Southwind v. Canada case summary

The Supreme Court of Canada (“SCC”) released its decision in Southwind v. Canada, 2021 SCC 28 (“Southwind”) on July 16, 2021. The decision clarifies how to assess equitable compensation for a breach of Canada’s fiduciary duty to Indigenous peoples in the context of reserve lands.

Background

In 1929, a dam to power hydroelectricity generation to Winnipeg was completed. It involved raising the water level of Lac Seul by ten feet to create a water reservoir (the “Project”). Despite repeated warnings about the considerable damage the flooding would cause the Lac Seul First Nation (“LSFN”) reserve, the Project advanced without the consent of the LSFN, without compensation, and without the lawful authorization required.

Trial Decision

The trial judge found that Canada breached its fiduciary duty and its obligations to the LSFN under the Indian Act[1] and Treaty No. 3.[2] He found that the appropriate remedy was to determine equitable compensation. The trial judge valued the flooded land as if it had been lawfully expropriated according to general expropriation law. In doing so, he excluded the value of the land for the Project and assessed the valuation as bushland and waterfront land. He also assessed other non-calculable damages for a total award of $30,000,000.

Federal Court of Appeal Decision

The LSFN challenged the trial judge’s evaluation of equitable compensation for the loss of the flooded lands. The majority of the Court of Appeal dismissed the appeal. A dissenting judge would have allowed the appeal, agreeing that the value calculated for the flooded land should have taken into account the value of the Project.

The Supreme Court of Canada

The SCC found that Canada breached its obligation to preserve and protect the LSFN’s interest in the reserve, which included an obligation to negotiate compensation for the LSFN on the basis of the value of the land to the hydroelectricity project and not as bushland or waterfront land. The SCC found that the LSFN was entitled to equitable compensation for the lost opportunity to negotiate for an agreement reflecting the value of the land to the hydroelectricity generation project.[3] The SCC allowed the appeal and held that the award for equitable compensation be set aside and returned to the Federal Court for reassessment.

Significance of the Southwind Decision

The SCC’s decision reiterated concepts of fiduciary obligation and honour of the Crown that many who practice in this area are familiar with. However, unlike other judgments, the SCC directly attacked the idea that a simple technical approach to legislation can be applied to the assessment of equitable compensation. The trial judge used a simple legislative approach of expropriation law from 1929 to calculate what the LSFN would have received had Canada followed the expropriation law set out in the Indian Act. However, the SCC rejected that approach, stating that the legal authority of the Crown to expropriate land under the Indian Act imposed a bare minimum requirement and did not consider the Crown’s fiduciary obligations that must be applied at the same time as expropriation law.

The SCC’s decision means that compensation cannot be assessed in the vacuum of historical legislation. The expropriating party and the courts need not only to consider the legislative scheme, but understand the depth of what the fiduciary duty means at its core and actually apply this duty in a meaningful way. Merely applying the legislative requirements will not satisfy the Crown’s fiduciary duty to Indigenous peoples. The SCC is clarifying that the Crown’s fiduciary duty to Indigenous peoples cannot be overlooked when it comes to compensation for expropriation.

Analysis

In Southwind, the issue for the SCC was whether the trial judge made an error of law in the assessment of equitable compensation for lost opportunity caused by Canada’s breach of fiduciary duty to the LSFN.

The SCC broke down its analysis into three parts. First, the SCC reviewed the relevant principles of the Crown’s relationship to Indigenous Peoples, and more specifically, the fiduciary duty that may arise. Second, the SCC considered the principles of equitable compensation for a breach of fiduciary duty. Third, the SCC applied those principles to the trial judge’s assessment of equitable compensation.[4]

Applicable Provisions and the Crown’s Fiduciary Duty to be Applied Simultaneously

The SCC reviewed the provisions of the Indian Act which were in force in 1929 and provided two ways to remove land from a reserve. The first was for a public purpose and the second was surrender by consent.[5]

The SCC further reviewed the language in Treaty No. 3 which imposed obligations on the Crown while willingly undertaking their role as a fiduciary, specifically with respect to reserve lands.[6]

The trial judge found that had Canada not breached its fiduciary duty, then it would have removed the land from reserve by expropriation because it had the legislative power to do so. However, the SCC disagreed with this conclusion, stating that equitable compensation should be assessed on the basis of a negotiated surrender prior to considering expropriation law. The SCC found that the lost opportunity in this case included the opportunity to negotiate a surrender because Canada failed the keep the LSFN informed and failed to prevent the Project from proceeding until negotiations for compensation had been resolved.[7]

The SCC further stated that the expropriation provision in the Indian Act must be understood in light of the pre-existing fiduciary duty of the Crown. The fiduciary duty, not just the Indian Act, imposed substantive obligations on how Canada was to exercise its discretion over the reserve land. Furthermore, the legal authority granted under the Indian Act to expropriate land for public use did not answer the question of what the fiduciary duty required in this case, as it only provided for a bare minimum requirement on the exercise of the Crown’s discretion.[8]

When applying the fiduciary duty to expropriations, the public interest cannot trump the Indigenous interest. The Crown can decide that a public work is in the public interest and thus should proceed, but the manner in which it proceeds is subject to the fiduciary duty.[9]  The law imposes a duty in the context of an expropriation which requires the Crown to minimally impair the protected interest. This means that the Crown must preserve the Indigenous interest to the greatest extent possible.[10]

Furthermore, expropriation law reflects fee simple interest in land, and not the sui generis Indigenous interests in land. The principles underlying Indigenous interest in land are fundamentally different from the principles underlying expropriation law. Indigenous interests in land are the centre of the relationship between the Crown and Indigenous peoples and are not fungible commodities that can be easily replaced by buying additional fee simple land.[11]

Although the SCC agreed with much of the trial judge’s analysis, the SCC found that the trial judge incorrectly applied only general expropriation law to the facts, and did not consider the unique obligations imposed by Canada’s fiduciary duty.[12] The SCC stated that the specific nature of the Crown’s fiduciary duty to Indigenous peoples, especially over reserve land, informs how equitable compensation must be assessed.[13] Simply, the SCC disagreed with the trial judge’s failure to understand the application and depth of Canada’s fiduciary duty being a vital component of the relationship between the Crown and Indigenous peoples and its intended purpose for reconciliation.

In sum, when dealing with Indigenous lands, Canada is not entitled to proceed in the same manner as an expropriation of fee simple lands. Canada must keep the First Nation informed, attempt to negotiate a surrender before proceeding to an expropriation, and ensure that compensation reflects the nature of the interest and the impact on the community.[14] The Crown is required to follow the law while also implementing its fiduciary duty to protect and preserve the First Nations’ interest to the greatest extent possible. In the context of this case, if the Crown was to follow expropriation law and simultaneously implement its fiduciary duty, it should have assessed compensation for the value of the land it was taking based on the value of the land to the Project, namely, hydroelectricity generation.[15]

Principles of Equitable Compensation

The SCC confirmed the following principles of equitable compensation for a breach of duty:

1. The goal of equitable compensation is to restore what the plaintiff has lost due to the breach;
2. The plaintiff’s loss is an opportunity that was not realized because of the breach;
3. The plaintiff’s loss must be assessed with the benefit of hindsight and not based on what was foreseeable or known at the date of the breach;
4. The losses are to be determined on a common sense view of causation;
5. The court must assume the plaintiff would have made the most favourable use of the trust property; and
6. The court must assume that the defendant would have carried out its duties in a lawful manner.[16]

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.[17] Equitable compensation is the preferred remedy when restoring the plaintiff’s position if an in specie remedy is not available.[18] It is a discretionary and restitutionary remedy that is assessed rather than precisely calculated.[19] As its purpose is to make up the plaintiff’s loss, it aims to restore the actual value of the thing lost through the fiduciary’s breach, referred to as the plaintiff’s lost opportunity.[20] Although the principles of equitable compensation were not in dispute, the application of these principles by the trial judge was.

Equity will assess the lost opportunity under the presumption that the beneficiary would have put the asset to its most favourable use. The most favourable use must be realistic, and the common law requires a plaintiff to lead evidence to that effect.[21] The Court must consider what the highest and best use of the asset was between breach and date of trial.[22]

The SCC considered the trial judge’s use of the presumption of legality and stated that this presumption prevents breaching fiduciaries from reducing compensation by arguing they would not have complied with the law.[23] The SCC found that the trial judge misapplied this equitable presumption to limit compensation by suggesting that the fiduciary is expected to do no more than what the law, not equity, requires.[24] This presumption is not to be used to limit compensation in this way.

Furthermore, the SCC explained that the inequality of bargaining powers between the LSFN and the Crown, due to the legal powers conferred in the Indian Act to the Crown, is also not a factor which can be argued to limit compensation.[25] The SCC directly stated that Canada is not permitted to use its legal power over the beneficiary to force an unfair settlement on the beneficiary, as such reasoning would turn Canada’s fiduciary duty on its head, allowing Canada to benefit from the very discretionary power it holds over the First Nation, which is the source of its fiduciary duty.[26]

Assessment of Equitable Compensation from 1929 to Today’s Value

The SCC did not take issue with the manner in which the trial judge brought forward historic losses to present value.[27] The trial judge broke down the assessment of equitable compensation in two categories: quantifiable losses capable of mathematical calculations and non-quantifiable losses not susceptible to mathematical calculation.

The trial court adopted the Lazar-Prisman model of creating a multiplier based on the historical Indian Trust Fund Rates.[28] Absent contrary evidence, the trial judge held that this was the appropriate basis to bring a past loss forward to the present day for equitable compensation purposes.

The SCC accepted the trial judge’s assessment of translating the compensation that ought to have been received in 1929 into today’s dollars by making an initial estimate of the loss in 1929, and then bringing that entire loss forward using the Indian Trust Account annual interest rate determined by the Government of Canada, compounded annually.[29] Although the SCC sent the decision back for reassessment as to the initial estimate of loss, it accepted this approach to bring forward the entire loss.

When assessing realistic contingencies that need to be taken into account, the trial judge clarified the correct interpretation of realistic contingencies which were originally discussed in Guerin[30] and then interpreted in Whitefish.[31] The trial judge clarified that a realistic contingency is not a consideration of what might have happened to the money that would have been given to the First Nation. He stated that this had nothing to do with the decision-making and is not a realistic contingency from an economic point of view. It has no bearing on estimating losses and nothing to do with what an economist would define as a realistic contingency.[32]

The trial judge considered a list of factors that were non-quantifiable. This included losses created in 1929 which persisted over decades, and still continue today.[33] The following is a list of factors considered in assessing loss:

1. The amount of the calculable losses;
2. That many of the non-quantifiable losses created in 1929 persisted over decades, and some are still continuing;
3. The failure to remove the timber from the foreshore created an eyesore and impacted the natural beauty of the Reserve land;
4. The failure to remove timber from the foreshore also created a very long-term water hazard effecting travel and fishing for members of the LSFN;
5. The flooding negatively affected hunting and trapping requiring members to travel further to engage in these pursuits and the number of animals were reduced for some period as a result of the flooding;
6. Although Canada supplied the materials to build the replacement houses, the LSFN members supplied their own labour;
7. The LSFN docks and other outbuildings were not replaced;
8. LSFN hay land, gardens and rice fields were destroyed;
9. The hunting and trapping grounds on the Reserve were negatively impacted;
10. Two LSFN communities were separated by water and one became an island, impacting the ease of movement of the people who lived there;
11. Canada failed to keep the LSFN informed and never consulted with the band on any of the flood related matters that affected it, creating uncertainty and, doubtless, some anxiety for the band; and
12. Canada failed to act in a prompt and effective manner to deal with compensation with the LSFN prior to the flooding and did not do so for many years after the flooding, despite being aware of the negative impact on the band members.

(Southwind, para. 512)

The trial judge assessed the non-calculable amount of loss at $16,152,129.60, which made up over 50% of the final award at the trial level. The decision has been returned for reassessment, but not on this point.

Conclusion

The SCC disagreed with the trial judge and found that a fundamental error of law was made because the trial judge focused on what Canada would likely have done instead of what Canada ought to have done as a fiduciary.[34] The SCC found that the fiduciary duty required more than compensation based upon expropriation principles for three main reasons.[35] First, the presence of legal discretion to take or expropriate the land in the Indian Act did not define the obligations imposed by Canada’s fiduciary duty. Second, the fact that the land was required for a public work did not negate the obligations imposed by Canada’s fiduciary duty. Third, the principles of expropriation law are fundamentally different than those underlying Indigenous interest in land and it is not the appropriate framework governing historic breaches of the Crown’s fiduciary duty to protect a First Nation’s interest in land.[36]

As a result, the SCC sent the assessment back to the trial court for a determination of the valuation of the lost opportunity reflecting Canada’s obligation to negotiate compensation based upon the best price that could have been obtained for the land’s use for the Project.

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[1] Indian Act, R.S.C. 1927, c. 98.

[2] Treaty No. 3, 1873. [The LSFN signed an adhesion July 9, 1874].

[3] Southwind v. Canada, 2021 SCC 28 at para 146.

[4] Ibid at para 53.

[5] Ibid at paras 46 & 47.

[6] Ibid at para 48.

[7] Ibid at para 121.

[8] Ibid at para 97.

[9] Ibid at para 102.

[10] Ibid at para 104.

[11] Ibid at para 105.

[12] Ibid at para 11.

[13] Ibid at para 54.

[14] Ibid at para 110.

[15] Ibid at para 106.

[16] Ibid at para 38 (see also para. 285 of Southwind v. Canada, 2017 FC 906 (“Trial Decision”)).

[17] Ibid at para 68.

[18] Ibid at para 68.

[19] Ibid at paras 68 & 69.

[20] Ibid at para 69.

[21] Ibid at para 80.

[22] Ibid at para 76.

[23] Ibid at para 81.

[24] Ibid at para 98.

[25] Ibid at para 99.

[26] Ibid at para 99.

[27] Ibid at para 164.

[28] Trial Decision at para 467.

[29] Trial Decision at para 482, 504 and footnote 6.

[30] Guerin v Canada, [1982] 2 FC 385 (TD)

[31] Whitefish Lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744 (see also Trial Decision at para 466).

[32] Trial Decision at para 466.

[33] Trial Decision at para 512.

[34] Ibid at para 11, 89, 98.

[35] Ibid at para 94.

[36] Ibid at para 94.