Southwind v Canada: An Opportunity to Reconsider the Nature of Canada's Fiduciary Duty to First Nations?

Shimon Sherrington, 3L, Volume 78 Editor-in-Chief

In Southwind v Canada, the Supreme Court will consider equitable compensation for historic breaches of the fiduciary duty owed by the Crown to First Nations. [1] Southwind should clarify how equitable compensation – a principle developed in the private trust law context – applies to the First Nations-Crown relationship. More broadly, Southwind will also provide an opportunity for the Court to confront the important question of whether the law of equitable compensation, as it currently stands, furthers the larger project of reconciliation between Canada and First Nations. The rulings at the Federal Court [2] and Federal Court of Appeal [3] reflect the courts’ limited expectations regarding how Canada should have acted towards Lac Seul First Nation [LSFN] for Canada to satisfy its fiduciary duty. This limited expectation ultimately lowered the amount of compensation Canada owed to LSFN. Reconciliation between First Nations and Canada requires more: on appeal, the Court should understand Canada’s obligations as a fiduciary more robustly than the current law regarding equitable compensation allows.

What is Equitable Compensation

Equitable compensation is a remedy that has developed from the private law context for breaches of trust by a fiduciary. In the foundational case of Canson Enterprises Ltd v Boughton & Co, [1991] 3 SCR 534. [4] Justice McLachlin (as she then was) explained the principles of equitable compensation:

[Equitable] compensation is an equitable monetary remedy … it attempts to restore to the plaintiff what has been lost as a result of the breach, i.e., the plaintiff's lost opportunity. The plaintiff's actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach. [5]

Equitable compensation may compensate a plaintiff beneficiary for the lost opportunity caused by a breach of trust. However, equitable compensation is, by definition, limited “to loss flowing from the [fiduciary’s] acts in relation to the interest he undertook to protect.” [6]

The Facts of Southwind

The LSFN reserve is in Northern Ontario as part of Treaty 3 territory. In 1929, Ear Falls dam was constructed 80 km from the reserve, raising the water level 10 feet above its normal pre-dam level. As a result of the dam, 11,304 acres of LSFN were flooded resulting in lost houses, lost wild rice fields, the separation of reserve communities by water, and the destruction of graves. The federal government took no steps at the time to legally authorize the taking up of LSFN reserve land; it was not until 1943 that a small amount of compensation was paid to LSFN. [7] LSFN sought damages of $500 million at trial. [8]

The Federal Court

After 25 years of litigation, Justice Zinn released his decision in 2017, finding that Canada had breached its fiduciary duty to LSFN. [9] Zinn J then considered how to apply the principles of equitable compensation, noting from the outset the difficulty of the task. [10] Relying on Canson Enterprises, Zinn J determined that equitable compensation should place LSFN in the position it otherwise would be but for Canada’s breach of the fiduciary duty in 1929. [11]

In the result LSFN was awarded $30 million. This amount was composed of approximately $13.85 million in calculable damages that the Crown should have paid LSFN in 1929. Calculable damages included the Crown paying LSFN compensation for a flowage easement over flooded lands (which Zinn J held to be equivalent to fair market value of the lost land in 1929), timber dues, and compensation for loss of community infrastructure. Payments made by Canada to LSFN in 1943 were deducted. The calculable amount was then increased based on a multiplier consistent with the historic annual interest rate paid on Indian Trust Accounts. The remaining compensation of approximately $16.15 million was for losses “not subject to mathematical calculation,” including the continuing impacts of the reservoir, the loss of the natural beauty of the reserve, the loss of navigable water due to timber not being adequately removed before flooding, and the impact of the flooding on LSFN traditional life. [12]

What is also notable about Zinn J’s reasons was that he rejected several items LSFN claimed as calculable damages for breach of fiduciary duty. Two were particularly significant. First, LSFN argued that Canada as a fiduciary should have negotiated a revenue sharing agreement on behalf of the First Nation. Zinn J rejected this claim, holding that, at the time, a revenue sharing agreement based on flooded reserve lands would have been without precedent. In declining to find that a revenue sharing agreement was required for Canada to satisfy its fiduciary duty, Zinn J distinguished a series of agreements between Calgary Power and the Stoney Indian Band in Alberta from 1911 to 1915 which incorporated revenue sharing [the Stoney Agreements]. The federal government had acted on behalf of the First Nation in negotiating the Stoney Agreements, subsequently raising the question of whether a revenue sharing agreement would have been similarly required for Canada to discharge its fiduciary duty to LSFN. Zinn J, relying on the historical record, found that the revenue sharing aspect of the Stoney Agreements was based on the respective dams’ location on Stoney reserve land. In his view, this made the circumstances of the Stoney Agreements distinct from LSFN, where the dam itself is located off reserve land. [13]

LSFN also argued that for the Crown to discharge its fiduciary obligations in 1929 it would have had to pay a premium for the flooded reserve lands. LSFN again relied on the Stoney Agreements, where a premium was paid for the flooded land. Zinn J once again distinguished the Stoney agreements, determining that Calgary Power paid a premium because the company had been given a legal opinion that it could not expropriate the land. By contrast, he held that in the case of LSFN, the terms of Treaty 3 and Indian Act gave the Crown the clear right to expropriate reserve land for public works projects. [14]

The Federal Court of Appeal

LSFN appealed based on the items that Zinn J rejected as damages for Canada’s breach of fiduciary duty at trial: (1) the value of the revenue sharing agreement and, (2) the premium for the flooded land. The majority of the Federal Court of Appeal (Justice Nadon writing for himself and Justice Webb) upheld Zinn J’s judgment in full. The majority found that Zinn J had properly applied the principles emerging from Canson Enterprises and had properly distinguished the Stoney Agreements. Justice Gleason would have allowed the appeal on a narrow point with respect to the second issue: that LSFN should have received a premium for the flooded land. She held that in both the circumstances of Stoney Indian Band and LSFN, Canada had the legal power to expropriate based on the Indian Act. The fact that Canada declined to intervene and use the power of expropriation during the negotiation of the Stoney Agreements, instead forcing Calgary Power to pay an amount above market value, raised the issue of whether LSFN should have received a similar premium. However, Gleason JA did not definitively decide the question of whether a premium should have been paid to LSFN: she would have sent the matter back to Federal Court for redetermination based on the Stoney Agreements being improperly distinguished. [15]

Implications of the Supreme Court Decision: An Opportunity for a New Way Forward

From a practical perspective, Southwind should bring clarity to First Nations litigants challenging the Crown’s historic breaches by demonstrating how principles of equitable compensation are applied in the determination of calculable and non-calculable damages. In explaining how to quantify damages for historic breach, the Court should clarify an issue obliquely considered but left substantially unresolved in Guerin v The Queen, [1984] 2 SCR 335. [16] In Guerin, the Court found that the Crown had breached its fiduciary duty by leasing Musqueam Indian Band reserve land to a golf club. The Court split three ways on the nature of the Crown-First Nation relationship, disagreeing whether the relationship was a full-fledged trust, a sui generis relationship, or agency. However, the three sets of reasons all awarded damages based on trust principles; what was lacking, however, was a clear expression of what trust principles meant to the respective judges. The majority’s reasons, written by Justice Dickson (as he then was), did not discuss how the quantum of damages should be assessed beyond referring to “principles of trust law.” [17] Justice Wilson was more explicit, stating: “it should be presumed that the Band would have wished to develop its land in the most advantageous way possible during the period covered by the unauthorized lease.” [18] Applied to the facts, this would have meant that the Crown should have returned the land, which the Musqueam would have then developed. But Wilson J’s reasons also did not linger on the difficult issue of how the assessment of damages was justified by the trust principles she invoked; this issue should be clarified by the Court in Southwind, given Zinn J’s lengthy treatment of the issue and LSFN’s arguments at the Court of Appeal.  

A careful reading of the Wilson J’s reasons in Guerin shows that on her logic, trust remedies placed the plaintiff Musqueam in the best possible position. The Musqueam’s damages were assessed based on the lost development opportunity at the date of breach when Canada failed to return the reserve land. But the potentially more interesting issue facing the Court in Southwind is whether equitable compensation provides a sufficient remedy to First Nations challenging historic breaches, when trust principles do not yield the most advantageous result to the First Nation. The main thrust of Zinn J’s analysis was affirmed by both sets of reasons at the Court of Appeal: equitable compensation requires Canada to have met its fiduciary duty, as understood in 1929, but not more. In the case of LSFN, this meant that Canada was not obligated to negotiate a revenue sharing agreement or pay a premium for the flooded land. 

If the Court agrees that Canson Enterprises has been properly applied (and Zinn J’s reasons appear to carefully follow this precedent), the more substantial question becomes whether equitable compensation is a satisfactory tool to remedy historic breaches by Canada. It is not. The Court has increasingly understood section 35 of the Constitution Act in terms of advancing reconciliation; [19] a limited understanding of equitable compensation for historic breaches is not consistent with this goal.   

It is puzzling that on the important issue of historic breaches by the Crown, litigants must continue to press their case in terms of the narrow confines of fiduciary doctrine. The Court has gradually moved away from a fiduciary understanding of the Crown-First Nations relationship, increasingly relying on legal principles such as the honour of the Crown and the duty to consult to understand Canada’s legal obligations under section 35 of the Constitution Act. [20] The Court’s concerns regarding the limits of a fiduciary understanding of the Crown-First Nation relationship should apply to historic breaches as well: the law should expect more than the bare minimum of conduct from Canada, especially in situations of historic breach where other legal doctrines, such as the duty to consult, were not yet developed to protect First Nations interests. 

There would seem to be a path for the Court to understand Canada’s fiduciary obligation more robustly than a fiduciary in the private law context based on the honour of the Crown principle. The honour of the Crown could help distinguish Canada’s enhanced duty as a fiduciary from those of private law fiduciaries. The honour of Crown emerged as a foundational section 35 constitutional principle in the leading case of Haida Nation v British Columbia (Minister of Forests), [2004] 3 SCR 511. Early in the decision, Chief Justice McLachlin distanced the Court from viewing the fiduciary duty as the bedrock of the Crown’s section 35 obligations, declaring that “‘fiduciary duty’ does not connote a universal trust relationship encompassing all aspects of the relationship between the Crown and Aboriginal peoples.” [21] McLachlin CJ explained that the honour of the Crown is a deeper basis for the Canada’s obligations to First Nations: “the honour of the Crown is always at stake in its dealings with Aboriginal peoples.” [22] Since Haida Nation, the honour of the Crown has been understood strongly as the “an important anchor” [23] which underlies Canada’s legal obligations to First Nations, including the duty to consult [24] and fiduciary duty. [25] Indeed, in Wewaykum Indian Band v Canada, [2002] 4 S.C.R. 245 Justice Binnie cited Aboriginal Law Scholar Brian Slattery with approval, noting that Canada’s fiduciary duty to First Nations must be understood differently than those of a private law fiduciary: 

The sources of the general fiduciary duty do not lie, then, in a paternalistic concern to protect a “weaker” or “primitive” people, as has sometimes been suggested, but rather in the necessity of persuading native peoples, at a time when they still had considerable military capacities, that their rights would be better protected by reliance on the Crown than by self-help. [26]

This passage recognizes the origins of Canada’s fiduciary duty as being grounded in a deep foundation: the duty derives from Canada’s assertion of sovereignty over historically sovereign First Nations. [27] This basis of Canada’s fiduciary duty in turn supports a stronger conception of the duty than those of private law fiduciaries. 

If the honour of the Crown is understood as underpinning a robust understanding of Canada’s fiduciary duty, a greater expectation could be placed on Canada. For example, Canada could be expected to have negotiated a revenue sharing agreement with LSFN notwithstanding that this would not be an obligation for a private law fiduciary. Delineating the limits of this enhanced fiduciary duty could be an issue for the Court. But other doctrines emerging from the honour of the Crown, such as the duty to consult, are subject to reasonable limits – this suggests that Canada’s enhanced fiduciary obligations could be appropriately limited as well. Ultimately, a more robust fiduciary duty would be more consistent with achieving the broader goal of reconciliation by forcing Canada to live up to a higher standard. 

If the dam were proposed today, LSFN would have numerous legal tools available according to the established doctrines flowing from the honour of the Crown principle, including a strong legal right to be consulted. These legal tools would enable LSFN to drive a hard bargain with Canada (to the point where the dam would almost certainly not be constructed). It is somewhat incongruent with the spirit of reconciliation that because Canada’s original breach of its fiduciary duty occurred in 1929, before legal tools such as the duty to consult were available, LSFN was only awarded relatively limited equitable compensation damages and not given an opportunity to share in the benefits of the project. In hearing this appeal, the Court should take the opportunity to enhance judicial expectations of Canada to remedy its historic breaches of the fiduciary duty. 

Notes

[1] Because of the COVID-19 public health emergency, oral arguments were postponed to fall 2020.  

[2] Southwind v Canada, 2017 FC 906 [Southwind FC].

[3] Southwind v Canada, 2019 FCA 171 [Southwind FCA].

[4] Canson Enterprises Ltd v Boughton & Co, [1991] 3 SCR 534 [Canson Enterprises]. 

[5] Canson Enterprises at para 84.

[6] Canson Enterprises at para 76.

[7] Southwind FC at paras 2–6. 

[8] Chantelle Bellrichard, “Lac Seul First Nation going to Supreme Court of Canada in hydro dam flooding compensation case” CBC News (April 17, 2020).  

[9] Southwind FC at paras 1, 8.

[10] Southwind FC at para 229. 

[11] Southwind FC at para 293. 

[12] Southwind FC at paras 508–512. 

[13] Southwind FC at para 346. 

[14] Southwind FC at paras 381–383.   

[15] Southwind FCA at paras 89–96.

[16] It should be noted that both sets of reasons in Canson Enterprises also considered Guerin; McLachlin J’s reasons in particular built significantly on Guerin’s foundation to establish the now accepted principles of equitable compensation. 

[17] Guerin at para 113.

[18] Guerin at para 52. 

[19] See e.g. Mikisew Cree First Nation v Canada (Minister of Canadian Heritage), 2005 SCC 69 at para 1, where Justice Binnie stated “[t]he fundamental objective of the modern law of aboriginal and treaty rights is the reconciliation of aboriginal peoples and non-aboriginal peoples and their respective claims, interests and ambitions.”

[20] See e.g. Beckman v Little Salmon/Carmacks First Nation, 2010 SCC 53 [Beckman] at para 105 where Justice Marie Deschamps stated “[t]his Court has, over time, substituted the principle of the honour of the Crown for a concept — the fiduciary duty — that, in addition to being limited to certain types of relations that did not always concern the constitutional rights of Aboriginal peoples, had paternalistic overtones.”

[21] Haida Nation at para 18. 

[22] Haida Nation at para 16. 

[23] Beckman at para 42. 

[24] See e.g. Mikisew Cree First Nation v Canada (Minister of Heritage), 2005 SCC 69 at para 36 where Binnie J recognized a duty to consult as being entirely rooted in the honour of the Crown, with “no need for present purposes to invoke fiduciary duties.” 

[25] Haida Nation at para 18. 

[26] Wewaykum Indian Band v Canada, [2002] 4 S.C.R. 245 at para 79. In Haida Nation, McLachlin CJ returned this passage of Binnie J’s judgment to support her elevation of the honour of the Crown principle to role of underpinning all of Canada’s section 35 obligations to First Nations. 

[27] This interpretation has been supported by other Court decisions. See e.g. Taku River Tlingit First Nation v British Columbia (Project Assessment Director), [2004] 3 SCR 550 at para 24.