Specific Claims Tribunal recognizes compensability of consumptive goods

16 January 2017

On December 12, 2016, the Specific Claims Tribunal ("the Tribunal") released its Reasons for Decision regarding the compensation phase of Huu-Ay-Aht First Nations v. Her Majesty the Queen in Right of Canada.1 The Tribunal ultimately found that the Crown owed HFN $13,884,000 in equitable compensation for its various breaches of fiduciary duty.

Factual background and procedural history

In 1938, HFN surrendered "all merchantable timber" on what was then the Numukamis Indian Reserve No. 1, an eleven-hundred acre reserve of the Barkley Sound area of Vancouver Island. A condition of the surrender was that the federal Crown dispose of the timber in the manner it deemed "most conducive to [HFN's] welfare." Following the surrender, the Crown assessed the timber, initiated a tendering process and, in 1942, accepted a bid and issued a license for the timber's harvest. However, as no harvesting had begun as of January 1948, HFN formally petitioned Canada to cancel the license. Despite HFN's formal petition, Canada did not terminate the license and logging began shortly thereafter, ending in 1970.2

At the validation phase of the proceedings, the Tribunal concluded that the Crown had breached various fiduciary duties to HFN by, inter alia, selling the timber outside the conditions of the surrender and by its ongoing failure to consult HFN regarding the timber sales, particularly after its receipt of HFN's 1948 formal petition for cancellation.3

Issue at the Tribunal

At the compensation phase of Tribunal proceedings, the question before the Tribunal is the quantum of compensation owed to the First Nation for the Crown's breach of a lawful obligation.

In this case, the question was: what amount of equitable compensation was owed to HFN for the Crown's breach of its fiduciary duties with respect to the surrender and sale of the reserve timber between 1942 and 1970?

The Tribunal's decision on compensation

HFN's specific claim against the Crown was for equitable compensation, a monetary remedy that attempts to restore to the plaintiff what has been lost as a result of a breach. In this case, HFN sought to restore the lost opportunity to spend the funds it would have received but for the Crown's breach of fiduciary duty.

The majority of the record before the Tribunal consisted of the evidence and testimony of the parties' experts. As such, the Tribunal's role was to measure the expert's competing compensation models against the recognized principles of equitable compensation and select the approach most faithful to those principles.

Both sets of experts, working from a common accounting of HFN's trust accounts, produced estimates of the current value of HFN's loss by creating hypothetical histories of how the First Nation likely would have used the funds up until December of 2014, had the Crown not breached its fiduciary duties. To do so, both expert models classified HFN's hypothetical spending into three broad categories:

  1. savings deposits to HFN's trust accounts;
  2. "investments," broadly defined to include, inter alia, infrastructure, health, and education expenditures; and
  3. "consumption" of food and other goods that do not otherwise generate income or other long-term benefits.

HFN and its expert, Professor Hosios, took the view that all three of categories of hypothetical spending were compensable when seeking equitable compensation. Their position was based on HFN's reading of Whitefish Lake Band of Indians v. Canada4 (the most recent authority on equitable compensation) and Professor Hosios' view that a meaningful valuation could be given for each category. He then totaled the values of each of the foregone savings, investments, and consumption amounts to arrive at this estimate of the current value of compensation: $13.8M.

By contrast, the Crown and its experts, Professor Laurence Booth and Professor Eric Kirzner, took the position that only hypothetical savings and investment values could be included in an equitable compensation award - that is, that "consumption" expenditures were not compensable as a matter of law. Their decision to exclude "consumption" was based largely on the Crown's reading of Whitefish, and their view that HFN, as a collective, did not receive long-term benefits from consumption expenditures.5 By their own estimates, these expenditures constituted approximately 85% of HFN's spending. As such, when they totaled the remaining values - those attributable to savings and investments - they reached a much smaller net compensation amount of $2,942,383.45.6

As noted above, the Tribunal rejected the calculations forwarded by the Crown and its experts. It did so for several reasons:

First, it disagreed with the Crown's position that Whitefish stood for the proposition that consumption costs did not merit equitable compensation: "I conclude that Whitefish did not decide that consumption would never merit equitable compensation."7 Rather, in the Tribunal's view, Whitefish's ratio was that an award of equitable compensation cannot be based on speculation when it offends an equitable presumption favouring the beneficiary.8

Second, it found the narrower, economic definition of "consumption" underlying the Crown's position as arbitrary in the context of the case.9

Third, and perhaps most importantly, it held that the exclusion of consumption expenditures from the overall award was not consistent with the general purpose of equitable compensation (restoration for a lost opportunity):

To repeat Justice McLachlin's conclusion in Canson (at para 27), equitable compensation "attempts to restore to the plaintiff what has been lost as a result of the breach; i.e., the plaintiff's lost opportunity." In this case, the Party to be restored is the Claimant HFN. It made the decision on the part of its members to sell its timber on terms formally accepted by the Respondent. Because of breach of fiduciary duty, the HFN lost the opportunity to save or spend (whether on investment or consumption) the funds it should have received.10

Furthermore, and contrary to the Crown's position, the Tribunal emphasized that consumption expenditures do result in long-term benefits and progress for HFN, and indeed, that the circumstances of HFN made the loss of the opportunity to expend the resources on consumptive goods significant:

With regard to the overall loss of opportunity arising from the breach, it makes little difference whether the funds were earmarked for consumption or infrastructure. Both categories of expenditure were for the benefit and progress of the Band

Documents produced in Phase One of this proceeding made it clear that in making the surrender the HFN was motivated by its members' serious need for food and health care. The Band was motivated to sell its timber precisely to address its subsistence level of poverty brought on by a poor economy and bad years of fishing. The Respondent recognized this at the time. Not being able to address those needs, most of which were classified by the Experts as consumption, was a great loss to the Band's leadership and the HFN as a whole.11

Having rejected the compensation model of the Crown and its experts, the Tribunal went on to embrace HFN's position that all hypothetical spending decisions, including consumption expenditures, should be compensable: "the Band should be remedied today for the opportunity to make all spending decisions it likely would have made but for the breach."12

In addition to the important finding that consumption costs are compensable in proceedings before it, the Tribunal may have also tacitly rejected the Crown's oft-stated position that the majority of an equitable compensation amount should be subject to simple interest, rather than compound interest. That is, it is at possible (but not certain) that after the Compensation Decision, the entirety of an equitable compensation claim is subject to compound interest. This possibility stems from two sets of remarks made by the Tribunal.

First, in response to the Crown's suggestion that "simple interest could be part of the assessment of equitable compensation in this Claim," the Tribunal notes that in Bank of America v Mutual Trust Co, the Supreme Court recognized that compound interest is generally a superior method of dealing with the effects of time on money, and that it is available in equity.13 Notably, the Tribunal does not take the step of expressly using these remarks to reject the Crown's suggestion.

Second, when endorsing the First Nation's compensation model, the Tribunal appears to include the use of compound interest rates as a principle of equitable compensation:

While equitable compensation should not be used to penalize a trustee, neither should its principles be interpreted to provide a shield to the wrongdoer in a manner that prevents a fair remedy. The fullness of equitable compensation, with its acknowledgement of lost opportunities to use assets over time, the presumption of the most advantageous use or most favourable accounting, and the application of compound interest rates, is intended to give a trustee incentives to perform his or her duty with the highest degree of care and integrity.14

Again, we stress that the Tribunal stops short of making an express statement that the entirety of an equitable compensation amount should be subject to compound interest. However, the two statements above may provide a decent bulwark against future Crown arguments that simple interest should be applied to much or most of these amounts.

Significance of the decision for future First Nation claimants

The Tribunal's decision is significant for two reasons. First, it expressly recognizes that foregone revenues that a First Nation likely would have been spent on "consumption" goods are compensable under equitable compensation. This significantly increases the scale of compensation available to First Nations bringing claims before the Specific Claims Tribunal, laying the ground for more meaningful and comprehensive awards in future cases. Second, in recognizing that the "fullness of equitable compensation" includes the application of compound interest rates, the Tribunal also tacitly rejected the Crown's position that only a portion of equitable compensation awards should be subject to compound interest.

[1] Huu-Ay-Aht First Nations v Her Majesty the Queen in Right of Canada, 2016 SCTC 14 ["Compensation Decision"].

[2] Compensation Decision, paras 10-12.

[3] Huu-Ay-Aht First Nations v Her Majesty the Queen in Right of Canada, 2014 SCC 7 ["Validity Decision"] at para 100.

[4] Whitefish Lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744.

[5] Compensation Decision, para 288.

[6] Compensation Decision, para 44.

[7] Compensation Decision, para 268.

[8] Compensation Decision, para 263.

[9] Compensation Decision, para 288.

[10] Compensation Decision, para 311.

[11] Compensation Decision, para 312.

[12] Compensation Decision, para 315.

[13] Compensation Decision, para 251-252, citing Bank of America Canada v. Mutual Trust Co., [2002] 2 SCR 601, 2002 SCC 43, paras 21-24.

[14] Compensation Decision, para 317.

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