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In Huu-Ay-Aht First Nations v. the Queen, 2014 SCTC 7, Judge Whalen of the Specific Claims Tribunal (“Tribunal”) decided in favour of the Huu-Ay-Aht First Nations (“Huu-Ay-Aht”), finding that Canada had committed multiple and ongoing breaches of fiduciary duties in relation to its dealings with a licence to harvest timber on Numukamis Indian Reserve No. 1 (“IR1”). Canada admitted that it had breached fiduciary obligations to Huu-Ay-Aht, however, the parties disagreed on the nature of the breach and the date on which it occurred. The date of the breach was significant because of its effect on the calculation of losses suffered and compensation owed. Judge Whalen found that Canada‘s breaches included failing to consult, failing to abide by the requirements of the Indian Act, and failing to rectify the wrong when it was discovered. This ruling is the first decision of the Tribunal to set out the legal principles that will guide the calculation of compensation for successful claimants.

Facts

In 1937, Huu-Ay-Aht passed a Band Council Resolution agreeing to sell timber on IR1 on the condition that it be “advertised in the usual manner and that all able members of the Band be given employment as far as possible on the logging operations.” In 1938, Huu-Ay-Aht conditionally surrendered the merchantable timber on IR1 to be held in trust by Canada and sold on terms that were “most conducive to [their] welfare.” Canada accepted the surrender, assessed the value of the timber, and put out a public call for tenders. Canada required that the timber be harvested within 5 years and that members of the First Nations be given preference for employment in the cutting of the timber. No formal offers were received. The eventual purchaser, BSW Limited (“BSW”), expressed its interest informally to Canada and began negotiations outside of the formal public tender process.

BSW proposed the following terms for the purchase:

  • BSW would pay a lump-sum for the timber instead of the usual stumpage fee;
  • BSW would be granted a 21-year term in which to harvest the timber (as opposed to the 5-year term that Canada had asked for in the public tender);
  • if the harvesting had not been completed within 21 years, BSW would have the option to renew the agreement for an additional 21 years; and
  • if the harvesting had not been completed within 42 years, BSW would have the first opportunity to purchase further rights to harvest the timber.

In 1942, Canada and BSW entered into an agreement to issue a timber licence to BSW on the above terms. A clause labelled “Special Condition” incorporated BSW’s proposal for a 21-year harvesting term with renewal rights. The agreement did not contain a condition that Band members be given preference for employment.

Six years later, BSW had yet to harvest any timber on IR1. It was at this time that Huu-Ay-Aht first learned of the Special Condition and petitioned Canada to cancel the timber licence. They argued Canada should cancel the timber licence because:

  •  they had not fully understood the terms and conditions included in the agreement;
  •  the value of timber in 1948 was much more than in 1942;
  •  they had surrendered timber on another reserve at a higher rate the year before;
  •  they would not get the full benefit of the sale of timber from IR1; and
  •  the Indian Act provided that timber licenses could only be granted for one year.

Canada largely ignored Huu-Ay-Aht’s petition and did not take steps to investigate or address its concerns. Shortly thereafter, BSW began active logging on IR1. Canada renewed the company’s annual harvesting licence under the Indian Act every year from 1948 to 1959. The licence was not renewed in 1960 or 1961, but it was renewed in 1962, and from 1967 through to 1970. BSW continued to log IR1 until 1970, even during the years where the licence had not been renewed.

Legal Analysis

Canada admitted its breach of fiduciary duty to Huu-Ay-Aht in 1942 arising from its failure to comply with the requirements of the Indian Act, and its failure to consult with Huu-Ay-Aht prior to accepting the Special Condition in the agreement. Huu-Ay-Aht argued that Canada’s breach was broader than admitted and advanced that the operative date of the breach upon which compensation should be founded was 1948. Expert reports confirmed the value of timber substantially increased from 1942 to 1948.

Judge Whalen found that Canada committed multiple breaches of fiduciary duty. The Indian Act did not permit the issuance of licence for a period a more than one year (or an agreement to automatically renew a harvesting licence) as was conclusively determined in Booth v. The King, [1915] 51 S.C.R. 20 (“Booth”). The Special Condition was therefore illegal. Canada had not considered Booth and had treated the Special Condition as binding when issuing annual harvesting licences to BSW. The continued issuance of the annual licences constituted an ongoing and repeated breach of Canada’s fiduciary duty. Moreover, the Indian Act empowered Canada to cancel a sale where an error or mistake was made. Canada had a duty to invoke this power when it realized the illegality of the agreement that it had concluded with BSW.

Judge Whalen also found that Canada had “failed completely” in its fiduciary obligation to consult with Huu-Ay-Aht. While Canada engaged in considerable internal debate before concluding the agreement with BSW, it should have kept Huu-Ay-Aht informed and sought its feedback “so as to formulate the Band’s best interests, including its expectations, its understanding of the process, its economic conditions, and its related interest in employment opportunities.”

Canada argued that the transfer of the interest in the timber had occurred in 1942 when the agreement was concluded, and thus compensation should be calculated based on the value of the timber in 1942. Judge Whalen rejected this argument, finding that the Indian Act only permitted the transfer of the interest in timber to vest in the purchaser once the timber had been cut. Accordingly, “the Crown maintained complete supervision and control of the asset and the process until cutting was complete…This scheme was consistent with Canada’s duty to protect the First Nation from exploitation and fixing Canada with total fiduciary responsibility for the satisfactory cutting and removal of the timber.”

As multiple continuing breaches had occurred, Judge Whalen found that Huu-Ay-Aht was free to frame its claim as it did by focusing on the breaches in 1948. Thus Judge Whalen used 1948 as the starting point for assessing compensation.

Judge Whalen stated that the purpose of equitable compensation is to restore the First Nation to the position it would have been in had there been no breach at all. The Tribunal went on to state that the following principles apply in determining compensation for breach of a fiduciary duty:

  • the loss is to be determined on a basis most favourable to the First Nation;
  • compensation includes lost opportunity and presumes that the First Nation would have made use of the land or resources in the most advantageous way possible; and
  • issues of causation, foreseeability and remoteness are not to be considered.

Judge Whalen considered expert evidence from both parties on the value of the loss and concluded that Huu-Ay-Aht was entitled to $279,597.50 based on a sale commencing in 1948, and $1,510,000 for the reduced value of IR1 as a result of the 28-year period BSW was permitted to harvest. In the second phase of the hearing the Tribunal will determine the amount of compensation owing based on bringing it forward to present day values, and will determine whether any revenues Huu-Ay-Aht received from the sale need to be subtracted from the total compensation award.

This ruling is another victory for First Nations seeking a just resolution of their historic claims at the Tribunal. The decision highlights, in particular, the high fiduciary standard on Canada when negotiating the sale of reserve interests after a surrender under the Indian Act, the need for Canada to consult with a First Nation before concluding negotiations, and the ongoing duty on Canada to rectify breaches of fiduciary of duty when they are discovered. The ruling is also the first time that the Tribunal has outlined the principles of compensation that apply to a breach of fiduciary duty by Canada.

This case summary provides our general comments on the case discussed and should not be relied on as legal advice. If you have any questions about this case or any similar issue, please contact any of our lawyers practicing in Specific Claims.


Posted in Case Summaries, Specific Claims