In the recent decision of Southwind v. Canada, 2021 SCC 28, the Supreme Court of Canada ruled that expropriation law is not the appropriate legal framework governing historic breaches of the Crown's fiduciary duty to protect a First Nation's interest in reserve land.

This important decision clarifies that in situations where reserve lands are taken for public purposes and projects, a First Nation must be entitled to equitable compensation, which can be more than the minimum amount required by the Crown's statutory obligations.

Background

The Southwind case arises out of the irreparable flooding of Lac Seul First Nation's ("LSFN") reserve lands pursuant to an agreement between Canada, Manitoba, and Ontario.

LSFN is a Treaty 3 Nation in Northern Ontario whose sole reserve is located on the southeastern shore of Lac Seul (the "Reserve"). In 1875, LSFN chose Lac Seul as the site of its Reserve because of the resources along the shoreline and the social, cultural, and spiritual importance of the area.

By 1911, Canada had identified Lac Seul as a potential reservoir for hydroelectric generation intended to power Winnipeg's economic growth (the "Project"). Canada found that if it raised the water level of Lac Seul by 10 feet, it could generate substantial electricity. Construction of a dam was completed in 1929 and Lac Seul's water levels rose steadily through the 1930s.

Canada failed to consult with, obtain consent from, or inform LSFN about the Project. Further, Canada failed to negotiate on LSFN's behalf to get the best compensation possible. The compensation Canada did manage to negotiate — 14 years after the flooding began — was inadequate.

The results of Canada's failures are tragic and well documented. Roughly 17 per cent of LSFN's Reserve (11,304 acres) is now permanently flooded. Homes were destroyed, as were wild rice fields, gardens, hay lands, and gravesites. Fishing, hunting, and trapping were all impacted. From the beginning, Canada was aware that the flooding would damage LSFN's Reserve. LSFN was separated because one part of the Reserve became an island. And, despite the sacrifices suffered by the LSFN to make the Project possible, the Reserve was not provided with electricity until the 1980s.

Lower Court Decisions

In 1991, Roger Southwind, for himself and on behalf of the members of the Lac Seul Band of Indians (together, "LSFN"), filed a civil claim in the Federal Court against Canada.

At trial, the trial judge held that Canada had breached its fiduciary obligations to LSFN and that equitable compensation was the appropriate remedy in the circumstances. Equitable compensation is equity's counterpart to common law damages. It is discretionary and restitutionary in nature, aiming to restore the actual value of the thing lost through the fiduciary's breach, known as the plaintiff's lost opportunity.

The trial judge determined that had Canada not breached its fiduciary obligations, it would have likely obtained a negotiated settlement for a flowage easement over LSFN's Reserve lands, or it would have used its powers under section 48 of the Indian Act, R.S.C. 1927, c. 98 to expropriate the Reserve land for the limited purpose of facilitating the Project.

On this basis, the trial judge assessed the market value of the flooded land based upon a hypothetical flowage easement, valued as if it had been lawfully expropriated according to general expropriation law. In doing so, the trial judge rejected expert opinion seeking to incorporate the value of the land for hydroelectricity generation, reasoning that any value attributable to the Project was to be excluded under the relevant expropriation legislation. In the end, the trial judge assessed the value of the flooded land at $1.29 per acre based on its value in 1929. After factoring in value of the flooded land and other calculable and non-calculable damages, the trial judge awarded LSFN approximately $30 million in equitable compensation.

LSFN appealed the trial judge's assessment of equitable compensation to the Federal Court of Appeal. LSFN's primary argument was that the trial judge should have included the loss of a revenue-sharing agreement as part of its calculable damages.

The Federal Court of Appeal dismissed LSFN's appeal, ruling that the trial judge made no palpable and overriding error of fact or legal error that went to the core of his determination.

The Supreme Court of Canada Decision

On appeal to the Supreme Court, LSFN abandoned its position that equitable compensation should include the loss of a revenue-sharing agreement, arguing instead that the flooded land be valued based on its value for hydroelectricity generation. LSFN submitted that the lower courts erred in their application of the principles of equitable compensation by relying on principles of expropriation law to value LSFN's loss.

The majority of the Supreme Court agreed with LSFN, ruling that the trial judge had improperly concluded that Canada's fiduciary obligations required it to do no more than the minimum required in an expropriation of fee simple lands. Upon making this determination, the Supreme Court revisited the principles for assessing equitable compensation.

Reaffirming the approach taken in Guerin v. R, [1984] 2 S.C.R 335, the majority of the Supreme Court held that the first step in assessing equitable compensation is to determine what the fiduciary would have been expected to do had it not breached its obligations.

In this case, instead of determining what the Crown would have been expected to do, the trial judge focused on the fact that the Crown could have legally expropriated the Reserve land under section 48 of the Indian Act. The trial judge's fundamental error, then, was that he focused on what Canada would likely have done instead of what Canada ought to have done as a fiduciary.

By focusing on the fact that the Crown could have expropriated the Reserve land, the trial judge valued the Reserve land at the minimum required under expropriation law. The majority of the Supreme Court found that this approach ignored necessary considerations including the nature of the LSFN's interest in the Reserve and the harm suffered by LSFN.

In reviewing the unique importance of Indigenous interests in land, the majority of the Supreme Court ruled that expropriation law is not the appropriate legal framework governing historic breaches of the Crown's fiduciary duty to protect a First Nation's interest in reserve land. In fact, the majority of the Supreme Court went so far as to state that Canada is never entitled to proceed in the same manner as an expropriation of fee simple lands. Instead, Canada must always keep the First Nation informed, attempt to negotiate a surrender before proceeding to an expropriation, and ensure compensation reflecting the nature of the interest and the impact on the community.

Following this approach, the Supreme Court ruled that Canada was obligated to negotiate with LSFN in order to secure compensation reflecting the impact suffered by LSFN and the full potential value of the land for its anticipated use, being hydroelectricity generation.

In light of the above, the Supreme Court determined that equitable compensation in this case should be assessed on the basis of a negotiated surrender. The Supreme Court set aside the lower court judgments and returned the case to the trial court to reassess the equitable compensation owed to LSFN on this basis.

Impact of this Case

Southwind provides further clarity and direction on the interplay between the Crown's fiduciary duty and equitable compensation arising out of public projects.

The Supreme Court of Canada has confirmed that, rather than being entitled to the bare minimum, First Nations should be entitled to the full potential value of the land that has been affected by the Crown's breach, considering the nature of the First Nation's interests and the impact on the community.