Fiduciary Duties in Government/Municipal Liability Litigation

Fiduciary Duties

Fiduciary duties arise in the context of a trust relationship.  A fiduciary is a person or corporation that stands in a position of trust to another person or corporation, with corresponding duties.   The breach of that duty is compensable in damages.

In the last several decades, the law relating to fiduciary duties in a civil context has expanded and has been clearly defined.  It is therefore important to look at whether these developments have had any impact on provincial/municipal liability.

The Supreme Court of Canada has set out the criteria for identifying a fiduciary relationship as follows:

  1.  
    1. The fiduciary has scope for the exercise of some discretion or power;
  2.  
    1. The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests; and,
  3.  
    1. The beneficiary is subject to peculiar vulnerability in the exercise of that discretion or power.

The fiduciary relationship, if one exists, involves a duty of loyalty, the utmost of good faith, and the avoidance of self-dealing or conflict.  The usual remedy for a breach is disgorgement of any profits or benefits derived from the breach, although general and pecuniary damages may also be awarded for any losses suffered.  It is fallacious to determine fiduciary status and fiduciary duty by reasoning from misbehaviour or from remedy to duty.   Mr. Justice Sopinka stated in Lac Minerals :
…the presence of conduct that incurs the censure of a court of equity in the context of a fiduciary duty cannot itself create the duty.
If there is no fiduciary relationship, there can be no breach or remedy. 

The traditional view

The traditional view has been that governments do not owe a fiduciary duty to its citizens.  The turning point occurred in 1984 when the Supreme Court of Canada observed that although fiduciary duties generally arise only with regard to obligations originating in a private law context, there is nothing in principle to prevent the Crown from acting as a trustee.  Dickson J.  stated:
…that where by statute, agreement, or perhaps by unilateral undertaking, one party has an obligation to act for the benefit of another, and that obligation carries with it discretionary power, the party thus empowered becomes a fiduciary. Equity will then supervise the relationship by holding him to the fiduciary’s strict standard of conduct.

When it comes to applying fiduciary obligations to government authorities, the prevailing litigation involves the Crown and native rights.  Starting withGuerin , it is now settled law that the Crown is in a special fiduciary relationship with aboriginal peoples.  However, there are some limitations:

  1. the fiduciary duty varies with the nature and importance of the interest sought to be protected.
  2. enforcement of equitable duties by equitable remedies is subject to the usual equitable defences, including laches and acquiescence.

With respect to other areas of government jurisdiction, the law has developed in a more sporadic fashion.  Traditionally, if a party felt aggrieved by government action, it would seek the traditional remedies such as judicial review or pursuing the normal private law remedies in tort and contract.  A more recent development is the emerging tort of abuse of public office.  In addition, in cases where you could establish the existence of a true trust relationship (such as the native rights cases), the plaintiff can pursue a remedy for breach of a fiduciary obligation.  To establish a true trust relationship in a statutory context, it must be shown that the Crown deliberately assumed the role of a trustee on the clearly demonstrated intent of the statute.

The New Approach
Professor Sossin, in an excellent article on public fiduciary obligations argues that a new civil claim has emerged in Canada that holds government decision makers accountable for breaching fiduciary obligations even where the requirements of a true trust have not been met, but where there is a statutory obligation for the government to act in the interests of a particular group.   He argues that an equitable or fiduciary model to administrative decision making has emerged based on the principle of reasonableness.  He states:
Reasonableness in discharging a public trust requires taking the interests of affected parties, especially vulnerable parties (such as individuals dealing with the mental health, child welfare, and income maintenance bureaucracies), into consideration when determining the public interest.  The extent to which the discretion can be justified on this basis is the extent to which it may be said to be reasonable.

The trend towards pleading breach of fiduciary duties by government authorities is increasing.  It has been pleaded in actions against pension commissions , police and police services boards , Crown prosecutors , Medical Officers of Health and municipal corporations and their elected officials and officers.

General Public Duty vs. Private Public Duty
In analyzing whether a public fiduciary duty exists, one needs to look at the nature of the duty.  Is it a general public duty or a private or individual public duty?  In the police cases the courts have said the duty is owed to the public at large, not to an individual.   In Romagnuolo v. Hoskin the court stated as follows:
The nature of the fiduciary relationship requires that one party act selflessly in the exclusive interests of another.  In performing his or her duties, a police officer does not, either personally or statutorily, undertake to act in the exclusive interest of each individual member of the public.  Instead, the officer’s duties are owed to society as a whole.  In the context of law enforcement, society’s best interests are often served at the expense of an individual’s liberty and freedom.  A police officer cannot always be expected to act in each individual’s best interests in fulfilling his or her duties to the public at large.

The same observations were made in Mitchell (Litigation Administrator of) v. Ontario .  In Mitchell, the Ontario Divisional Court dismissed the Plaintiffs’ claim for damages as a result of the death of an infant while receiving care at the hospital emergency department.  The Plaintiffs alleged that the child did not receive proper treatment quickly enough and that the overcrowded conditions were caused by reductions in hospital funding and restructuring decisions by the Province of Ontario.  The Plaintiffs alleged negligence, breach of contract, abuse of public office and breach of fiduciary duties.
On the claim for breach of fiduciary duty, the Divisional Court stated:  
No trustee-beneficiary relationship or agent-principal relationship was pleaded, nor could there be one as a matter of law.  Moreover, the governing statutory regime makes it clear that there could not have been a duty on any Ontario representative to act in the best interests of the plaintiffs.  Ms. Witmir’s duty as Minister of Health was a general public duty to act in the interests of the public as a whole.

Municipal Corporations
As in the case of provincial and federal jurisdiction, a municipal corporation has a duty to protect the interests of its inhabitants generally.  However, that duty is based on statutory obligations and statutory remedies, and does not necessarily give rise to a fiduciary relationship between the municipality and its ratepayers.  There is considerable judicial history related to this issue.  In a 1908 decision of the Supreme Court of Canada , an inhabitant who was not a ratepayer sued for the return to the municipality payments improperly made to a municipal officer.    Council took the position that only a ratepayer had the standing to sue.  The court concluded:  
The right of the inhabitants to compel the city corporation, that is the city council, as a body, to do its duty, rests on this: -that the corporation is a trustee for its inhabitants.  
This proposition was clarified in Gallagher v. Armstrong where the corporate analogy was used to explain the distinction between the municipal corporation and its councillors:  
The council are not the corporation…The inhabitants are the corporation and the council are their trustees…directors of a company are trustees for the shareholders just as municipal councillors are trustees for the inhabitants…the relationship is created by statute.
The Gallagher decision therefore affirmed an action for breach of a fiduciary duty against municipal councillors, but not against the municipal corporation.   A subsequent decision of the Ontario Court of Appeal and affirmed by the Supreme Court of Canada severely limited the scope of the fiduciary relationship:
It is, in my opinion, erroneous to treat either corporation or its council as trustees for the ratepayers.  They are…trustees for the inhabitants of the municipality; but they are, in my opinion, in no other sense trustees, but a branch of civil government of the Province; and, within the limits of the powers committed to them by the Legislature, at all events in the absence of fraud, should be free from interference by the Courts.
Since then, generally speaking the courts have been reluctant to impose a fiduciary duty on municipalities in the performance of a public duty.  InWindsor Roman Catholic Separate School Board v. Windsor (City) , the Ontario Court of Appeal was considering whether the City breached a fiduciary duty to the School Board in failing to pay the Board a share of the interest and penalties collected on delinquent taxes, but not yet paid to the Board.  The court stated:
The clear trend of modern authorities is to distinguish private from public duties as is shown in the leading decision of Swain v. Law Society, [1982] 2 All E.R. 827 (H.L.)…The same principle applies to the relationship between the City and the Board in this case…In the exercise of its function, the City is responsible not only to the Board but to its citizens at large.  Its relationship to the Board is not that of a fiduciary governed by the principles of equity.  Rather its relationship is that of a public authority governed by proper construction of the relevant statutes.  It follows that no fiduciary duty can be superimposed on the City’s statutory duty prescribed [in this case].

Elected Officials

There is a clear distinction between elected officials and the municipal corporation.  Councillors (similar to directors of a corporation) are clearly in a fiduciary relationship with those they serve.   To a large extent this fiduciary duty has been codified through provincial conflict of interest legislation with serious remedies.  It should be noted that the existence of such legislation has not taken away the common law civil remedy based on a breach of fiduciary duty.  In both cases, the remedy is not based on a finding of wrongdoing or wrongful gain, but on the principle that a fiduciary ought not to breach his fiduciary obligations and put himself or herself in position of conflict. 

Municipal Corporation vs. Elected Officials and Municipal Officers
There is no doubt that a fiduciary duty is owed by elected officials to the municipality.  The Ontario conflict of interest legislation empowers a judge to order restitution “to the party suffering the loss, or, where such party is not readily ascertainable, to the municipality... .  One interesting decision of the Supreme Court of Canada, decided in a common law context (as opposed to under conflict of interest legislation) is Edmonton v. Hawrelak .  The City sued Hawrelak, a former mayor, who had been removed under conflict of interest legislation, for damages for breach of fiduciary duty for profits earned by him as a result of City planning decisions.  The City was awarded  disgorgement damages at trial on the basis that the mayor was a fiduciary to the municipality, that he cannot act in conflict with that duty, and it is immaterial whether he acted in good faith or whether the City suffered a loss.   The decision was affirmed on appeal, but reversed by the Supreme Court of Canada.  The Supreme Court, on a factual basis, found no breach of a fiduciary duty.  Although the court agreed that the actions violated the conflict of interest legislation therefore justifying the mayor’s removal, it also found that there was no statutory basis for recovery by the City.   A strong dissenting opinion would have upheld the decision of the courts below.  What is instructive about this case is that you can have a finding of conflict under the conflict of interest legislation without finding a corresponding breach of a fiduciary duty. 

In a recent decision of the Ontario Superior Court of Justice , the City of Ottawa successfully recovered a retirement allowance paid to a former CAO paid without lawful authority on the grounds that Letourneau breached his fiduciary obligation to the city when he accepted the allowance, contrary to his ensuring that proper procedures were followed.  The trial judge noted:
Letourneau owed a fiduciary duty to the municipal corporation…[holding]a permanent position of responsibility with definite rights and duties prescribed by statute or by-law…An officer has, in the performance of his or her duties, some discretionary authority and has a responsibility to perform vital duties of the corporation...As a fiduciary, Letourneau was subject to the general standards of loyalty, good faith and avoidance of a conflict of duty and self-interest.  Letourneau was precluded from obtaining for himself, either secretly or without the approval of the municipal corporation, any property belonging to the municipality.

Defending a claim for breach of fiduciary duty
The law with respect to fiduciary relationships remains a fertile ground for litigation.  It has been extended to all kinds of fact situations, provided the essential ingredients are present.  With respect to government liability, the Supreme Court of Canada has significantly expanded the scope of the duty since Guerin.  Notwithstanding the increasing types of relationships which may create a fiduciary duty, when acting for government, there are a number of factors to examine when defending an action for breach of the alleged duty:

  1. Does the statute intend to create a true trust relationship?
  2. Is the defendant the person or government agency that actually owes the duty?
  3. Is the duty owed to the plaintiff, or to the public generally?
  4. Does the legislation mandate a duty?
  5. Does the defendant have scope for the exercise of some discretion or power?
  6. Does the exercise of that power or discretion affect the plaintiff’s legal or practical interests?
  7. Was the plaintiff subject to a peculiar vulnerability in the exercise of that discretion or power?
  8. Was the duty reasonably exercised or was it breached?

Pre-emptive Strikes

Pre-emptive strikes are increasingly used by parties to determine substantive issues.  They are used by the plaintiffs in summary judgment motions and by the defendants in motion to strike pleadings on the grounds of not disclosing a cause of action.

Authorson v. Canada (Attorney General) 
This case involved a class action by veterans against the Crown alleging that the Department of Veterans’ Affairs had breached its fiduciary obligations by not investing the funds it administered for the veterans, thereby denying them interest on those funds.  The veterans were successful on a motion for summary judgment, which was upheld on appeal to the Ontario Court of Appeal.  The Motion Judge observed:
The Crown…could have, and under the rules of equity, should have, made whatever statutory or regulatory provisions might have been necessary to invest and pay interest…The point is that the Crown had the power and authority, and the failure to exercise it does not absolve the Crown.

The Court of Appeal, in affirming the decision of the Motion Judge, held that the Crown had breached its fiduciary duty to the members of the class.  Once a veteran is awarded a pension, the payments are the property of the veteran, and the Crown is required by statute to administer the funds for the benefit of the veteran.  The legislative scheme did not set up a closed system of administrative law, excluding private law remedies.  The principles of fiduciary duty established by Guerin were applied to this case because the trust was found to be for the benefit of the veterans specifically, which took it out of the public law realm of a “political trust”. 

The Supreme Court of Canada overturned the decision of the Ontario Courts on the grounds that parliament specifically chose to limit the liability for past interest by legislative enactment.  Thus parliamentary sovereignty prevailed, and denied the veterans a common law remedy.  In my opinion, this narrow fact specific finding does not take away the right of action in appropriate circumstances where a trust relationship has been clearly established. 

Hodgkinson v. Simms (1994), 117 D.L.R. (4th) 161 (S.C.C.) at p. 176

Paul M. Perrell, “Fiduciary Obligations or is it a Breach of Fiduciary Duty to Accept an Appointment to the Bench” (2004), 28 Advocates’ Quarterly 471, p. 479

[1989] 2 S.C.R. 574 at p.600

Guerin v. R. [1984] 2 S.C.R. 335

supra

Roberts v. R, 2002 SCC 79

Public Fiduciary Obligations, Political Trusts, and the Equitable Duty of Reasonableness in Administrative Law, (2003) 66 Sask.L.R. 129

Supra, at p. 168

Re Collins and Ontario Pension Commission (1986), 56 O.R. (2d) 274 (Div.Ct.); Hislop v Canada (A.G.) [2002], O.J. No. 2700 (Ont.S.C.J.)

Romagnuolo v. Hoskin [2001] O.J. No. 3537 (Ont. S.C.J.); Leadbeater v. Ontario [2001] O.J. No. 3472 (Ont. S.C.J.); Lajlo v. Peel Police Services Board [1998] O.J. No. 4485 (Ont.Gen.Div.)

P. (K.) v. Desrochers [2001] O.J. No. 4560 (C.A.); R. v. Creighton [2002] B.C.J. No. 2985 (B.C. Prov. Ct.)

E. (D.)v. British Columbia  [2003] BCSC 1013

supra

[2004] O.J. No. 3084 (Div.Ct.)

MacIlreith v. Hart, [1908] S.C.R. 657

(1911), 3 Alta. L.R. 443

Norfolk v. Roberts (1913), 28 O.L.R. 593, affirmed (1914), 50 S.C.R. 283

(1988), 64 O.R. (2d) 241 (C.A.)

Toronto v. Bowes (1854), 4 Gr. 489; affirmed (1856), 6 Gr. 1 (C.A.)

Municipal Conflict of Interest Act, R.S.O. 1990, c. M.50, section 10

[1976] 1 S.C.R. 387

Ottawa v. Letourneau, 2005 CanLII 1407

(2002) 58 O.R. (3rd) 417 (C.A.); [2003] 2 S.C.R. 40