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CLASS OR REPRESENTATIVE ACTIONS - Certification - Pleadings - Institution of proceedings - Reasonable cause of action

Friday, July 24, 2020 @ 3:29 PM  

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Appeals by the defendant Atlantic Lottery Corporation Inc. (ALC) and third parties joined in the action by ALC from the dismissal of an application to strike the statement of claim and certification of a class action. ALC was 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 the province who paid to play VLTs in the six years preceding the class action, or on behalf of the estate of any such person. The plaintiffs’ essential claim was that VLTs were inherently dangerous and deceptive, and contravened the Criminal Code prohibition of games similar to three‑card monte. The plaintiffs relied on waiver of tort, breach of contract and unjust enrichment. They sought a gain-based award, quantified by the profit ALC earned by licensing VLTs. With respect to waiver of tort, the plaintiffs alleged that ALC breached a duty to warn of the inherent dangers associated with VLTs, including the risk of addiction and suicidal ideation. The plaintiffs alleged a contract arising from ALC’s offer of VLTs to the public, and the plaintiffs’ corresponding acceptance by paying to play. They claimed ALC breached the contract by supplying deceptive VLTs. Finally, the plaintiffs said that ALC was unjustly enriched at their expense. The Supreme Court of Newfoundland and Labrador dismissed ALC’s application to strike the plaintiffs’ claim as disclosing no reasonable cause of action and certified the plaintiffs’ action as a class action. ALC appealed both decisions. The Newfoundland and Labrador Court of Appeal substantially upheld the certification judge’s conclusions. The Court of Appeal concluded that the doctrine of waiver of tort could operate as an independent cause of action for disgorgement, where it would serve the purpose of deterring wrongful conduct. The Court of Appeal found that the pleaded facts, particularly considering the allegations of criminal conduct, could reasonably support a claim for disgorgement as a remedy for breach of contract.

HELD: Appeals allowed. Prior to the Court of Appeal decision, no Canadian authority had recognized waiver of tort as an independent cause of action for disgorgement. The plaintiffs said they were entitled to a remedy quantified solely on the basis of ALC’s gain, without reference to damage that any of them could have suffered. Disgorgement should be viewed as an alternative remedy for certain forms of wrongful conduct and not as an independent cause of action. By pleading disgorgement as an independent cause of action, the plaintiffs sought to establish an entirely new category of wrongful conduct, one that was akin to negligence but did not require proof of damage. 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 was given as to why any particular plaintiff was entitled to recover the whole of the defendant’s gain. A cause of action that promoted a race to recover by awarding a windfall to the first plaintiff who arrived at the courthouse steps undermined the foundational principle of tort law. It followed that the novel cause of action proposed by the plaintiffs had no reasonable chance of succeeding at trial. The plaintiffs did not adequately plead a claim in negligence. While the plaintiffs alleged that ALC had a duty to warn of the inherent dangers associated with VLTs, including the risk of addiction and suicide, those dangers were not alleged to have materialized. The plaintiffs did not allege that proper warnings would have caused them to spend less money playing VLTs or to avoid them altogether. The Criminal Code prohibition against three-card monte and similar games involved, at a minimum, a player betting on the location of an object after a series of manipulations. Nothing in the pleadings described VLTs as operating in that manner. Thus, the claim that VLTs were similar to three‑card monte had no reasonable chance of success. In their breach of contract claim, the plaintiffs sought only disgorgement and punitive damages. Disgorgement was available for breach of contract only where, at a minimum, other remedies were inadequate. Where the argument was that the quantum of loss was equal to the defendant’s gain, but the plaintiff would simply rather pursue disgorgement, a gain‑based remedy was not appropriate. The plaintiffs’ claim was that they paid to play a gambling game and did not get exactly what they paid for. They could not be said to have a legitimate interest in ALC’s profit‑making activity. The claim for disgorgement for breach of contract was doomed to fail. The alleged contract between ALC and the plaintiffs did not fit within any of the established good faith categories. Accordingly, the claim for punitive damages had no reasonable chance of success. The plaintiffs did not argue that their claim should survive because nominal damages were available, and the claim should not proceed to trial on that basis. The unjust enrichment claim must also fail. The plaintiffs’ pleadings alleged that there was a contract between ALC and the plaintiffs under which the plaintiffs paid to play VLTs. A defendant that acquired a benefit pursuant to a valid contract was justified in retaining that benefit. The certification order was set aside and the plaintiffs’ statement of claim was struck in its entirety.

Atlantic Lottery Corp. Inc. v. Babstock, [2020] S.C.J. No. 19, Supreme Court of Canada, R. Wagner C.J. and R.S. Abella, M.J. Moldaver, A. Karakatsanis, S. Côté, R. Brown, M. Rowe, S.L. Martin and N. Kasirer JJ., July 24, 2020. Digest No. TLD-July202020011-SCC