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01 March 2005
The Supreme Court of Canada recently delivered two decisions that refine the established three-part test for claims for unjust enrichment: Garland v Consumers' Gas Co(1) and Pacific National Investments Ltd v Victoria (City).(2) The court divided the analysis of the third element of the test - absence of a juristic reason - into two stages. The effect is to give judges greater discretion in how they decide individual cases involving claims for unjust enrichment.
The Garland Case was a class action in which the plaintiff sought to recover the late payment penalties imposed by a regulated gas utility on the basis of unjust enrichment. Each late payment penalty was 5% of the unpaid gas charges. In an earlier Supreme Court decision (Garland v Consumers' Gas Co)(3) the court had held that this late payment penalty constituted interest for the purposes of a section of the Criminal Code that (i) establishes effective rates above 60% as a criminal rate of interest, and (ii) makes it a criminal offence to receive interest at a criminal rate. The evidence established that if a customer paid a bill less than 38 days after the due date (as most did), the 5% late payment penalty constituted interest at a criminal rate.
Nevertheless the Ontario Energy Board had always approved the defendant's late payment penalty scheme as required under provincial legislation. The board fixed rates and determined each regulated utility's permitted revenue stream.
In the Pacific National Case, which was also before the Supreme Court for a second time, a developer had agreed, at the municipality's request, to build and develop roads, parkland and walkways that the municipality could not otherwise lawfully demand. In return for the developer's agreement to provide these amenities, the municipality agreed to keep the existing zoning in place for a reasonable time to allow for completion of another project by the developer. After the developer provided the amenities to the municipality at a substantial cost, the municipality downzoned the property so as to prevent a material part of the planned development from proceeding, to the financial detriment of the developer.
In its first decision in this case (Pacific National Investments Ltd v Victoria (City))(4), the Supreme Court decided that the municipality's undertaking to maintain the existing zoning was ultra vires (ie, beyond the scope of its authority), with the result that its breach by the municipality could not give rise to a claim by the developer for damages for breach of contract. The developer then pursued its claim for unjust enrichment against the municipality.
In Canada, the general test for unjust enrichment claims was well established before these two decisions. However, significant uncertainties existed as to how that test should be applied to particular facts. In these decisions, the Supreme Court attempted to address some of those uncertainties.
The three elements of a claim for unjust enrichment are:
Most of the judicial and academic commentary has focused on the third element. There has been much debate and disagreement over what constitutes a juristic reason, as well as whether the plaintiff must establish the absence of every possible juristic reason or whether the defendant must establish the existence of at least one juristic reason. However, there have also been questions about what can constitute an enrichment and a corresponding deprivation.
In Garland the Supreme Court confirmed that a straightforward economic approach is to be used in determining whether there has been an enrichment of the defendant and a corresponding deprivation of the plaintiff. Other considerations relating to whether the defendant should be entitled to keep the benefit are to be considered under the third element.
Thus, where the defendant received late payment penalties in the form of money - a clear and incontrovertible benefit - it was enriched by the receipt of each penalty and the paying customer suffered a corresponding deprivation. This conclusion was not affected by the defendant's argument that, since its overall revenue was fixed by the board, it did not benefit from its receipt of the penalties since the penalty revenue was offset by a corresponding decrease in gas rates.
In Pacific National the municipality benefited from the receipt of the additional amenities since it had requested them, notwithstanding its argument that it was now responsible for their upkeep at its own cost. The developer suffered a corresponding deprivation equal to its cost of providing the amenities.
Turning to the absence of a juristic reason requirement, the Supreme Court held that this requirement ensures that the test for unjust enrichment involves questions of law and legal reasoning rather than the purely subjective question of what is unjust. The court confirmed that claims for unjust enrichment should not be decided based on case-by-case 'palm tree' justice. Nevertheless, the court also held that the test for unjust enrichment is relatively new to Canadian jurisprudence and the courts require flexibility to expand the categories of juristic reasons as circumstances require.
In Garland the Supreme Court determined that the proper approach to the juristic reason analysis is in two stages.
First, the plaintiff must show that no juristic reason from an established category exists to deny recovery. The currently established categories identified in Garland and Pacific National are:
Other categories may be added. If a plaintiff proves that no juristic reason from an established category exists, it has made out a prima facie case of unjust enrichment.
At the second stage, which is a new addition to Canadian law, the onus shifts to the defendant to rebut that determination by showing that there is some other valid reason to deny recovery. Courts should have regard to two factors here: (i) the reasonable expectations of the parties; and (ii) public policy considerations.
In Garland the Supreme Court held that the only possible established category of juristic reason for the defendant's enrichment was the existence of the board's orders approving the late payment penalties under the disposition of law category. However, those orders could not constitute a juristic reason in relation to late payment penalties collected in contravention of the Criminal Code because they were inoperative constitutionally insofar as they conflicted with the code. The plaintiff had, therefore, established a prima facie claim for unjust enrichment.
At the second stage the court held that, after the plaintiff had commenced his claim in 1994, the defendant's reliance on the board's orders was no longer reasonable to insulate it from liability for its contraventions of the code. However, it was entitled to rely reasonably on those orders until the commencement of the litigation, since regulated entities should be able to rely on regulators' orders unless there is actual or constructive notice that the orders are inoperative. This conclusion was reached despite the court's assertion that the overriding public policy consideration in the case was the fact that people should not be permitted to keep the proceeds of their crimes.
In the Pacific National Case the municipality argued that its ultra vires (and therefore unenforceable) promise not to downzone the property constituted a juristic reason for its retention of the benefits it received under the contract category. The Supreme Court held that the unenforceable commitment it had made could not constitute an established category of juristic reason, given that the developer and the municipality had both mistakenly assumed that the municipality had the legal authority to make the commitment it did.
On the second stage of the test the court held that it would not be good public policy to allow municipalities to make ultra vires development commitments and retain any financial windfalls that they receive at the expense of those who contract with them in good faith.
The addition of the second stage to the juristic reason analysis has the potential to introduce more judicial discretion and to allow courts to decide unjust enrichment cases based on what seems just to the particular judge, notwithstanding the admonitions of the Supreme Court to the contrary.
In Garland the Supreme Court's analysis of the second stage resulted in the defendant retaining some late payment penalties and being forced to pay back others. Given the identification of an overriding public policy consideration that 'crime does not pay', the basis for this apparent compromise, which is not expressly explained by the Supreme Court, is not easy to determine.
For further information on this topic please contact Barbara Grossman or Christopher Woodbury at Fraser Milner Casgrain LLP by telephone (+1 4 16 863 4511) or by fax (+1 416 863 4592) or by email (email@example.com or firstname.lastname@example.org).
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Christopher D Woodbury