the claim for breach of contract was doomed to fail, and that it should be possible for the plaintiff to receive nominal damages.

“In my view, there are several remedies that are open to the plaintiffs on their pleadings, including nominal damages, declaratory relief, disgorgement, and punitive damages,” wrote Justice Andromache Karakatsanis for the minority, including Chief Justice Richard Wagner and Justices Sheilah Martin and Nicholas Kasirer.

“Unlike a claim in negligence, loss is not an essential element of a cause of action for breach of contract,” Justice Karakatsanis wrote. “In my view, there is a basis for an action for breach of contract and a basis to obtain remedies against ALC even in the absence of pleadings of specific personal loss. For example, a court finding breach of contract may make binding declarations of right, whether or not any consequential relief is or could be claimed, and whether or not a declaration was pleaded as relief sought … “

“The plaintiffs were successful in the Trial Division,” the respondents’ counsel, Kirk Baert of Koskie Minksy LLP in Toronto, told Canadian Lawyer in a statement. “The plaintiffs were successful in the Court of Appeal for Newfoundland and Labrador. The plaintiffs lost 5 votes to 4 in the Supreme Court of Canada. As a result, this case is over and the issue of the alleged deceptive practices of the Atlantic Lottery Corporation will not be further explored. That is unfortunate.”

A statement from Atlantic Lottery read: “Atlantic Lottery is satisfied with the outcome of the process. We will stand by our program. As the only regulated video lottery provider in Atlantic Canada, Atlantic Lottery provides its players with a responsible and regulated video lottery program that delivers benefits to our communities.”

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