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PUNITIVE DAMAGES FOR BREACH OFCONTRACT: THE SUPREME COURT OF

CANADA ON SUBSTANCE AND PROCEDURE

These materials were prepared by Tamara Buckwold, of the College of Law, University of SaskatchewanSaskatoon, Saskatchewan for the Saskatchewan Legal Education Society Inc. seminar, Remedies;March 2003. .

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Punitive Damages for Breach of Contract: The Supreme Court of Canada onSubstance and Procedure

A Paper Preparedfor the Saskatchewan Legal Education Society Inc. Seminar onRemedies, March 21,2003

Professor Tamara M. BuckwoldCollege ofLaw, University ofSaskatchewan

Contents

1. Introduction 2

2. Background , 2

3. Substantive Basis of a Punitive Damages Award in Contract 3

4. Circumstances Justifying a Punitive Damages Award:

the "If but only If' Test 9

5. Quantum of the Award: The Rationality Test and its Application 10

6. The Standard of Appellate Review of a Punitive Damages Award 14

7. Instructing the Jury on the Award of Punitive Damages 15

8. Pleading Punitive Damages 17

9. Severance of Claims and Questions of Privilege 17

10. A Note on Aggravated Damages 24

11. Conclusion 24

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1. Introduction

The decision of the Supreme Court of Canada in Whiten v. Pilot Insurance Co.(hereafter Pilot Insurance)1 brings to the fore several points of both conceptual andpractical significance in connection with the award of damages for breach of contract.This paper delineates and examines those points in the hope of offering some usefulguidance to lawyers faced with circumstances raising a potential claim for compensationby way of punitive or, to a lesser extent, aggravated damages.

Pilot Insurance addresses the availability of punitive damages for contract breach.However, the decision has indirect implications for the award of aggravated damages.Though the latter point merits thorough examination in its own right, it will be consideredonly by way of a note ancillary to the fuller analysis of punitive damages.

2. Background

The facts of Pilot Insurance are straightforward and need not be comprehensivelyreviewed for purposes of this discussion. The action arose from the refusal of PilotInsurance to pay a patently legitimate claim under a policy of insurance held by theplaintiff, Whiten, for the destruction of her home by fire. Although the company's initialinvestigations indicated that the claim was legitimate and that any suspicion of arson wasunfounded, its claims officer and solicitor went to inexplicable lengths to mount an arsondefence as grounds for its refusal. Mr. and Mrs. Whiten suffered not only the publicindignity of the imputation of arson implicit in the denial of coverage, but also acutefinancial hardship as a result of the loss of their living accommodation and householditems. They were fully cooperative with the insurance investigators throughout.

Binnie J summarized the outcome of the trial of the action as follows;

The jury was clearly outraged by the high-handed tactics employed by therespondent, Pilot Insurance Company, following its unjustified refusal topay the appellant's claim under a fire insurance policy (ultimatelyquantified at approximately $345,000). Pilot forced an eight-week trial onan allegation of arson that the jury obviously considered trumped up. Itforced the appellant to put at risk her only remaining asset (the insuranceclaim) plus approximately $320,000 in legal costs that she did not have.The denial of the claim was designed to force her to make an unfairsettlement for less than she was entitled to. The conduct was planned anddeliberate and continued for over two years, while the financial situationof the appellant grew increasingly desperate. Evidently concluding that thearson defence from the outset was unsustainable and made in bad faith, thejury added an award of punitive damages of $1 million, in effect providingthe appellant with a "windfall" that added something less than trebledamages to her actual out-of-pocket loss.

1 (2002), 209 D.L.R. (4th) 257.

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The Ontario Court of Appeal dismissed Pilot's appeal as to the availabilityof punitive damages, but reduced the award to $lOO,OOO. Laskin JA in dissentwould have affirmed the trial decision as to the quantum of the award as well.2

The Supreme Court, by a majority of six to one, confirmed the substantive basisof the award of punitive damages on which the trial and appeal decisions werebased, and restored the jury's quantification of that award in the amount of $1million?

3. Substantive Basis of a Punitive Damages Award in Contract

In substantive terms, Pilot Insurance does little more than confirm theprinciples articulated by the Supreme Court almost twenty-five years ago in thecase of Vorvis v. Insurance Corp. ofBritish Columbia,4 and more recentlyendorsed in the context of wrongful dismissal in Wallace v. United GrainGrowers Ltd.5 Those principles are founded upon the general view that damagesawarded for breach of contract are purely compensatory in nature. They areintended to compensate the plaintiff for loss of the benefits he or she would haverealized had the contract been performed by substituting a monetary sumapproximating the value of that performance. Because punitive damages aredesigned, not to compensate the plaintiff, but rather to punish the defendant anddeter both the defendant and others from similar wrongdoing, they should rarelybe awarded for breach of contract.

As to the objective of a punitive damages award, the Court adopted aqualified version of the classic (a.k.a. ancient) statement of Lord Chief JusticePratt in Wilkes v. Wood,6 namely that such damages are intended as punishment,deterrence and denunciation. As reformulated by Binnie J, the modem versionwould substitute "retribution" for the word "punishment", given that the lattermight be viewed as including both retribution and denunciation.7 Aftercanvassing the policy basis for punitive damages and the position that has beenadopted in connection with their award in other common law countries, Binne Jconfirmed the foundational principle established in Vorvis. 8 Punitive damages arerecoverable in breach of contract cases provided the defendant's conduct is itselfan "actionable wrong" independent of the breach contract giving rise to the

2 (1999), 170 D.L.R. (4th) 280, 32 c.P.C. (4th) 3 (ant. c.A.)3 LeBel J dissented on the issue of quantum, and took issue with the manner in which the jury had beeninstructed regarding the award of punitive damages.4 [1989] 1 S.C.R. 1085,58 D.L.R.(4th) 193.5 [1997] 3 S.C.R. 7011, 52 D.L.R. (4th) 1.6 (1763), Lofft. 1,98 E.R. 489 (K.B.) at 498-99.7 Supra note 1 at 277.8 For a ten point summary of the general principles extracted by Binnie J from his review of thecommonwealth jurisprudence, see the case comment by Shannon Kathleen O'Byrne and EvaristusOshionebo, Punitive Damages and the Requirementfor an Independent Actionable Wrong: Whiten v. PilotInsurance Co. (2000), 25 Adv. Q. 496 at 499-500.

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primary loss.9 A further requirement is that punitive damages will only beawarded in exceptional cases for "malicious, oppressive and high-handed"misconduct that "offends the court's sense of decency". 1

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Since they were established in Vorvis, these principles have been acceptedin Canadian jurisprudence as the basis for a punitive damage award. However,prior to Pilot Insurance, the courts had been less than certain about what juridicalsort of wrongdoing constitutes an independent actionable wrong falling withintheir scope. Most importantly, the unresolved question was whether punitivedamages could be awarded only where the conduct associated with the breach ofcontract also constituted a tort (such as fraud, defamation or deceit). PilotInsurance has answered that question in the negative. Though the "independentwrong" may be a tort, it can also be comprised of the breach of an independentcontractual obligation; in this case, the breach of a contractual duty of good faith.

The existence of a contractual duty of good faith was unchallenged in thiscase. 11 The duty to which an insurance company is subject under a policy ofinsurance was described in the Ontario Court of Appeal as follows;

A contract of insurance between an insurer and its insured is one ofutmost good faith. Although the insurer is not a fiduciary, it holds aposition of power over an insured; conversely, the insured is in avulnerable position, entirely dependent on the insurer when a lossoccurs. For these reasons, in every insurance contract an insurerhas an implied obligation to deal with the claims of its insureds ingood faith. 12

All three of the courts that addressed the case agreed that the breach of thisduty constituted a wrong separate from the breach of contract comprised of theinsurer's failure to pay the claim under the terms of the policy. Accordingly, onceit was confirmed that the "wrong" required under the Vorvis principle need not bea tort, the first requirement for a punitive damage award was established. PilotInsurance has been followed on this point in several cases decided since.

Although the.independent wrong supporting the damage award in this casewas breach of the duty of good faith, Binnie J clearly saw the principle asencompassing breaches of other kinds of contractual obligation. He concluded his

9Supra note 1 at 289-90.10 Ibid. at 274, quoting from Hill v. Church ofScientology of Toronto, [1995] 2 S.C.R. 1130, 126 D.L.R.(4th

) 129 at para. 196. This requirement was reiterated by the Supreme Court more recently inPerformance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. (2002),209 DLR. (4 th

) 318 (S.C.c.)affirming 185 DLR. (4th

) 269 (Alta. c.A.).11 Although the insurer admitted that it was subject to a contractual duty of good faith and fair dealing, itdisputed the conclusion ofthe Court of Appeal that breach of that duty constituted an actionable wrongcapable of supporting an award of punitive damages. It argued that an "independent wrong" required byVorvis must be a tort. That argument was rejected by Binnie J, supra note 1 at 290.12 Whiten v. Pilot Insurance Co., supra note 2 at 291.

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refutation of the argument that the independent wrong must be a tort in theseterms;

An independent actionable wrong is required, but it can be foundin breach of a distinct and separate contractual provision or otherduty such as a fiduciary obligation. 13

Though this is superficially clear, the decision is in fact problematic in thisconnection in at least two respects. First, the Court makes no effort to address thevexing general question of when a duty of good faith performance arises, whetheras an implied contractual term or as an overriding contractual duty imposed onpublic policy grounds. Is such a duty restricted to the limited categories of casesin which it has been heretofore recognized, or may it arise under any contractwhere the relationship between the parties embodies certain definablecharacteristics? If the latter is the case, what are the identifying characteristics ofsuch a contractual relationship? Secondly, a careful analysis suggests that a dutyof good faith is in reality the only conceivable sort of contractual obligation thatcan be differentiated from what might be described as a contractual duty ofperformance as a basis for punitive damages.

The broad question of whether a duty of good faith in contractperformance may be found outside limited categories of contract involving aspecial sort of ~ersonal relationship has been pondered by many courts andcommentators. : Regrettably, the Supreme Court has again declined theopportunity to address that question directly.

In addition to the duty of good faith identified in contracts of insurance,the Supreme Court has recognized such a duty in more limited form in the contextof employment contracts. In Wallace v. United Grain Growers,15 the majorityheld that an employer is subject to a duty of good faith in the manner in which anemployee is dismissed, the violation of which justifies extension of the period ofnotice upon which quantification of an award for wrongful dismissal is based. In·dissent, McLachlin J advanced the more doctrinally coherent theory of animplied term in the contract of employment, which term consists of a duty on thepart of the employer to act in good faith in termination of the employment. Theduty of good faith in termination is explicitly recognized in the dissentingjudgment as a new cause of action in contract capable of constituting the"independent wrong" supporting an award of aggravated or punitive damages. 16

13 Supra note 1 at 291.14 See e.g. David Stack, The Two Standards ofGood Faith in Canadian Contract Law (1999), 62 Sask.L.Rev. 201, Shannon Kathleen O'Byrne, Good Faith in Contractual Performance: Recent Developments(1995),74 Can. Bar Rev. 70.IS (1997), 152 D.L.R. (4th

) 1.16 Ibid. at 48 McLachlin J was joined in dissent by La Forest and L'Heureux-Dube J.

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However, in neither Pilot Insurance nor Wallace did the Supreme Courtclearly either endorse or reject the notion that a duty of good faith might ariseunder a contract outside these categories as a matter of general principle. I?Notably, the duty attached to a contract of insurance was linked by Laskin J.A. inPilot Insurance with the insurer's superior bargaining position and the insured'sdependence and vulnerability. He quoted at some length from the Ontario LawReform Commission's 1991 Report on Exemplary Damages, in which theCommission concluded that punitive damages might be limited to wrongfuldismissal and insurance cases, since "[s]uch cases typically involve the abuse ofcontractual power, which might not be the case in all other circumstancescaptured by a more general rule.,,18 Although Binnie J did not explicitly adoptthis analysis, he appears to have been in broad agreement with Laskin JA's viewson the issue of punitive damages. 19

Similarly, in Wallace, a critical basis for the recognition of a duty of goodfaith in the manner of dismissal was the power imbalance inherent in anemployment relationship and the special vulnerability of the employee to abusiveconduct on the part of the employer.2o However, in· neither of these cases did theSupreme Court directly indicate that a duty of good faith may be found in otherkinds of contract based on criteria of power imbalance and personal vulnerability.A full review of the decisions of the courts below the Supreme Court level on thequestion of whether a duty of good faith may be identified under a generallyapplicable principled approach is beyond the scope of this paper. However, onecan safely say that the authorities are mixed.

In Forest City Uniform Service Ltd. v. P. Klassen Custom Fab. Inc, theOntario Superior Court of Justice expressed the opinion that the doctrine of goodfaith as a basis for the award of punitive damages should not be expanded intoordinary commercial contracts. Gillese J noted that what he called the good faithdoctrine is found in cases involving, if not a fiduciary obligation, at least arelationship between the parties that is "special", as for example in insurancecontracts?I However, in Katotikidis v. Mr. Submarine Ltd. that Court, speakingthrough Taliano J, found a duty of fair dealing and good faith in a franchisecontract. He said;

It is clear that unless powers of the magnitude demonstrated by thefranchise agreement are harnessed or at the very least, tempered byimplied obligations of fair dealing and good faith originating either

17 The dissent of McLachlin J in Wallace does, however, appear to contemplate the recognition of a dutybased on the type of relationship involved in the particular kind of contract under examination. See herdiscussion of good faith, ibid. at 44-48.18 Supra note 2 at 292.19 Supra note 1 at 272-3.20 Supra note 15 at para. 90-95.21 [2000] O.J. No. 2706. A similar view is suggested in that Court's judgment in Bank ofMontreal v.Maple City Ford Sales (1986) Ltd., [2002] OJ. No. 3573, in the context of a contract of loan between thebank and the defendant.

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as a rule of law or by necessary implication from the contract, theirunrestrained exercise will inevitably lead to oppressiveconsequences. It was the abuse of the power imbalance betweenthe contracting parties in Whiten that prompted the Supreme Courtof Canada to uphold a significant punitive damage award based onthe breach of an implied term of good faith. 22

He went on to describe the relationship between a franchisor andfranchisee as one epitomized by trust. While this analysis suggests that it ispossible to identify categories of contractual relationship additional to those ofemployment and insurance in which a duty of good faith may inhere, it does notgo so far as to support the view that such a duty may be found in any givencontractual relationship based on the de facto power imbalance of the particularparties involved and the particular vulnerability of one of them.23

In sum, the decision in Pilot Insurance confirms that violation of a duty ofgood faith in a contract of insurance can support an award of punitive damages.However it offers inferential guidance at best in the determination of whethersuch a duty arises in other kinds of contractual relationship.

The second difficulty mentioned above is that while the decision in PilotInsurance suggests that the "independent wrong" supporting an award of punitivedamages may be the breach of any distinct contractual term, that proposition isarguably suspect. Compensatory (as distinguished from punitive) damages are tobe awarded for the breach of any contract term imposing a performance obligationof some kind. Pilot Insurance appears to suggest that a punitive damages awardmust be based on breach of a term other than one giving rise to compensatorydamages. But itwould seem that the breach of any conceivable contractual termjustifies a compensatory award. Though one may in fact argue thateven breachof an implied duty of good faith might support an award of compensatorydamages, we are obliged by the Supreme Court's decision to accept that thebreach of that particular implied term qualifies as a breach "independent" of theprimary breach causing the economic harm for which compensatory damages areawarded.

The point may be illustrated by a simple hypothetical. Assume that Acontracts to supply B with a specially designed and manufactured item ofequipment for use in B's fledgling business. Ifbuilt in accordance with thecontractual specifications, the equipment will double B' s output. The equipmentis to be delivered on March 1. Assume that the equipment is not delivered until

22 (2002) 26 B.L.R. (3d) 140, [2002] O.T.C. 367 (Ont. Sup. Ct. Just.). The quantification of damages wassubsequently established, on application ofthe principles in Pilot Insurance, at [2002] O.J. No. 4101.23 In Mohn v. Dreiser [2002] 0.1.4989 (Sup. Ct. Just.) , Kozak J. appears to have found a duty of goodfaith in a contract for sale of a motel and restaurant, the breach of which was capable of supporting apunitive damages award. However, the analysis is vague at best and the Court's observations in that regardare obiter, inasmuch as it concluded that no punitive damages should be awarded since the compensatoryaward sufficiently served the goals of retribution, deterrence and denunciation.

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October 1, and that it does not meet the contractual design specifications. As aresult, it does not materially increase B's output. Finally, assume that although Aknew that B was throughout the relevant period verging on insolvency and indesperate need of the equipment, A deliberately both delivered the machine late,and actively neglected to ensure that it met the contractual specifications. Theissue presented is whether punitive damages may be awarded against A. Assumethat A's conduct can be characterized as "malicious, oppressive and high-handed",and generally of such an abhorrent nature as to justify punishment. But is there inthis scenario an "independent wrong" supporting a punitive damage award? Thequestion is, independent of what? Though breach of the duty of timely delivery isindependent of the breach of the contractual specification provisions,compensatory damages would be awarded for the economic losses flowing fromboth. If it is necessary to find yet a another distinct breach as the foundation ofpunitive damages, it would seem that the only sort of contractual obligation thatmight conceivably be identified for that purpose is an implied duty of good faith.Further, it would seem that if a duty of good faith can be found to exist, theconsequences of breach of that particular term could not be viewed as leading toan award of compensatory damages, but rather only to an award of punitive orpossibly aggravated damages. If it is regarded as supporting an award ofcompensatory damages, can it also amount to an "independent wrong" supportingpunitive damages?

On the existing authorities, there is no clear conceptual answer to thisquestion. However, in practical terms the decision in Pilot Insurance supports thefollowing conclusions with respect to the substantive foundation for an award ofpunitive damages;

(1) A duty of good faith in contract performance may be found to existas an implied term (or possibly an overriding contractual obligation) in contractsof insurance and very likely in other contracts that by their nature create afiduciary or quasi-fiduciary relationship between the parties.

(2) The Supreme Court's analysis may be regarded as inferentiallysupporting, or at least not precluding, an argument that a duty of good faith inperformance may be implied in other kinds of contract if there is a marked powerimbalance between the parties and the failure of the more powerful party toperform renders the other party exceptionally and foreseeably vulnerable to harm,particularly if nonperformance jeopardizes the personal emotional andpsychological as distinguished from purely economic integrity of that party.

(3) Breach of a duty of good faith in contract performance constitutesan independent wrong that may support an award of punitive damages within themeaning of the principles articulated in Vorvis. If the conduct associated withbreach also satisfies the second branch of Vorvis in that it is malicious, oppressiveand high-handed, punitive damages may be awarded if necessary to meet theobjectives of retribution, deterrence and denunciation.

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(4) Though breach of a contractual term other than one imposing aduty to act in good faith may, according to the Supreme Court of Canada,constitute an independent wrong for purposes of the imposition of punitivedamages, it is not clear what other kind of term might fulfil that requirement.

4. Circumstances Justifying a Punitive Damages Award: the "If but onlyIf" Test

The foregoing addresses only the threshold question of whether asubstantive legal basis for an award of punitive damages exists in a given case.However, the discussion of that point comprised a relatively minor part of theSupreme Court's judgment in Pilot Insurance. Binne J. devoted considerableattention to defining a principled basis upon which a court should determinewhether the circumstances are such that punitive damages should be awarded,assuming that a substantive basis for punitive damages has been found to exist.

Binne J. described the test to be applied in determining whether punitivedamages were properly awarded by a jury as the "rationality" test.24 His referencewas to the Supreme Court decision in Hill v. Church ofScientology of Toronto, inwhich Cory J. said that "The appellate review should be based upon the court'sestimation as to whether punitive damages serve a rational purpose." 25 Once ithas been determined on the application of that principle that punitive damages aremerited, the quantum of the award should be fixed in a manner rationallyproportionate to the nature of the wrongdoing.

The over-arching principle that may be extracted from Pilot Insurance isthat punitive damages should be awarded "if but only if' the threefold objectiveof retribution, deterrence and denunciation is not sufficiently met by the award ofcompensatory damages, either alone or combined with penal or other sanctions.That formulation was recently applied by the Supreme Court in PerformanceIndustries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd. 26 The Court concludedthat punitive damages were not warranted in that case because the threefoldobjective was satisfied by the substantial award of compensatory damages againstthe defendant, combined with an award of costs to the plaintiff on a solicitor­client basis. It pointed out that the compensatory award plus costs had a punitiveeffect on the defendant, that he had been stigmatized and "soundly denounced" bya judicial finding that he acted in a way that was "fraudulent, dishonest anddeceitful", and that there were no aggravating circumstances present in the casethat would distinguish it from the ordinary case of business fraud so as to warrantthe exceptional response of imposing a punitive damage award.

24 Supra note 1 at 297.25 Supra note 10 at para. 197.26 (2002), 209 D.L.R. (4th

) 318 at 345.

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In Pilot Insurance itself, the majority concluded that the trial jury hadacted in full awareness of the question of whether the compensatory damageswere sufficient punishment to avoid a repetition of the offence and a deterrent toothers. It pointed out that the compensatory award was no more than thecompany had contractually obligated itself to pay under the insurance policy, thatthe power imbalance was "highly relevant", that Pilot Insurance held itself out asoffering peace of mind to its customers and that the financial vulnerability arisingfrom the loss the policy was intended to guard against was aggravated by thecompany as a negotiating tactic. Binne J said;

It is this relationship of reliance and vulnerability that wasoutrageously exploited by Pilot in this case. The jury, it appears,decided a powerful message of retribution, deterrence anddenunciation had to be sent to the respondent and they sent it,27

5. Quantum of the Award: The Rationality Test and its Application

Once it has been established that punitive damages are properly awardedunder the foregoing analysis, the quantum of the award must be assessed on aprincipled basis. In Pilot Insurance, Binnie J articulated "rationalproportionality" as the test determining the quantum of an award of punitivedamages. He related the foundational basis for determining that an award isjustified to the question of quantification of that award in these terms;

Retribution, denunciation and deterrence are the recognizedjustification for punitive damages and the means must be rationallyproportionate the end sought to be achieved.28

The proportionality of the award is to be addressed "in severaldimensions", outlined by the Court as follows:

(i) Proportionate to the Blameworthiness of the Defendant's Conduct

The factors identified as relevant to this dimension in Canadian cases, withcase references as reproduced by the Court, include:

(1) whether the misconduct was planned and deliberate:Patenaude v. Roy (1994), 123 D.L.R. (4th) 78 (Que. c.A.), at p.91;

(2) the intent and motive of the defendant: Recovery ProductionEquipment Ltd. v. McKinney Machine Co. (1998),223 A.R. 24(C.A.), at para. 77;

27 Supra note 1 at 306.28 Ibid. at 299.

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(3) whether the defendant persisted in the outrageous conduct overa lengthy period of time: Mustaji v. Tjin (1996), 30 C.C.L.T. (2d)53 (RC.C.A.), Quebec (Curateur public) v. Syndicat national desemployes de l'Hopital St~Ferdinand(1994),66 Q.A.C. 1, Matusiakv. British Columbia and Yukon Territory Building andConstruction Trades Council, [1999] B.C.J. No. 2416 (QL) (S.c.)[summarized 92 A.C.W.S. (3d) 452];

(4) whether the defendant concealed or attempted to cover up itsmisconduct: Gerula v. Flores (1995), 126 D.L.R. (4th) 506 (Ont.c.A.), at p. 525, Walker v. D'Arcy Moving & Storage Ltd. (1999),117 O.A.C. 367, United Services Funds (Trustees) v. Hennessey,[1994] O.J. No. 1391 (QL) (Gen. Div.), at para. 58 [summarized 48A.C.W.S. (3d) 954 sub nom. Allen v. Hennessey];

(5) the defendant's awareness that what he or she was doing waswrong: Williams v. Motorola Ltd. (1998),38 c.c.E.L. (2d) 76(Ont. c.A.), and Procor Ltd. v. U.S. W.A. (1989), 71 O.R. (2d) 410at p. 433, 65 D.L.R. (4th) 287 (H.C.);

(6) whether the defendant profited from its misconduct: ClaiborneIndustries Ltd. v. National Bank of Canada (1989), 69 O.R. (2d)65,59 D.L.R. (4th) 533 (C.A.);

(7) whether the interest violated by the misconduct was known tobe deeply personal to the plaintiff (e.g., professional reputation(Hill, supra)) or a thing that was irreplaceable (e.g., the maturetrees cut down by the real estate developer in Horseshoe BayRetirement Society v. S.I.F. Development Corp. (1990),66 D.L.R.(4th) 42 (B.C.S.C.)); see also Kates v. Hall (1991), 53 B.C.L.R.(2d) 322 (C.A.). Special interests have included the reproductivecapacity of the plaintiff deliberately sterilized by an irreversiblesurgical procedure while the plaintiff was confined in a provincialmental institution, although no award of punitive damages wasmade on the facts (Muir v. Alberta, [1996] 4 W.W.R. 177, 132D.L.R. (4th) 695 (Alta. Q.B.)); the deliberate publication of aninformant's identity (R. (L.) v. Nyp (1995), 25 C.C.L.T. (2d) 309(Ont. Ct. Gen. Div.)). In Weinstein v. Bucar, [1990] 6 W.W.R. 615(Man. Q.B.), the defendant shot and killed plaintiffs' threecompanion and breeding German Shepherds who had merelywandered onto the defendant's property from a neighbouring yard.Here the "property" was sentimental, not replaceable, and, unlikethe trees, themselves sentient beings.29

In the case before the Court, Binnie said that the need for denunciationwas aggravated by the fact that the insurance company's conduct had persisted

29 Ibid. at 299-300.

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over a lengthy period of more than two years without any rational justification,and despite its awareness of the hardship it was inflicting. In fact, he suggestedthat Pilot Insurance knowingly exploited the plaintiff's hardship in an attempt toforce a settlement.

(ii) Proportionate to the Degree ofVulnerability of the Plaintiff

Though the Court indicated that financial or other vulnerability facilitating anabuse of power is relevant where there is a power imbalance, it cautioned against anaward of punitive damages where vulnerability is an ordinary risk of engaging in dealingsin the commercial marketplace. Contracting parties are presumed to know that suchdealings are "fuelled by the aggressive pursuit of self-interest." However, a "peace ofmind" contract apparently is to be regarded as presenting special considerations ofvulnerability that would not be recognized in ordinary commercial contracts.3°

Further, though emotional distress may be a product of particular vulnerability,compensation for such distress may be addressed through an award of aggravateddamages. Thus emotional distress is relevant to the question of punitive damages onlywhere it "helps to assess the oppressive character ofthe respondent's conduct."Recognition of emotional distress in an award of both aggravated and punitive damageswould amount to double recovery.3l

(iii) Proportionate to the Harm ofPotential Harm Directed Specifically at the Plaintiff

The Court's guidance on this point was ambiguous at best. A plaintiff who hasbeen a minor victim of the defendant's "scam" should not realize an excessive windfall.However, malicious and high-handed conduct of a kind likely to cause severe injury tothe plaintiff may be punishable even though in fact it results in little personal damage.32

The Court did not relate this "dimension" to the facts of the case before it.

(iv) Proportionate to the Needfor Deterrence

In considering the deterrent effect of the award, the defendant's financial power isrelevant only;

(1) if the defendant chooses to argue financial hardship, or (2) it is directlyrelevant to the defendant's misconduct (e.g., financial power is whatenabled the defendant Church of Scientology to sustain such anoutrageous campaign for so long against the plaintiff in Hill, supra), or (3)other circumstances where it may rationally be concluded that a lesseraward against a moneyed defendant would fail to achieve deterrence.33

Although disclosure to the jury of the fact that Pilot Insurance had assets of $231million was "unhelpful" in this regard, Binnie J concluded that "no harm was done".

30 Ibid. at 301.31 Ibid.32 Ibid.33 Ibid. at 302.

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It appears that, prior to the Supreme Court's decision in this case, discoverydirected to determination of the means of the defendant was regularly permitted forpurposes of assessing punitive damages, at least by Ontario courts.34 Though the Courtmight have been more specific on this point, it appears that the assets of the defendant areordinarily not to be regarded as relevant to a punitive damages award and thus notdiscoverable.

(v) Proportionate, Even After Taking Into Account the Other Penalties, Both Civiland Criminal, Which Have Been or Are Likely to be Inflicted on the Defendant forthe Same MisconductSuch consequences of the defendant's behaviour as compensatory damages or

other civil or criminal penalties are relevant to determination of the need for punitivedamages to meet the threefold objective of retribution, denunciation and deterrence.However, punitive damages may be awarded if other penalties are inadequate toaccomplish those objectives. In this case, the potential disciplinary review of theInsurance Council of Canada or the Registrar of Insurance was not a factor. 35

(vi) Proportionate to the Advantage Wrongfully Gained by a Defendantfrom theMisconduct

The profit gained by a defendant through its misconduct is relevant wherecompensatory damages might otherwise amount to "a licence to get its way," or a cost ofdoing business. The court referred by way of example to Horseshoe Bay RetirementSociety v. S.I.F. Development Corp.36 In that case, the destruction of trees on theplaintiff's property for the sake of enhancing the view and thus the selling price of thedefendant's residential lots was properly punished through an award of punitive damageswhere it appeared that the defendant had factored into its pricing the compensation itwould have to pay for its misconduct. The Court also cited Nantel v. Parisien37 andClaiborne Industries Ltd. v. National Bank ofCanada 38as illustrative of cases in whichprofit gained was properly recognized as a factor in quantification of an award.39

However, it indicated that punitive damages should not be awarded in an amount thateffectively relieves the defendant of its improperly received profit twice; once through anaccounting of profits in the compensatory award and again through punitive damages.4o

34 See e.g. Freise v. Citadel Life Assurance Co. [2000] O.J. No. 1718, 19 C.C.L.I. (3d) 178 (ant. Ct. Just.),affd. at [2000] O.J. No. 2365, 19 C.CLI. (3d) 185, Simpson v. Gafar, [2002] OJ. NO. 3351 (ant. Sup. Ct.Just.). However, in Bridge v. Dominion of Canada General Insurance Co., [2000] OJ. No. 5349 (ant.Sup. Ct. Just.), Chapnik J said that while the financial worth of a defendant is material to an award ofpunitive damages, the mere inclusion of a claim for punitive damages in an action should not entitle theplaintiff to disclosure of the defendant's financial position as of right.35 Supra note 1 at 303.36 (1990),66 DLR. (4th

) 42 (B.C.S.C.).37 (1981), 18 C.CLT. 79 (ant. H.C.).38 (1969), 69 O.R. (2d) 76 (ant. c.A.).39 Supra note 1 at 304.40 The court referred to LubrizolCorp. v. Imperial Oil Ltd. (1994), 84 F.T.R. 197, reversed on appeal at[1996] 3 F.C. 40 (C.A.).

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Relevance ofa Ratio

Having outlined the foregoing factors as relevant to the quantum of a punitivedamages award, Binnie J rejected the view that a ratio of compensatory to punitivedamages is legitimate benchmark. Since that ratio is based upon the plaintiff's loss (asmeasured by the compensatory award), it is not relevant to the quantification of punitivedamages, which focus on the defendant's misconduct. Further, the factors identified arenot captured by such a ratio. Nevertheless, he subsequently noted that theratio ofpunitive to compensatory damages in the case before him, as established by the jury,would be no more than a multiple of three however calculated - a ratio "well within whathas been considered "rational" in decided cases.,,41

The Jury's Assessment

On application of this reasoning, Binnie J concluded that the quantum awarded bythe jury at trial was "not so disproportionate as to exceed the bounds of rationality.,,42 Inother words, it met the "rational proportionality" standard articulated as the parameter ofan award.

6. The Standard of Appellate Review of a Punitive Damages Award

In Pilot Insurance, the majority of the Supreme Court adopted in elaborated termsthe standard for review of a punitive damages award applied by the Court in Hill. Thetest as articulated by Binnie J is "whether a reasonable jury, properly instructed, couldhave concluded that an award in that amount, and no less, was rationally required topunish the defendant's misconduct.,,43 In so doing, he pointed out that this test entitles anappellate court to take a more interventionist approach than in the case of jury awards ofgeneral damages, with respect to which a court should only intervene if the award is "soexorbitant or so grossly out of proportion [to the injury] as to shock the court'sconscience and sense of justice" He went on to note that "The focus is on whether theCourt's sense of reason is offended rather than on whether its conscience is shocked.,,44

The application of that test to the jury award in the case before him led Binne J toconclude that, while he would not have awarded $1 million in punitive damages in thecase, the award was within the rational limits within which the jury must be allowed tooperate. It "was not so disproportionate as to exceed the bounds of rationality. ,,45Having properly followed the "if but only if' model in deciding that punitive damageswere warranted, the jury addressed the question of quantum with appropriate regard forthe factors outlined. The fact that there was a dissenting decision in the Ontario Court of

41 Supra note 1 at 306.42 Ibid. at 305.43 Ibid. at 298.44 Ibid.45 Ibid. at 305.

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Appeal as to the issue of quantum confirmed that the jury's approach was not"irrational".46

7. Instructing the Jury on the Award of Punitive Damages

In practical terms, one of the most difficult issues raised by cases meritingconsideration of a punitive damages award is the degree of specificity with which ajuryshould be instructed regarding the basis for and approach to quantification of the award.In recognition of the need to provide some sort of principled guidance to juries, Binnie Jsaid that it would be "helpful" (though not obligatory) if the trial judge's chargeexplained the following points:

(1) Punitive damages are very much the exception rather than the rule, (2)imposed only if there has been high-handed, malicious, arbitrary or highlyreprehensible misconduct that departs to a marked degree from ordinarystandards of decent behaviour. (3) Where they are awarded, punitivedamages should be assessed in an amount reasonably proportionate tosuch factors as the harm caused, the degree of the misconduct, the relativevulnerability of the plaintiff and any advantage or profit gained by thedefendant, (4) having regard to any other fines or penalties suffered by thedefendant for the misconduct in question. (5) Punitive damages aregenerally given only where the misconduct would otherwise beunpunished or where other penalties are or are likely to be inadequate toachieve the objectives of retribution, deterrence and denunciation. (6)Their purpose is not to compensate the plaintiff, but (7) to give adefendant his or her just desert (retribution), to deter the defendant andothers from similar misconduct in the future (deterrence), and to mark thecommunity's collective condemnation (denunciation) of what hashappened. (8) Punitive damages are awarded only where compensatorydamages, which to some extent are punitive, are insufficient to accomplishthese objectives, and (9) they are given in an amount that is no greaterthan necessary to rationally accomplish their purpose. (10) While normallythe state would be the recipient of any fine or penalty for misconduct, theplaintiff will keep punitive damages as a "windfall" in addition tocompensatory damages. (11) Judges and juries in our system have usuallyfound that moderate awards of punitive damages, which inevitably carry astigma in the broader community, are generally sufficient.47

He further held that a range of appropriate award agreed upon by counselshould be conveyed to the jury, but that in absence of such agreement specificfigures should not be mentioned. Notably, however, he specificallyacknowledged that the prohibition against providing figures "may have to be re­examined in future, based on further experience,,48 - an apparent invitation to

46 Ibid. at 309.47 Ibid. at 295.48 Ibid.

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appeal on that point in a suitable case. He "suggested" that counsel shouldconsider asking the trial judge to advise the jury of awards made in comparablecircumstances and sustained on appeal.

Binnie J adopted the Court of Appeal's conclusion that the jury charge inthat case sufficiently covered the essentials, particularly since no objection wasmade to it by either counsel. However, he expressed the view that a "moreample" charge should be given in future, to ensure that the jury is not left in doubtabout what they are to do.49

The need for a jury to be carefully charged in a case involving a claim forpunitive damages is illustrated by the Ontario Court of Appeal's decision inFerme Gerald Laplante & Fils Ltee v. Grenville Patron Mutual Fire InsuranceCo.50 The Court set aside a jury's award of punitive damages on the ground thatno reasonable jury, properly instructed, could have concluded that the conduct inquestion was so outrageous or extreme as to warrant punishment. The Courtfound the trial judge's charge to the jury deficient as follows:

There is no question that the jury was properly instructed on theexceptional nature of the remedy, its underlying purpose, and theegregious and extreme nature of the misconduct that can found an awardfor punitive damages. However, the jury was never instructed on thenature and extent of Grenville's obligation to act fairly and in good faith inprocessing Laplante's claim, as distinct from its obligation to pay whatwas owed under the policy. In my view, such an instruction would havebeen necessary in order to convey to the jury some understanding of thelegal requirement for an independent actionable wrong.Further, the jury was provided no assistance in relating the law on punitivedamages to the evidence. In my view, it would not have been obvious tothe jury that the focus on the question of punitive damages was not theultimate success or failure of the parties' respective arguments on thevarious aspects of the claim but, rather, the overall conduct of the insurerduring the whole claims process. The conduct of the insurer should beconsidered fairly with some understanding of its right to investigate andassess the claim and its duty to do so fairly and in good faith.

There is some merit to Grenville's submission that it may have beenhelpful in this case if the jury had been asked to briefly specify whatconduct merited punishment if it decided that punitive damages wereappropriate. In any case, it will be up to the trial judge to determinewhether this question should be asked. In the circumstances of this case, itis my view that a question along the lines suggested by Grenville wouldhave been entirely appropriate. It would have assisted the jury in betterfocusing on the nature of Grenville's conduct. However, this additional

49 Ibid.50 (2002),217 D.L.R. (4 th

) 34.

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question alone would not have provided the jury with the further guidanceit needed on the issue of punitive damages. In any event, in light of myconclusion on the reasonableness of the award, I need not decide whetherthe inadequacy of the instructions, in and of itself, would constitutereversible error. 51

Though Pilot Insurance has undoubtedly opened the way to the impositionof punitive damages awards with greater frequency and in larger amounts, most ofthe subsequent case law supports the conclusion that courts will remain reluctantto permit them to be awarded unless the conduct in question is clearly egregious.

8. Pleading Punitive Damages

A second practice point addressed by Binnie J is the manner in which aclaim for punitive damages should be pleaded. He rejected cause authority to theeffect that such a claim need not be specifically pleaded on the principle that,before punishment is imposed, defendants should "have advance notice of thecharge sufficient to allow them to consider the scope of their jeopardy as well asthe opportunity to respond to it." Though the point is of some significance inother jurisdictions it will presumably not affect Saskatchewan practice, given thatthe Saskatchewan Queen's Bench Rules require that claims for punitive damagesbe expressly pleaded and that the misconduct giving rise to such damages bespecified.52 As to the latter feature of the rules, Binnie J expressed the view thatthe facts alleged as grounds for punitive damages should be pleaded with someparticularity53 and in a manner that relates them to the punitive damages claim.54

9. Severance of Claims and Questions of Privilege

In Pilot Insurance itself, the insurer did not contest the plaintiff's right todisclosure of correspondence between it and its solicitor, or of otherdocumentation arising from its investigation and refusal of the claim. However,the insurer's disclosure obligation has been put in issue in several cases decidedsince. The problem was foreshadowed by Binnie 1's observation in PilotInsurance that, "Where a trial judge is concerned that the claim for punitivedamages may affect the fairness of the liability trial, bifurcated proceedings maybe appropriate.,,55 However, given the clearly obiter nature of the comment, itcan hardly be regarded as an endorsement of severance of the claim for punitivedamages from that for non-payment itself.

51 Ibid. at 62-3.52 The Saskatchewan Rules were noted by Binnie J, ibid. at 293, along with case authorities relevant to theirapplication. See Rieger v. Burgess, [1988] 4 W.W.R. 577 (Sask. c.A.); Lauscher v. Berryere (1999), 172D.L.R. (4th) 439 (Sask. c.A.).53 Ibid.54 Ibid. at 294.55 Ibid. at 302.

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The arguable need for severance of claims has arisen on the basis of theassertion that trial of the alleged breach of an insurer's duty of good faith,founding the claim for punitive damages, would require disclosure ofdocumentation that would, with respect to the claim for non-payment, beprotected by solicitor-client or litigation privilege. Two recent British Columbiacases illustrate the point.

In Wonderful Ventures Ltd. v. Maylam,56 Canadian Northern ShieldInsurance Company applied to sever those portions of the Statement of Claiminan action for payment under a policy of fire insurance that advanced a claim forpunitive damages for bad faith. The rationale put forward was that trial of theclaim for insurance moneys alleged to be owed at the same time as the bad faithclaim would be prejudicial in that the insurer would be forced to disclose whatwould otherwise be privileged communications in order to defend itself againstthe bad faith claim. Counsel for CNS argued that his legal opinions, advice andcommunications with his client would be relevant evidence in the defence of thebad faith claim, but that CNS would be entitled to maintain its claim for privilegeover those communications with respect to the coverage issues. He further arguedthat he would be required to resign as counsel on the file because he could berequired to give evidence on the good faith issue.

On behalf of Wonderful Ventures, it was argued that separate trials of therespective claims would require repetition of evidence involving the repeatappearance of witnesses, raising the risk of different findings of credibility andfact. The duplication of evidence would offend the goal of judicial economy andput the plaintiff to significant additional expense.

Taylor J of the British Columbia Supreme Court decided in the insurer'sfavour, on the ground that solicitor-client privilege is fundamental to the legalsystem, and that disclosure of privileged communications in a trial encompassingboth claims would be more prejudicial to the insurer than would any prejudicesuffered by the plaintiff as a result of two trials. The Court also pointed out that iftrial of the claims were severed, failure on the substantive claim to paymentwould eliminate the need for a trial on the issue of bad faith. On the other hand,success on the first claim would entitle the plaintiff to immediate payment of theinsurance moneys. It would not have to await the outcome of the bad faith trial torecovery its pecuniary losses.

The same conclusion was reached by Garson J, also of the B.c. SupremeCourt, on a similar application in Lawrence v. Insurance Corp. ofBritishColumbia.57 The Court acknowledged the potential need for the insurer's solicitorto testify on the bad faith claim, as well as the need for disclosure of mattersotherwise within solicitor-client privilege. Given that the bad faith claim involvedan allegation of an offensive general policy on the defendant's part to deny

56 (2001), 91 B.CL.R. (3d) 319, 31 CCL.1. (3d) 298 (B.CS.C).57 (2001) 96 B.C.L.R. (3d) 375, 34 C.C.L.1. (3d) 99 (B.C.S.C.).

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disability benefits in cases involving accidents causing minimal property damage,the evidence on that claim would be extensive and would require a prolongedtrial. Garson 1's decision to sever the bad faith claim from the claim for paymentwas thus further supported by his view that an early successful resolution of thepayment claim would limit the damages assessed in the bad faith claim to thosearising up to that point in time. In conclusion, he applied the reasoning of TaylorJ in Wonderful Ventures.

The approach of the British Columbia Supreme Court in these cases wasapproved by Clackson J of the Alberta Court of Queen's Bench in hiscomprehensive discussion of the relevant principles in Sovereign GeneralInsurance v. Tanar Industries Ltd.58 In that case, the Court endorsed what seemsto be an established practice in the United States of severing the bad faith claim inan action under an insurance policy from the claim for non-payment of benefits.Under such an approach, the claim for non-payment is tried first and, if it isdecided in favour of the plaintiff, discovery and trial of the claim for punitivedamages follows. Clackson 1's views on the insurer's entitlement to assertprivilege in each of the two proceedings may be summarized as follows:

1. The insurer is entitled to maintain a claim of litigation privilegewith respect to the claim for payment unless the privilege has been waived.

2. Litigation privilege is intended to protect the opinions, strategiesand conclusions of counsel and documents created or obtained with the dominantpurpose of use in .litigation.

3. Litigation privilege does not preclude disclosure of whether therewas an investigation of the claim by the insurer's counsel and what was done toinvestigate. However, this information need not be disclosed until after the claimfor payment has been decided.

4. Investigation undertaken by an adjuster before there is anycontemplation of litigation is discoverable.

5. The insurer may be deemed to have waived litigation privilege byvoluntarily raising a defence or asserting a claim that puts in issue its state ofmind as to its legal position. Thus a party's assertion of reliance on legal adviceas a defence to a claim constitutes a waiver of privilege with respect to the adviceobtained. However, a simple denial of a bad faith claim does not constitute awaiver of privilege.

In the case before him, Clackson J concluded that the insurer hadvoluntarily injected its state of mind into the action by claiming reliance on theinvestigations and opinion of counsel. Since the insurer's state of mind may havebeen influenced by those investigations and that advice, the fruits of the

58 [2002] 3 W.W.R. 340, 36 C.C.L.L (3d) 225.

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investigations were discoverable. Further, the insurer waived its privilege byfiling an affidavit in which one of its officers deposed that he had no knowledgeof facts that would support the plaintiff's claim of bad faith. Though disclosurewas therefore to be made in connection with the bad faith claim, it was notrequired until after the claim for payment was decided.

Ontario courts have taken a significantly different approach to the questionof severance of claims. In Sempecos v. State Farm Fire and Casualty InsuranceCo. 59 Killeen J in chambers directly rejected the American approach to severanceand its adoption by Garson J in Wonderful Ventures. In Sempecos, the insurer'smotion for severance was opposed by the plaintiff. The chambers judge affirmedthe general principle that it is a basic right of a litigant to have all issues in disputeresolved in one trial, and a split trial should be ordered only in the clearest ofcases. He expressed skepticism of the view that the potential need for disclosure,in connection with the good faith claim, of information that might otherwise beprivileged necessarily outweighed the plaintiff's right to a single trial.

The reasoning of the chambers judge was adopted on appeal of hisdecision to a three member panel of the Ontario Superior Court of Justice. TheCourt confirmed that severance would not necessarily be ordered in casesinvolving claims for punitive damages on the basis of violation of a duty of goodfaith, and agreed that severance should only be granted where a strong factualfoundation of potential adverse conse~uences to the moving party can beestablished on the basis of prejudice.6

Notably, that decision was rendered just three months after a panel of thesame court had delivered a decision that strongly affirmed the right of a defendantinsurer to maintain its claim of privilege in an action for damages based on aninsurer's alleged breach of a duty of good faith in its initial failure to pay theplaintiff's insurance claim. In Davies v. American Home Assurance Co.,61 theappeal panel overruled in unusually critical terms a chambers decision that wouldhave significantly limited if not virtually eliminated solicitor-client and litigationprivilege in cases involving a claim of bad faith, in favour of the plaintiff's needfor full disclosure of the manner in which the claim was dealt with. In reasonswritten by Blair RSJ, the appeal panel advanced views that may be summarized inthe following points;

1. The burden of proof is on the party claiming privilege to establishentitlement. That should be done through delivery of an affidavit in which thedocuments respecting which privilege is claimed are individually listed and thegrounds for the privilege articulated and particularized. (However, the Courtsubsequently noted authority to the effect that the onus rests on the party seekingto set aside the privilege.)

59 [2001] OJ. No. 4887, (2001) 17 c.P.c. (5th) 371 (Sup. Ct. Just.).60 [2002] OJ. No. 4498 (Sup. Ct. Just.)..61 (2002), 217 D.L.R. (4th

) 157 (Ont. Sup Ct. Just.), on appeal from [2001] O.J. 677.

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2. Solicitor-client privilege is fundamental to the Canadian legalsystem. However, only those communications between a lawyer and client thatarise where the client has sought legal advice are privileged.

3. Solicitor-client privilege is waived where the party asserting theprivilege places its state of mind in issue by attemptingto justi~ its position onthe grounds of detrimental reliance upon legal advice received. 2

4 The mere fact that the insurer's witness has admitted oninterrogatory that a legal opinion was obtained and relied upon does not constitutewaiver of privilege.

5. Information obtained in the course of investigation of a claim isnot privileged, even if control of the investigation has been placed in the hands ofthe insurer's lawyer. However, the legal opinion rendered on the basis of theinformation obtained is protected by privilege.

6. Litigation privilege is to be differentiated from solicitor-clientprivilege. The former protects from production a communication made or adocument created for the dominant purpose of assisting the client in litigation,actual or contemplated.63 Litigation privilege is designed to facilitate theadversarial process, while solicitor-client privilege is designed to ensure thatcitizens can obtain legal advice in the assurance that communications made to thatend are confidential.

7. Solicitor-client privilege extends only to confidentialcommunications between solicitor and client, while litigation privilege applies tocommunications whether or not of a confidential nature and extends tocommunications between a lawyer and third parties. Litigation privilege appliesonly in the context of litigation itself while solicitor-client privilege applies to anyconfidential communications between solicitor and client.

8. Litigation and solicitor-client privilege trump relevance in almostall circumstances. Thus the orders of the motions judge for disclosure of

62 The defendant insurer was "deemed" to have waived solicitor-client privilege in Samoila v. Prudential ofAmerica General Insurance Co. (Canada) (2000), 50 O.R. (3d) 65 (Sup. Ct. Just.), a case involving a badfaith claim against an insurer. However, Blair J writing for the appeal panel in Davies, ibid. at 167-8,appears to have been skeptical of the soundness of the decision. He said;

While I think it is doubtful that solicitor-client privilege can be pierced simply throughthe expedient of counsel for the party seeking to set aside the privilege "setting up" theclaim by cross-examining the insurer's witness on discovery and establishing the not­unlikely scenario that the insurer has been prudent enough to obtain a legal opinion andconsider or even rely on it, the decision in that case was that waiver had been established.

63 For recent applications of this principle, see Gabany v. Sobeys Capital Inc., [2002] O.J. No. 3151 (Ont.Sup. Ct. Just.), Royal & Sun Alliance Insurance Co. of Canada v. Fiberglas Canada Inc., [2002] O.J. No.3846 (Sup. Ct. Just. - Master).

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counsel's opinion letters and of the full claim investigation file were to be setaside in favour of an order for a more fully particularized affidavit as todocuments.

In the result, it would seem that British Columbia courts are willing toreadily sever a claim for non-payment of benefits under a policy of insurancefrom an accompanying claim for breach of a duty of good faith in order tofacilitate disclosure on the latter claim of information that the insurer might wishto shelter under solicitor-client or litigation privilege in the former. In contrast,Ontario courts are generally unwilling to grant an order for severance, but willprotect an insurer's claim to solicitor-client or litigation privilege on the combinedclaim. An insurer who wishes to voluntarily disclose documents that wouldotherwise be privileged for purposes of defending the good faith claim will beobliged to rely upon the jury's ability, with the assistance of the trial judge, todistinguish on grounds of relevance between the applicability of such informationto the good faith claim and its applicability to the claim for non-payment.64

The Ontario approach as reflected in Sempecos has been adopted in atleast one other province, namel~, Newfoundland, in Lundrigan v. Non-MarineUnderwriters, Lloyd's London. 5

The manner in which the Saskatchewan jurisprudence will develop on theissues of severance and privilege remain unclear. In what has been described asthe leading case on litigation privilege, Laxton Holdings Ltd. v. Non-MarineUnderwriters,66 the Saskatchewan Court of Appeal did not clearly differentiatebetween solicitor-client and litigation privilege. It applied the "dominantpurpose" test articulated in the Ontario caselaw to the benefit of the insurer, whowas claiming privilege over the report of the person hired on counsel'srecommendation to investigate an insurance claim. The test was broken downinto two branches, namely; that the dominant purpose for preparation of thedocument was to be used in obtaining legal advice, and that there was at the timeof its preparation a reasonable prospect of litigation.

In Hill (Litigation Guardian of) v. Arcola School Division No. 72,67 theCourt of Appeal distinguished the two forms of privilege, on the basis of therationales articulated above under point 6 of the commentary on Davies v.American Home Assurance Co. In application of the principles as articulated inLaxton, the Court took what appears to be a somewhat narrower view of the scopeof litigation privilege. It held that the facts relevant to the case, whether reflectedin privileged documents or not, are not privileged and must be disclosed if sought

64 In Sempecos v. State Farm Fire and CasualtY Insurqnce Co., supra note 59, Killeen J in chambersspecifically rejected the suggestion of counsel for the insurer that the claim for non-payment would be"contaminated" with evidence directed to the good faith claim, and that the jury would not be able toaddress the issues before it impartially and fairly.65 (2002), 210 Nfld. & P.E.I.R. 77, 36 C.C.L.I. (3d) 263 (S.c. Tr. Div.).66 (1988), 72 Sask. R. 313 (Sask. c.A.).67 (1999), 179 D.L.R. (4th

) 539 (Sask.C.A.).

22

by one party from the other in a proper way, including through examination fordiscovery. The criterion for discoverability is whether the information soughtmay be characterized as being "facts that are or may be relevant to thedetermination of the facts in issue."

The approach represented by Laxton has been inferentially criticized bythe Alberta Court of Appeal. In Moseley v. Spray Lakes Sawmills (1980) Ltd., 68

that court suggested in reference to Laxton and subsequent authority that;

These Saskatchewan cases seem to suggest that there is nodistinction between assessing liability and preparation forlitigation. In my view there can be one without the other. Eachcase will tum on its own facts. I do accept that an investigationcan occur for reasons other than preparation for litigation. It can bedone to avoid litigation, or determine whether litigation will be alikelihood, or it can be done simply because there is an obligationunder a contract of insurance that requires it. It depends on thefacts. The litigation privilege has been carefully confined tonarrow limits in order to preserve the public interest in fulldisclosure. The onus of proving that the privilege applies shouldrest squarely on the person claiming the privilege.

In Moseley, the Court concluded that application of the dominant purposetest did not protect an insurance adjuster's investigative report from disclosure,even though there may have been some contemplation of litigation, given that theinsurance claim in question involved a serious accident. The report was viewedas having been prepared primarily for the purpose of enabling the insurer to assesswhether there was potential liability exposure arising out of the accident.

In conclusion on this point, the courts' future position on the scope oflitigation privilege in insurance cases may be influenced by their stance on theissue of severance. Where the good faith claim is severed from the claim forpayment, it is reasonable to postulate that the scope of privilege will be morenarrowly confined than it might otherwise be. The nature and outcome of theinsurer's investigation and its outcome will in most cases be highly relevant to thegood faith claim, and disclosure will not prejudice the outcome of the cl~im forpayment. Moreover, if the claim for payment fails, there will be few cases inwhich the good faith claim would be pursued at all. On the other hand if, as hasbeen the case in Ontario, the courts refuse to sever the claims, they are morelikely to be willing to support the insurer's claim for privilege, if disclosure wouldat least arguably prejudice the primary claim.

68 (1996), 135 D.L.R. (4th) 69 (Alta. CA.).

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10. A Note on Aggravated Damages

The length, subject and scope of this paper precludes a full examination ofthe implications of the Supreme Court's decision in Pilot Insurance in connectionwith the award of aggravated damages. However, a brief note is warranted.

The decision in Vorvis v. Insurance Corporation ofBritish Columbia wasas significant in connection with the award of aggravated damages as with theaward of punitive damages, given that the requirement of an "independent wrong"was imposed as the basis of an award of either kind. Pilot Insurance presumablyconfirms that breach of a contract duty may constitute an "independent wrong"for purposes of the fonner, as it can for purposes of the latter, though theacknowledgement that both a compensatory award (aggravated damages) and apenal award (punitive damages) may arise from the same breach appears to raise aconceptual issue that fits rather uneasily with the Supreme Court's analysis.69

This conclusion is less significant for purposes of claims involvinginsurance contracts than it may be in connection with claims for breach of otherkinds of contract. It has already been established that many contracts of insuranceinvolve a positive covenant to give the insured "peace of mind", the violation ofwhich may support an award of damages com~ensating for the emotional distressaccompanying refusal of a claim for benefits. However, in other kinds ofcontract, damages for emotional or psychological suffering are rarely available.Pilot Insurance may have gently nudged the door opening the way to such awardsby endorsing violation of a duty of good faith as the basis for punitive, andinferentially aggravated, damages.

11. Conclusion

The decision of the Supreme Court in Pilot Insurance has resolved animportant longstanding question regarding the substantive basis that must beestablished to found an award of punitive damages in an action for breach of

69 In Wallace v. United Grain Growers Ltd., supra note 5 at 202, the Supreme Court of Canada defined thedistinction between aggravated and punitive damages as follows:

Aggravated damages are awarded to compensate for aggravated damage. As explained byWaddams, they take account of intangible injuries and by definition will generallyaugment damages assessed under the general rules relating to the assessment of damages.Aggravated damages are compensatory in nature and may only be awarded for thatpurpose. Punitive damages, on the other hand, are punitive in nature and may only beemployed in circumstances where the conduct giving the cause for complaint is of suchnature that it merits punishment.

The linkage between aggravated and punitive damages in terms of the "independent wrong" isillustrated by the recent Ontario Court of Appeal decision in Prinzo v. Baycrest Centre forGeriatric Care (2002), 215 D.L.R. (4th

) 31.70 The analysis in Warrington v. Great-West Life Assurance Co. (1996), 139 D.L.R. (4th

) 18, [1996] 10W.W.R. 691 (B.C.C.A.) was affirmed in McIsaac v. Sun Life Assurance Co. of Canada (1999), 173 D.L.R.(4th

) 649 (B.C.C.A.).

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contract. Though the "independent wrong" required will still in most cases be atort, the Court has confirmed that breach of a distinct contractual term or duty willsuffice. Specifically, breach of an implied duty of good faith in contractperformance provides a substantive basis for the award of punitive damages. Theanalysis presumably applies in similar fashion to the award of aggravateddamages.

In addition, the Court has offered significant assistance by way of the testto be applied to determine whether punitive damages should be awarded once thesubstantive foundation is established (the "if but only if test"), and has articulatedfactors relevant to the quantification of the award. It has also offered practice tipson the nature of the pleadings required to support a claim for punitive damages,the sort of jury charge that counsel might properly expect on such a claim and thestandard for appellate review of a jury or trial level judicial award.

A byproduct of the decision is the need to address whether claims forpunitive damages, particularly in cases involving an allegation of good faith,should or will be severed from the primary claim for contract breach. A secondunresolved question is the extent to which the expanded potential for seekingpunitive damages will affect application of the principles associated withsolicitor-client and litigation privilege. The issues of severance and privilege are,as the foregoing discussion suggests, arguably linked.

Finally, the decision potentially expands the field within which aggravateddamages may be awarded for breach of contract, though that expansion is likely todepend on the willingness of courts to imply a duty of good faith in theperformance of contracts other than those in which such a duty has already beenrecognized.

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