Waiver 'f T'rts as a New Cause 'f Acti'n

The Ontari* Divisi*nal C*urt heard an appeal *f the decisi*n in Serhan Estate v
J+hns+n and J+hns+n1 t* certify a pr*duct liability class acti*n. The m*ti*ns judge held
that the material facts pleaded c*uld sustain an acti*n based *n the equitable d*ctrine
*f waiver *f t*rt. Significantly, the m*ti*ns judge f*und that pr**f *f l*ss w*uld n*t be
required in such a claim. The Divisi*nal C*urt upheld the appeal by a 2-1 margin, and
b*th the Ontari* C*urt *f Appeal and the Supreme C*urt *f Canada denied leave t*
appeal.

Facts

The claim in Serhan relates t* defective bl**d gluc*se meters and testing strips used by
diabetics t* m*nit*r their bl**d gluc*se levels. These were manufactured by LifeScan
Inc, a wh*lly *wned subsidiary *f J*hns*n and J*hns*n. The defective meters failed t*
indicate high bl**d gluc*se levels, but instead indicated that an err*r had *ccurred. The
defective strips resulted in err*ne*usly l*w readings if they were inc*mpletely inserted
by *ne 15,000th *f an inch *r m*re. These pr*blems were res*lved by LifeScan in 1997
and 1998.

By the late 1990s a number *f US federal agencies, including the F**d and Drug
Administrati*n and the Department *f Justice, had c*mmenced investigati*ns int*
LifeScan with respect t* these pr*ducts. In December 2000 LifeScan entered int* a plea
agreement with the pr*secuti*n and admitted kn*wledge *f the defects dating back t*
1993. Pursuant t* the plea agreement, LifeScan paid a fine *f US$29.4 milli*n.

The Ontari* plaintiff in this case s*ught damages f*r:

• negligence;

• negligent and fraudulent misrepresentati*n;

• breach *f Secti*n 52(1) *f the C*mpetiti*n Act; and

• c*nspiracy t* manufacture, sell and distribute defective pr*ducts in

Canada.

The plaintiff s*ught t* have all the revenue generated fr*m the sale *f the defective
pr*ducts held in a c*nstructive trust f*r the benefit *f the class. It als* asked f*r an
acc*unting *rder and an *rder f*r the disg*rgement *f all such revenue.

Absence 'f Evidence 'f L'ss

Critical t* any acti*n in t*rt is pr**f *f damages. One *f the primary issues in Serhan
was whether a cause *f acti*n c*uld be rec*gnized in the absence *f evidence *f injury
*r damages. As stated by the m*ti*ns judge: X[t]here is… virtually n* evidence that
either *f the representative plaintiffs, *r any *ther members *f the putative class,
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suffered any injuri*us effects t* their health by using the meter *r the strips *ther than
the pain inv*lved in *btaining additi*nal bl**d samples”.2 M*re*ver, as a functi*n *f
Canada’s public healthcare system, there was Xn* evidence that any *ther member *f
the putative class actually paid f*r either the meters *r the strips”.3

Waiver 'f T'rt

Waiver *f t*rt, as it was described by the m*ti*ns judge when citing a US decisi*n, is a
cause *f acti*n that is said t* turn *n whether the defendant:

“unjustly enriched itself by d0ing a wr0ng t0 [the] plaintiff in such

manner and in such circumstances that in equity and g00d c0nscience
[the] defendant sh0uld n0t be permitted t0 retain that by which it has
been enriched.”4

Justice Cullity c*nceded that the existence *f such a t*rt in Canada was debatable.
H*wever, he n*ted that the standard f*r striking *ut a pleading is high. He *bserved that
emerging causes *f acti*n sh*uld n*t be struck *ut bef*re they are factually devel*ped.
A successful plaintiff claiming waiver *r t*rt w*uld *btain the financial benefit that
accrued t* the defendant as a result *f the defendant’s wr*ngful acti*ns. Despite waiver
*f t*rt n*t being specifically pleaded, he f*und in the statement *f claim allegati*ns *f
material fact Xthat, if pr*ven, c*uld entitle the plaintiff t* remedy *n the basis *f the
d*ctrine”.5

The availability *f waiver *f t*rt as a cause *f acti*n w*uld significantly alter the legal
landscape *f pr*duct liability acti*ns in Canada. Damages are an essential c*mp*nent
f*r traditi*nal t*rt claims. If the decisi*n *f the m*ti*ns judge is upheld, a plaintiff wh* is
unable t* pr*ve damages w*uld nevertheless be able t* pr*ceed with his *r her claim
*n the basis *f this d*ctrine. M*re*ver, a successful claim c*uld result in an award that
is dispr*p*rti*nately large in c*mparis*n t* the actual l*ss, thereby creating a windfall
f*r the plaintiff. Finally, in the c*ntext *f class acti*ns, pr**f *f l*ss is typically tried as
an individual issue. Significantly different individual damage claims can derail a class
acti*n. The right t* pr*ceed with*ut pr*ving damages w*uld enlarge the p*tential f*r
class acti*ns. If this cause *f acti*n is ultimately accepted, a waiver *f t*rt w*uld
br*aden the availability *f class acti*ns and significantly reduce the expense *f litigating
a class acti*n f*r plaintiffs.

Ontari' C'urt 'f Appeal Granted Leave t' Appeal

The defendant s*ught and *btained leave t* appeal the m*ti*ns judge’s decisi*n. In the
Ontari* C*urt *f Appeal Justice Gr*und granted the m*ti*n f*r leave t* the Divisi*nal
C*urt. He f*rmulated the issue as whether:

“waiver f0r t0rt c0nstitutes a cause 0f acti0n in its 0wn right 0r is a

principle which is applied t0 the ch0ice 0f a plaintiff, having
established an acti0nable wr0ng, t0 seek a remedy by way 0f restituti0n,
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disg0rgement 0r an acc0unting rather than by way 0f damages t0

c0mpensate the plaintiff f0r his 0r her l0ss.”6

He c*nducted a review *f case law fr*m Canada and the United Kingd*m, as well as
vari*us sch*larly auth*rities. He f*und that Cullity’s decisi*n was in c*nflict with *ther
decisi*ns that have held that the waiver *f t*rt is Xa ch*ice *f remedies after an
acti*nable wr*ng has been established.”7

Divisi'nal C'urt Upheld M'ti'ns Judge’s Decisi'n

The appeal was subsequently heard by the Divisi*nal C*urt. Justice Epstein, writing f*r
the 2-1 maj*rity decisi*n, f*und that Justice Cullity had n*t erred:

“Cullity J. was theref0re c0rrect in c0ncluding that the issue 0f

whether waiver 0f t0rt is an independent cause 0f acti0n sh0uld
be res0lved in the c0ntext 0f a factual backgr0und 0f a m0re
fully devel0ped rec0rd.”8

Justice Chapnik, dissenting, agreed *n the p*int:

“As 0bserved in detail by Epstein J., given the present unsettled

nature 0f the jurisprudence in this area, there appears t0 be n0
reas0n why waiver 0f t0rt c0uld n0t be rec0gnized as an
independent restituti0nary cause 0f acti0n in Canadian
jurisprudence.” 9

B*th the Ontari* C*urt *f Appeal and the Supreme C*urt *f Canada denied leave t*
appeal the Divisi*nal C*urt’s decisi*n.

The pr*ceedings have thus far left *pen the p*ssibility that waiver *f t*rt may c*nstitute
an independent cause *f acti*n.

F+r further inf+rmati+n +n this t+pic please c+ntact James Newland +r Brian M+her at
Lerners LLP by teleph+ne (416 867 3076) +r by fax (416 867 9192) +r by email
(jnewland@lerners.ca +r bm+her@lerners.ca).

Endn'tes

1
(2004) 72 OR (3d) 296 (SCJ).
2
Ibid, para 12.
3
Ibid, para 16.
4
Ibid, paras 34 and 35, qu*ting Maddaugh and McCamus, The Law +f Restituti+n (2nd editi*n, 2004), at
page 739.
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5
Ibid, para 34.
6
Serhan Estate v J+hns+n and J+hns+n [2004] Carswell Ont 4511 (Div Ct) at para 4.
7
Ibid, para 7.
8
2006 CanLII 20322 (ON S.C.D.C.), para. 69
9
Ibid, para. 195.