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Equity - Compensation

. Southwind v. Canada

In Southwind v. Canada (SCC, 2021) the Supreme Court of Canada broadly considered principles of equitable remedies (here compensation):
B. Principles of Equitable Compensation

[65] The basic principles of equitable compensation are not in dispute in this appeal. However, the parties disagree about their application to breaches of the Crown’s fiduciary duty in relation to land held for the benefit of Indigenous Peoples.

[66] As I shall explain, equitable compensation is a loss-based remedy that deters wrongdoing and enforces the trust at the heart of the fiduciary relationship. It differs from common law damages because of the “unique foundation and goals of equity” (Canson Enterprises Ltd. v. Boughton & Co., 1991 CanLII 52 (SCC), [1991] 3 S.C.R. 534, at p. 543, per McLachlin J.). 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 owed by the fiduciary. The loss must be caused in fact by the fiduciary’s breach, and the causation analysis is not limited by foreseeability (to use the language in Canson, at p. 552, where foreseeability was used synonymously with remoteness in this context).

[67] This Court’s decision in Guerin explained that, although a fiduciary relationship is different than a traditional trust relationship, breach of the Crown’s fiduciary duty gives rise to the same equitable remedies as breach of trust (p. 376; see also Wewaykum, at para. 94). The available equitable remedies include, among others, accounting for profits, constructive trust, and equitable compensation (Canson, at p. 588, per La Forest J.) Accounting for profits and constructive trust are gains-based remedies, meaning they are measured by the fiduciary’s gain rather than the plaintiff’s loss. The purpose is to undo the fiduciary’s gain. Equitable compensation, on the other hand, is a loss-based remedy; the purpose is to make up the plaintiff’s loss (S. L. Bray, “Fiduciary Remedies”, in E. J. Criddle, P. B. Miller and R. H. Stikoff, eds., The Oxford Handbook of Fiduciary Law (2019), 449, at pp. 449 and 456).

[68] When the Crown breaches its fiduciary duty, the remedy will seek to restore the plaintiff to the position the plaintiff would have been in had the Crown not breached its duty (Guerin, at p. 360, citing Re Dawson; Union Fidelity Trustee Co. v. Perpetual Trustee Co. (1966), 84 W.N. (Pt. 1) (N.S.W.) 399 (S.C.); Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377, at p. 440) When it is possible to restore the plaintiff’s assets in specie, accounting for profits and constructive trust are often appropriate (see Guerin, at pp. 360-61; Hodgkinson, at pp. 452-53). When, however, restoring the plaintiff’s assets in specie is not available, equitable compensation is the preferred remedy (Canson, at p. 547). The LSFN seeks equitable compensation in this case because what it lost — its land — cannot be returned. It is therefore unnecessary to consider gains-based remedies.

[69] Equitable compensation is equity’s counterpart to common law damages (see Whitefish Lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744, 87 O.R. (3d) 321, at para. 48). It is discretionary and restitutionary in nature, aiming to restore the actual value of the thing lost through the fiduciary’s breach, referred to as the plaintiff’s lost opportunity (Canson, at pp. 547-48, 551-52, 555 and 585).

(1) Causation

[70] To award equitable compensation, there must be factual causation: the fiduciary’s breach must have caused, in fact, the plaintiff’s lost opportunity (Canson, at p. 551; see also Stirrett v. Cheema, 2020 ONCA 288, 150 O.R. (3d) 561, at para. 69). This basic principle, that equitable compensation restores the lost opportunity caused in fact by the fiduciary’s breach, is uncontroversial. However, there has been debate about the extent to which the causation analysis should borrow from the common law of damages and import limiting factors such as foreseeability.

[71] In concurring reasons in Canson, McLachlin J. stressed the differences between equitable remedies and common law damages, explaining that the purpose of equity is to enforce the trust which lies at its heart (p. 543). Analogy with common law damages may not be appropriate given this misalignment between the purpose of fiduciary obligations and obligations through tort and contract. The same point was adopted by Lord Reed J.S.C. in AIB Group (UK) plc v. Mark Redler & Co. Solicitors, [2014] UKSC 58, [2015] A.C. 1503, at para. 83:
In negligence and contract the parties were taken to be independent and equal actors, concerned primarily with their own self-interest. Consequently, the law sought a balance between enforcing obligations by awarding compensation, and preserving optimum freedom for those involved in the relationship. The essence of a fiduciary relationship, by contrast, was that one party pledged herself to act in the best interests of the other. The freedom of the fiduciary was diminished by the nature of the obligation she had undertaken. The fiduciary relationship had trust, not self-interest, at its core.
[72] Another difference between equitable compensation and common law damages is that equity is especially concerned with deterring wrongful conduct by fiduciaries. As Professor Rotman observed, “[b]eneficiaries are . . . implicitly dependent upon and peculiarly vulnerable to their fiduciaries’ use, misuse, or abuse of power over their interests” (p. 991). It is therefore crucial that equitable remedies deter fiduciaries from misusing their powers. By restoring the beneficiary’s lost opportunity, equitable compensation enforces the fiduciary relationship and deters the fiduciary’s wrongful conduct.

[73] Due to these differences, rather than relying on common law principles, McLachlin J. explained that the proper approach to equitable compensation “is to look to the policy behind compensation for breach of fiduciary duty and determine what remedies will best further that policy” (Canson, at p. 545). McLachlin J.’s approach was subsequently followed by this Court in Cadbury Schweppes Inc. v. FBI Foods Ltd., 1999 CanLII 705 (SCC), [1999] 1 S.C.R. 142, and recognizes that the applicable rules will depend both on the nature of the fiduciary relationship and the fiduciary obligations: “Differences between different types of fiduciary relationships may, depending on the circumstances, dictate different approaches to damages” (Canson, at p. 546). In other words, “[t]he rules appropriate to a breach of duty by a trustee . . . have to be determined in the light of the characteristics of the obligation in question” (AIB, at para. 93). There must be a close relationship between the fiduciary duty and the fiduciary remedy, and the fiduciary duty must “forcefully shape the content of [the] fiduciary remed[y]” (Bray, at p. 451). Thus, while factual causation will always apply to equitable compensation in the sense that the fiduciary’s breach must cause in fact the plaintiff’s loss, common law limiting factors will not readily apply because of the nature of the fiduciary relationship and obligations.

[74] Equity assesses the loss at the date of trial and with the benefit of hindsight (Guerin, at pp. 361-62, per Wilson J.; Canson, at p. 556; Target Holdings Ltd. v. Redferns, [1996] 1 A.C. 421 (H.L.), at pp. 437-39). This means that equity compensates the plaintiff for the lost opportunity caused by the breach, regardless of whether that opportunity could have been foreseen at the time of breach. McLachlin J. described the analysis as follows:
The plaintiff’s actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach.

(Canson, at p. 556)
[75] McLachlin J.’s use of the phrase “common sense view of causation” in Canson should not be taken to mean that the causation analysis in equitable compensation cases will always have an “intuitively obvious answer” (AIB, at para. 95). This is not always the case; trial judges are often faced with difficult questions of causation in claims for equitable compensation. Instead, the phrase “common sense” clarifies that the rules developed in legal causation, such as foreseeability, do not readily apply in equity: “The requirement that the loss must result from the breach of the relevant equitable duty does not negate the fact that ‘causality’ in the legal sense as limited by foreseeability at the time of breach does not apply in equity” (Canson, at p. 552). Professor Rotman explains the same point as follows:
Each starts with the idea of “but for,” “cause-in-fact,” or “sine qua non,” causation. This generally satisfies Equity, but the common law requires more; it demands a finding of materiality or substantial cause to link the impugned activity with the harm to the plaintiff. Further, the common law imports ideas of foreseeability (or reasonable contemplation) and remoteness into its assessment of causality. . . . These other considerations do not readily enter into Equity’s assessment of fiduciary accountability.

(Fiduciary Law (2005), at p. 634).
See, also, Target Holdings, where Lord Browne-Wilkinson observed that “the common law rules of remoteness of damage and causation do not apply” (p. 434).

[76] 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.).

[77] 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.

(2) Equitable Presumptions

[78] To achieve these purposes of equitable compensation, the assessment is also guided by presumptions that equity makes against breaching fiduciaries.

[79] Equity presumes that the plaintiff would have made the most favourable use of the trust property (Guerin, at pp. 362-63; Canson, at p. 545; Oosterhoff on Trusts: Text, Commentary and Materials (9th ed. 2019), by A. H. Oosterhoff, R. Chambers and M. McInnes, at p. 1018). In Guerin, for example, the Musqueam Indian Band expected certain advantageous terms in a lease agreement that Canada negotiated on its behalf with a private developer. Canada failed to secure those terms, but instead entered into a less-favourable agreement that was not authorized by the band. In determining how to compensate the band for breach of Canada’s fiduciary duty, however, the trial judge determined that the favourable lease terms were not the appropriate measure of compensation because no third party would have agreed to such terms and that measure of loss was not, therefore, causally connected to the breach. The trial judge then considered what the highest and best use of the asset was between breach and date of trial, finding that it was a residential development. This was even though the trial judge found that the area would likely not have developed until some years after the breach. As McLachlin J. observed in Canson, the trial judge “assessed, as best he could, the value of the actual opportunity lost as a result of the breach” (p. 552).

[80] The focus is always on whether the plaintiff’s lost opportunity was caused in fact by the fiduciary’s breach. Equity will assess that opportunity under the presumption that the beneficiary would have put the asset to its most favourable use. The most favourable use must be realistic. The common law requires a plaintiff to lead evidence to that effect.

[81] There are additional equitable presumptions that are applicable in appropriate cases. The presumption of legality, discussed in more detail below, prevents breaching fiduciaries from reducing compensation by arguing they would not have complied with the law.

[82] Another presumption, the so-called Brickenden rule, applies where the fiduciary breached a duty to disclose material facts. The breaching fiduciary is prevented from arguing that the outcome would be the same regardless of whether the facts were disclosed (Brickenden v. London Loan & Savings Co., 1934 CanLII 280 (UK JCPC), [1934] 3 D.L.R. 465 (P.C.)).

[83] 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.



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