June 16, 2020
This claim by Lac Seul First Nation (“LSFN”) alleges Canada breached Treaty 3, the Indian Act 1927, and Canada’s fiduciary duty in relation to the construction of a dam at Lower Ear Falls (the “Dam”) where Lac Seul drains into the English River in Ontario (the “Lac Seul Project”). The Dam caused the flooding of 11,304 acres of LSFN’s reserve land.
The main issue in the claim was whether Canada was obliged to obtain a royalty, rental or some other form of return in favour of the band in relation to the Lac Seul Project.
The Federal Court found there was insufficient evidence to establish that in 1929 Canada would have negotiated an agreement that would have offered LSFN income from the Lac Seul Project.
The Federal Court assessed the value of the flooded land by examining the land’s highest and best use, which in this case the Federal Court found to be traditional uses - not for use as a hydro-development. The Federal Court noted that lost consumption may be calculated in a manner similar to lost return on investments; therefore, the present value of the loss was determined by creating a multiplier based on historic Band Trust Fund rates.
On appeal, the majority of the Federal Court of Appeal upheld the Federal Court’s decision. The Federal Court of Appeal’s decision will be heard on appeal to the Supreme Court of Canada.
The Lac Seul Project involved the construction of the Dam on the English River in Ontario. The LSFN was “kept in the dark” with respect to the arrangements for the Lac Seul Project. In 1928, the Canada, Ontario, and Manitoba governments executed the Lac Seul Storage Agreement, without consulting LSFN. The Dam was completed in 1929 resulting in major flooding over the LSFN reserve. In 1943, Ontario and Canada agreed to compensate LSFN in the amount of $72,539.
Canada had the right to “appropriate” reserve land for public works with the consent of the Governor in Council, but no such consent was obtained. LSFN never surrendered the flooded reserve land to the Crown.
In or about the same time as the Lac Seul Storage Project, Canada was involved in negotiating with power authorities in Alberta that wished to build power plants at water power sites wholly or partially on the Stoney Band’s reserve land. In each instance, an agreement was entered into that provided the Stoney Band with an ongoing stream of revenue from the power plants at the power site.
At the Federal Court, Zinn J. concluded that Canada breached four fiduciary duties to LSFN in respect of the flooding:
1. A duty of loyalty and good faith to LSFN in the discharge of its mandate as trustee of reserve lands;
2. A duty to provide full disclosure and to consult with the band;
3. A duty to act with ordinary prudence with a view to the best interest of LSFN; and
4. A duty to protect and preserve the band's proprietary interest in the reserve from exploitation.
Justice Zinn noted six key points to consider regarding equitable compensation in the aboriginal law context:
1. The goal of equitable compensation is to restore what the plaintiff has lost due to the breach;
2. What the plaintiff lost is an opportunity that was not realized because of the breach;
3. The plaintiff’s loss arising from the breach is to be assessed with the advantage of hindsight and is not to be assessed based on what may have been known at the date of the breach or have been reasonably foreseeable;
4. The losses are to be determined based on a common-sense view of causation, which is to say that the lost opportunity must have been caused by the breach;
5. The Court must assume that the plaintiff would have made the most favourable use of the trust property – the plaintiff’s best opportunity – and the loss of use must be assessed accordingly; and
6. When considering what would have happened had the defendant not breached its duty to the plaintiff, the Court must assume that the defendant would have carried out its duties vis-à-vis the plaintiff in a lawful manner.
Available Options in 1929
In determining what would have been the highest and best use of the land, Zinn J. concluded that he must take into account “realistic contingencies” and turned his analysis to enumerating the realistic contingencies in 1929 regarding the Lac Seul Project. Zinn J. concluded that on the evidence before him, the Lac Seul Project would have been undertaken, regardless of the opposition of the First Nation or Indian Affairs, and the flooding was inevitable.
Canada’s Legal Duties to LSFN Relating to the Storage Project
Zinn J. concluded that Canada could legally “take” LSFN lands if necessary, and could arrange a surrender or expropriation. Either way, Canada had a duty to act in a manner that minimally impaired the band’s interest in the land. The issue then became, what was likely to have occurred in 1929 had Canada legally fulfilled its duties to LSFN?
What Would Have Occurred in 1929
To determine what would have occurred in 1929 - whether Canada would have negotiated an arrangement that offered LSFN an annual income from the project - Zinn J. took into account an approach that accounts for the benefit of hindsight. However, he noted that hindsight was unnecessary in this case to know that the land would be used for water storage, as this was already known in 1929.
Zinn J. then turned his attention to an analogous case from Alberta. In 1910, Calgary Power made an application to the develop Kananaskis Falls. The lands required were within the Stoney Indian Reserve, but the flooded lands were mostly in what is now Banff National Park. The Department of Indian Affairs required Calgary Power to negotiate an agreement with the Stoney Band that resulted in the Band receiving a payment for the flooded lands in excess of their value as agricultural lands.
Zinn J. held that there was no precedent or evidence regarding LSFN that showed that such an agreement would have been considered with LSFN. Had the Crown been acting legally, it would have obtained either a surrender for a flowage easement or an expropriation.
Valuation of Nominal Damages
Zinn J. found that the band’s livelihood losses resulting from the flooding were the appropriate measure of damages. In 1929, had LSFN been a willing seller, it would have considered the impact the flooding of the reserve land would have had on its livelihood, including the loss of the land, the timber, the buildings and improvements, the graves on the site, and the physical separation of its communities by water. Zinn J. then resolved to calculate some losses and assess what he could not.
Value of Flooded Reserve Lands
Zinn J. accepted Canada’s expert valuation of $1.29/acre. It reflected traditional uses as the highest and best use of land, without reference to the possibility of hydro-development. Zinn J. noted that his conclusion departed from the approach of Indian Affairs at Kananaskis Falls and he distinguished the Lac Seul Project from it, finding that Canada did not have the ability to expropriate reserve lands for the Kananaskis Falls development, whereas it did have that power in relation to the Lac Seul Project.
Canada was in a position to unilaterally take the land through a flowage easement at fair market value ($1.29/acre). Ontario and Manitoba would have known this, and there was no evidence to indicate that Canada was inclined to pay a greater sum.
In addition to these calculable losses, LSFN suffered the following losses, which are not capable of mathematical calculation:
· Loss of livelihood both on and off-reserve; and
· Loss of easy shore access, damage to boats, and overall damage to the aesthetic of the lake shore due to the failure to remove the timber prior to flooding.
Present Valuation
Zinn J. adopted the view of the Lazar-Prisman expert model of creating a multiplier based on the historic Band Trust Fund Rates as the appropriate basis to bring a past loss forward to the present day for equitable compensation purposes.
The other proposed expert models took the view that losses are “payment deficiencies” being either one-time losses or annual losses. The Lazar-Prisman model used a prospective approach and the concept of economic rents to make an initial estimate of the loss in 1929 and then brought that entire loss forward using the Band Trust Fund annual interest rate determined by the Government of Canada.
Zinn J. wrote that when assessing equitable compensation, lost consumption cannot simply be ignored or discounted; there is still a lost opportunity to consume. Spending has long-term benefits to the band as a whole, and even though it might not be known exactly what those benefits are, they are still realistic. Therefore, the valuation of lost consumption may be calculated in a manner similar to lost return on savings and investments.
Zinn J. also agreed with the Lazar-Prisman model’s use of the Band Trust Fund as the most realistic vehicle for determining that return.
Using the Lazar-Prisman approach, Zinn J. concluded that the balance owing to LSFN would be $13,847,7870.40. In total, Zinn J. awarded $30 million in equitable damages, but declined to award punitive damages or declaratory relief.
SOUTHWIND V CANADA, 2019 FCA 171
LFSN appealed the decision of Zinn J. on the basis that appropriate compensation ought to have included the value of a revenue-sharing agreement that Canada should have negotiated on the First Nation’s behalf. In the alternative, LSFN argued that the value of the flooded reserve lands should be calculated in a higher amount than fixed by the Federal Court (i.e. $1.29/acre), to take into account the value of the lands in connection with downstream electricity generation.
The majority, per Nadon J.A. (Webb J.A. concurring), found that there was no basis to award compensation for the lack of a revenue-sharing agreement.
The majority also found that Zinn J. did not err in valuing the flooded reserve lands at $1.29/acre. The majority found that while Zinn J. might have distinguished the Lac Seul Project from the Kananaskis Project on an incorrect basis, this error alone did not constitute an error going to the core of the outcome.
The dissent, per Gleason J.A., also found that there was no basis to award compensation for the lack of a revenue-sharing agreement. Gleason J.A. found that Zinn J. correctly applied the principles of equitable compensation when considering whether the appellants were entitled for a loss of a revenue sharing agreement. The losses must flow from the breach of fiduciary duty; for the appellants to recover the value of a revenue-sharing agreement, they must be able to establish that it forms part of what LSFN lost as a result of Canada's breach. That was not made out on the evidence. The rest of the Court agreed with Gleason J.A.’s reasons on this issue.
However, Gleason J.A. would have found that LSFN’s alternative argument as to the value of the flooded reserve land did provide a basis for additional compensation. Zinn J. had distinguished the Lac Seul Project from the Kananaskis Project in that Canada did not have the power to expropriate land for the Kananaskis Project. Gleason J.A. found that Zinn J. had misapprehended the nature of Canada’s power to expropriate in that situation, and therefore the two cases should not have been distinguished on that ground. The proper remedy was to refer the matter back to the trial court for redetermination.
The Supreme Court of Canada has granted LSFN leave for an appeal of the Federal Court of Appeal’s decision.
