When gains trump losses: an analysis of restitutionary relief for the tort of conversion.

• Author: Rosenberg, H. Michael
• Position: Canada

Abstract

This article considers the relatively common situation in which a tortfeasor innocently takes and improves property belonging to another. A vexing question arises from these facts: who is entitled to the tortfeasor's profits? Canadian courts are familiar with the general principle of tort law, which holds that damages return the plaintiff to her original position, but for the tort. On this basis, the plaintiff would receive the value of her property at the time she lost it, and the tortfeasor would retain his profits. Canadian courts, however, are less comfortable with the alternative claim that arises when the plaintiff waives the tort and sues in restitution. On this alternative claim, the plaintiff is entitled to the gains that resulted from the tort. This article uses the recent case of Freyberg v. Fletcher Challenge to show why Canadian courts have been reluctant to allow a restitutionary remedy, regarding it as punitive rather than compensatory. This article challenges that view, arguing that only the restitutionary remedy fully compensates the plaintiff for the interference with her property rights.

This article uses the facts of Freyberg to rationalize the availability of restitution for proprietary torts. It argues that the enduring nature of property rights holds the key to understanding the claim in restitution. To this end, it starts by examining the doctrine of tracing, which explains why the plaintiff's ownership right in the original property gives her a right to the value of the property for which it was exchanged. Next, it considers the tortfeasor's counterclaim in unjust enrichment, which entitles him to compensation for the improvements that he made to the plaintiff's property. Having established the parties' competing claims, this article returns to the property rights analysis to decide who is due the profits that resulted from the tort. It determines that the tortfeasor's compensation is limited to the cost of his labour, rather than the value of the improvements that he wrought. This theoretical construct explains why the plaintiff is entitled to the surplus generated by the defendant's tort, and suggests that Freyberg was wrong to refuse the claim for a restitutionary remedy. Restitution is widely available for proprietary torts, and Canadian courts should be more willing to allow the claim.

Resume

Cet article s'attarde sur un scenario relativement commun, ou un auteur de delit prend innocemment et ameliore la propriete d'une autre partie. Un enjeu quelque peu fastidieux emane de ces faits : qui a droit aux profits de l'auteur du delit ? Les tribunaux canadiens connaissent bien le principe general du droit de la responsabilite delictuelle, qui stipule que les dommages-interets accordes replacent la demanderesse dans la situation ou elle se serait trouvee n'eut ete le delit. Selon ce principe, la demanderesse recevrait la valeur de sa propriete au temps ou elle la perdit, et l'auteur du delit conserverait ses profits. Toutefois, les tribunaux canadiens sont moins a l'aise avec la reclamation alternative ou la demanderesse renonce au delit et poursuit en restitution. Selon cette alternative, la demanderesse a droit aux profits resultant du delit. Cet article adopte le cas recent de Freyberg c. Fletcher Challenge pour demontrer pourquoi les tribunaux canadiens hesitent a reconnaire un tel recours en restitution, le considerant de nature punitive plutot que de nature compensatoire. Ensuite, ce texte conteste ce point de vue, et suggere qu'un recours en restitution est le seul recours qui ne puisse indemniser la demanderesse de facon adequate pour l'obstruction a sa propriete.

Les faits de Freyberg sont utilises pour rationaliser la disponibilite d'un recours en restitution pour un delit de propriete. L'article soutient que le caractere durable des droits de propriete aide a comprendre la reclamation en restitution. En premier lieu, il s'attarde au >, qui explique pourquoi les droits de propriete de la demanderesse en sa propriete originale lui donnent droit a la valeur de la propriete pour laquelle elle a ete echangee. Ensuite, le texte considere la demande reconventionnelle du defendeur en enrichissement injustifie lui donnant droit a une indemnisation pour les ameliorations a la propriete de la demanderesse. Apres avoir discute ces demandes concurrentes, l'article reprend l'analyse en droit des biens pour determiner a qui reviennent les profits decoulant du delit. Il conclut que la compensation accordee a l'auteur du delit doit se limiter aux couts de la main-d'oeuvre, et non a la valeur des ameliorations effectuees. Cette theorie explique pourquoi la demanderesse a droit aux surplus decoulant du delit, et suggerent que la cour dans le cas de Freyberg a eu tort de refuser de reconnaitre la reclamation en restitution. La restitution est largement disponible face a un delit de propriete, et les tribunaux canadiens ne devraient pas hesiter a reconnaitre de telles demandes.

I INTRODUCTION The Sad Story of Lady Freyberg's Mineral Rights The Williston Decision II THE DEVELOPMENT OF RESTITUTIONARY CLAIMS IN MINING LAW The Early Cases A Divergent Path III A THEORETICAL ACCOUNT OF RESTITUTION AS A REMEDY FOR PROPRIETARY TORTS Hard-Nosed Property Rights Doing Justice Between the Parties IV APPLYING THEORY TO FACTS Identifying the Moment When Damages Crystallize Objective, Rather Than Subjective, Damages The Final Hurdle of Valuing the Defendant's Improvements V CONCLUSION The Final Word I INTRODUCTION

The notion of a tort is most closely associated with the loss that it inflicts. Indeed, by malice, carelessness, or ill fortune, many torts will do nothing more than inflict loss. Some torts, however, will also produce a gain for the tortfeasor, and his gain may exceed any loss caused by the tort. This situation arises frequently in the context of proprietary torts, such as conversion or trespass. (1) In order to explore the availability of restitutionary remedies, this paper tackles a particularly perplexing subsection of proprietary torts in which the tortfeasor unknowingly takes property to which he has no claim of right. When the property increases in value in the hands of the tortfeasor, either by virtue of his own labour or otherwise, a natural question arises: who is entitled to the tortfeasor's gains?

I answer this question through the prism of Freyberg v. Fletcher Challenge Oil and Gas, a recent decision of Kent J. of the Alberta Court of Queen's Bench. (2) Like the earlier case of Montreal Trust Co. v. Williston Wildcatters, (3) Freyberg addressed the relatively common situation in which one party accidentally extracts and sells minerals belonging to another party. Older authorities would have allowed the plaintiff to claim a restitutionary disgorgement of the defendant's gains, less certain expenses. (4) Freyberg and Williston, however, refused the restitutionary claim, and limited the plaintiff's damages to what she had expected to receive for her property at the time it was taken. On this holding, the tortfeasor was permitted to retain the bulk of the profits from its tort.

Though Freyberg and Williston are important to the practice of natural resources law, they tackle a problem that extends far beyond the oil patch. These cases are archetypal manifestations of the basic fact pattern in which the tortfeasor innocently takes and improves another party's property. As such, they serve to illustrate Canadian courts' peculiar discomfort with the claim in restitution, which has been characterized as a punitive measure to castigate a willful tortfeasor. Problematically, the restitutionary remedy is the only one that fully compensates the plaintiff in a case like Freyberg or Williston.

I argue that Freyberg fundamentally misstates the law of restitution. Justice Kent was wrong to conclude that restitution is available only to redress bad faith on the part of the defendant. This error led the honourable judge to conclude that the plaintiff's claim was limited to what she had expected to receive, but for the defendant's tort. Justice Kent's reasoning was flawed because she neglected the fact that the tort of conversion does not extinguish the property interest of the mineral rights owner. Rather, the owner who falls victim to an act of conversion may follow her property, and, if it has been sold, she may trace and claim the proceeds. This forward-looking remedy explains why the owner's restitutionary damages are not limited to the value of the minerals at the time they were taken. Instead, she is entitled to the profits that were generated when her minerals were brought to the surface and sold. To ignore the surviving property interest, as Freyberg did, is to undercompensate the victims of proprietary torts and to perpetuate a line of authority that unduly limits the claim in restitution. Restitution is not about recovering the thing that the plaintiff has lost, but, rather, the thing that the owner's claim of right has become. Though tort damages may restore the value of the property at the time it was taken, in a larger sense, the restitutionary remedy restores the plaintiff to her position as one who owns property and is entitled to its value, come what may.

In the first section of this paper, I discuss the ratio decidendi in Freyberg, noting the ways in which it echoes Williston. In the second Section, I review the jurisprudence and conclude that restitutionary relief has historically been available for the innocent conversion of minerals. In the third section, I construct a theoretical framework of proprietary torts to demonstrate the plaintiff's entitlement to the profits from an innocent conversion of her property. Finally, in the fourth section, I apply this framework to reveal the errors in Freyberg and to argue that this case, and cases like it, have been wrongly decided.

The Sad Story of Lady Freyberg's Mineral Rights

In 1979, Lady Ivry Freyberg, an elderly...