To strike or not to strike– that is the question: reconciling conflicting case law on government liability claim pleadings

Spectators to the seemingly never-ending clash between big tobacco and the government will be interested to know the SCC will be hosting another round of litigation between these parties. On May 21, 2010, the SCC granted leave to appeal from the judgement of the British Columbia Court of Appeal in Knight v. Imperial Tobacco Canada Limited, 2009 BCCA 541, under the name Her Majesty the Queen in Right of Canada v. Imperial Tobacco Canada. Representative plaintiff Kenneth Knight launched a class proceeding pursuant to consumer protection legislation against Imperial Tobacco Canada Limited (“ITCAN”) for the refund of money paid for the purchase of cigarettes manufactured by ITCAN that were designated as “light”, “mild” and other equivalent terms. Among other things, Knight and his fellow plaintiffs alleged that the designations were misleading and did not accurately disclose the health risks of smoking these particular cigarettes. Knight did not seek a refund from the federal government for taxes paid on the cigarettes.

These facts set the stage for the main act, which is the federal government’s application to strike ITCAN’s third party notice against it for contribution and indemnification. ITCAN made several allegations in its amended third party notice, which included the allegation that Agriculture Canada developed strains of tobacco for use as ingredients in “light” and “mild” cigarettes, and billed ITCAN license fees and royalties for the use of the strains. A second allegation was that ITCAN relied on representations made by Health Canada regarding the relative health risks of consuming mild and light cigarettes, such as the relative safety of these products. This allegation was supported by a third one claiming that Health Canada failed to disclose information within its knowledge, such as the extent to which smokers compensated for the lower levels of tar and nicotine in the cigarettes. Based on these allegations, ITCAN argued that it was entitled to contribution and indemnification by the federal government in the event that it was liable for losses.

The main issue before the SCC is whether to strike the third party notice. Generally speaking, the rules of procedure allow a court to strike a pleading if it does not disclose a reasonable claim or defense. According to the leading SCC decision in Hunt v. Carey, [1990] 2 S.C.R. 959, a court must  first assume that the facts as stated in the statement of claim can be proved, and then ask whether it is “plain and obvious” that the plaintiff’s statement of claim does not disclose a reasonable action. A pleading cannot be struck because of the novelty of the claim or the complexity of the issues. The following analysis looks specifically ITCAN’s pleadings which assert that the federal government owed duties of care to ITCAN and consumers for negligent misrepresentation or negligent design.

The BC Court of Appeal Decision

Tysoe J., writing for the majority of the Court of Appeal, applied the plain and obvious test through a duty of care analysis. Recall that the Anns test is used to determine whether a duty of care exists. For full explanation on the application of the test, see the recent post by Allison MacIsacc, A Victory for Employers: Piresferreira v. Ayotte Limits Liability for Mental Suffering in Employment Relationships. In the second step of the test, Tysoe J. had to determine whether the federal government was acting in a policy or operational capacity. Generally speaking, a prima facie duty of care will be negated where a policy decision is involved. The government’s policy decisions must be immune to tort liability to preserve the government’s ability to govern. In contrast, operational decisions that involve the actual performance or execution of policy are not immune to tort liability.

Based on the Ontario Court of Appeal decision in Sauer v. Canada, 2007 ONCA 454, Tysoe J. ultimately held that the lower court erred when it struck ITCAN’s pleadings that the federal government owed both it and consumers a duty of care. In Sauer, a rancher responded to the U.S. ban on Canadian beef during the 2003 Bovine Spongiform Encephalopathy outbreak by bringing an action against the federal government for negligent regulation. Sauer alleged that the federal government was negligent in failing to enact legislation banning the use of cattle remains and other ruminants as ingredients of cattle feed. The Ontario Court of Appeal upheld the lower court’s finding that it was not plain and obvious that that the rancher’s claim would fail, and that a more complete evidentiary record was required to determine whether the claim was based on governmental policy decisions or operational decisions.

Based on the pleadings alone, Tysoe J. held that it was not plain and obvious that the prima facie duties owed by the federal government to ITCAN and the consumers should be negated. Evidence at trial was required to show that the government conduct was rooted in a policy in order to rebut the prima facie duties.

What’s in a name? That which we call a rose
By any other name would smell as sweet.

The SCC should clarify the difference between policy and operational decisions and how that difference interacts with the meaning of word “regulator”. I believe this clarification is necessary because the majority and minority decisions demonstrate that those concepts are still gray areas that lack certainty. For example, the federal government argued that its regulatory role and duties to the general public were policy considerations which negated the prima facie duty. Tysoe J. rejected this argument because the third party notice indicated that the government was acting beyond its role as a regulator. According to the ITCAN’s third party notice, Agriculture Canada allegedly developed the new strains of tobacco and charged ITCAN for license fees and royalties. Implicitly, Tysoe J.’s understanding of the word “regulator” involves an arms-length relationship between the government as the enforcer of applicable laws and tobacco companies as the industry participants subject to those laws.

In contrast, Hall J., writing for the minority, implicitly adopted an inconsistent meaning of the word “regulator” that allows the government to enforce laws, but also to participate in important production processes such as chemically engineering ingredients. Based on his understanding of the word, Hall J. was able to interpret ITCAN’s allegations in a manner that characterized all of the federal government’s acts as being pursuant to its role as a regulator. He wrote that “Any initiatives [the federal government] took to develop less hazardous strains of tobacco, or to publish the tar and nicotine yields of different cigarette brands were directed to this end.” The end in question is protecting the health of the Canadian public. Since it was acting as a regulator, the logical consequence is that the federal government was acting in a policy capacity.

Regardless of what Hall J. calls it, the federal government’s actions go beyond the traditional role of a regulator. The SCC should uphold Tysoe J.’s finding that the federal government produce evidence to demonstrate that it was acting in a policy capacity.

Clarification of the Concepts is Necessary

Defining the word “regulator” may also assist the SCC in its determination as to whether the governing law is the decision in  Sauer or its decision in Welbridge Holdings Ltd. v. Winnipeg (Greater), [1971] S.C.R. 957.  In Welbridge Holdings, a builder brought an action against the City of Winnipeg for negligence because its building permit was revoked after an amending zoning by-law had been declared invalid for the City’s failure to observe antecedent procedures for notice to affected parties. In rejecting the builder’s claim, the SCC held that there is no private tort duty where legislative or adjudicative authority is exercised by a level of government because “the risk of loss…is a general public risk and not one for which compensation can be supported on the basis of a private duty of care.” Liability can only exist where the plaintiff acts pursuant to legislative or adjudicative decrees.

Regardless of which decision it adopts as the governing law, the SCC will still be confronted with the lack of conceptual clarity. Policy decisions are analogous to exercises of legislative or adjudicative authority according to their meaning in Welbridge Holdings because both concepts involve acts that apply generally to the public, and thus have potential to create indeterminate liability. The issue regarding the meaning of a “regulator” comes into play for both concepts because the boundaries of this word influence which acts are exempt from liability. There is also a rough analogy between operational decisions and acting pursuant to legislative or adjudicative decrees. Both permit government liability, apply to discrete groups of people, and involve negligent acts of the government.

Based on these analogies, it seems that the determination of the governing law will come down to the SCC’s preference in approach. Hopefully the SCC chooses the one that makes the government accountable for its actions.