Southwind v Canada

2021 SCC 28 (CanLII)

Karakatsanis J.– #

At the beginning of the twentieth century, Canada needed more electricity to fuel Winnipeg’s economic growth. The governments of Canada, Manitoba, and Ontario decided to create a water reservoir in northern Ontario to power hydroelectricity generation. They settled on Lac Seul, which flows into both Ontario and Manitoba, and determined that if they raised the water level of Lac Seul by 10 feet, or approximately 3 metres, they could generate substantial electricity. Construction of the dam was completed in 1929 and the water steadily rose through the 1930s. The project was a success for the three governments.

The project was also a tragedy for the Lac Seul First Nation (LSFN). The LSFN’s reserve (Reserve) is located on the southeastern shore of Lac Seul. Almost one-fifth of its best land was flooded and its members were “deprived of their livelihood, robbed of their natural resources, and driven out of their home[s]” (2017 FC 906, [2018] 4 C.N.L.R. 63).

Canada was aware from the outset that flooding Lac Seul by 10 feet would cause “very considerable” damage to the Reserve. In the late 1920s, the Supervisor responsible for valuing the loss warned that the Reserve would be “ruined for any purpose [for] which it was set aside”, that the members of the First Nation were “helpless to avert this calamity”, and that they viewed their future “with utter dismay” (Trial Reasons, at paras. 152 and 156).

Despite repeated warnings from government officials about the impact that the project would have on the First Nation, the project advanced without the consent of the Lac Seul First Nation, without any compensation, and without the lawful authorization required.

Since the Royal Proclamation, 1763 (G.B.), 3 Geo. 3 (reproduced in R.S.C. 1985, App. II, No. 1), Indigenous interests in land, including reserve land, cannot be taken or used without legal authorization from the Crown. The Indian Act, R.S.C. 1927, c. 98, permitted expropriation for public works, but only with the approval of Cabinet through the Governor in Council. Treaty No. 3 (1873), that set aside the reserve land for the LSFN, required “due compensation” for any taking or appropriation. In addition, this Court recognized in Guerin v. The Queen, and subsequent decisions, that the Crown is subject to a fiduciary duty when it exercises control over Indigenous interests. This fiduciary duty imposes strict obligations on the Crown to advance the best interests of Indigenous Peoples.

The trial judge concluded that Canada failed to meet its fiduciary duty to the Lac Seul First Nation in respect of its interest in Reserve land. On appeal, Canada does not dispute this conclusion.

Canada did not keep the LSFN informed about the project; did not consult the LSFN; did not negotiate on the LSFN’s behalf to get the best compensation possible; did not use its power to refuse to authorize the project until the other parties agreed to fair compensation; and the compensation Canada did manage to negotiate — 14 years after the flooding began — was inadequate. This was unlawful and egregious conduct, even by the standards of the time. As the trial judge observed, this outcome was “inexplicable” (para. 298).

The results of Canada’s failures are tragic and well documented. Roughly 17 percent of the Reserve — 11,304 acres or approximately 4,575 hectares — is now permanently flooded. Homes were destroyed, as were wild rice fields, gardens, haylands, and gravesites. Fishing, hunting, and trapping were all impacted. The LSFN was separated because one part of the Reserve became an island. And, despite the sacrifices suffered by the LSFN to make the hydroelectricity project possible, the Reserve was not provided with electricity until the 1980s.

The LSFN challenges the trial judge’s evaluation of equitable compensation for the loss of the flooded lands. The issue for this Court is how to assess equitable compensation for the loss caused by Canada’s breach of fiduciary duty. The central inquiry is: what position would the beneficiary be in had the fiduciary fulfilled its obligations?

The trial judge valued the flooded land based on its value in 1929, with 10 percent valued as waterfront land and 90 percent valued as bushland. He determined that because Canada was authorized to expropriate the land for a public work under the provisions in force at the time, the land should be valued based upon an expropriation in 1929. Thus, the trial judge concluded that the First Nation was not entitled to be compensated for any value that the land provided to the hydroelectricity project itself.

In my view, this approach to equitable compensation for breach of fiduciary duty is flawed. By looking solely at the amount the LSFN would have received if Canada had complied with the general law relating to expropriation, the trial judge gave no effect to the unique obligations imposed by the fiduciary duty. The trial judge improperly focused on what Canada would likely have done, as opposed to what Canada ought to have done as a fiduciary. While I agree with much of the trial judge’s analysis, this error tainted his assessment of equitable compensation.

The fiduciary duty imposes heavy obligations on Canada. The duty does not melt away when Canada has competing priorities. Canada was under an obligation to preserve and protect the LSFN’s interest in the Reserve. This included an obligation to negotiate compensation for the LSFN on the basis of the value of the land to the hydroelectricity project. Compensation must be assessed on that basis.

I would allow the appeal and remit the case back to the Federal Court for reassessment of the equitable compensation to include the value of the flooded land to the hydroelectricity project.

I. Background #

The LSFN is a Treaty 3 First Nation in Northern Ontario. The members are Anishinaabe people. According to Chief Clifford Bull, they have always been lake dwellers who travelled through the water, kept their homes and gardens near the water, cultivated wild rice in the water, fished in the water, and hunted near the water.

The LSFN’s traditional territory extends from the Trout Lake region in northwestern Ontario, southeast through the Lac Seul region, and northeast towards Lake St. Joseph. The LSFN has one Reserve, called the Lac Seul Indian Reserve No. 28, which is located on the southeastern shore of Lac Seul in northern Ontario. The Reserve has three communities – Kejick Bay, Whitefish Bay, and Frenchman’s Head.

The Reserve was created under Treaty 3, which required Canada to select and set aside reserves that would be “most convenient and advantageous for each band or bands of Indians”. In 1875, the LSFN chose Lac Seul as the site of the Reserve because of the resources along the shoreline and the social, cultural, and spiritual importance of the area.

In the early twentieth century, Canada wanted to provide more electricity to Winnipeg. By 1911, Canada identified Lac Seul as a potential reservoir for hydroelectricity generation (Project). Lac Seul flows into the English River in Ontario, which in turn flows into the Winnipeg River in Manitoba. In 1915, the Dominion Water Power Branch, within the Department of the Interior, prepared a report noting that a 10 foot flooding of Lac Seul would increase the power potential on the English River by 233 percent.

In the same year, the Manitoba Hydrographic Survey began preliminary fieldwork. Chief John Akewance of the LSFN first became aware of the potential Project through the fieldwork, and wrote to Indian Agent R. S. McKenzie in 1915 outlining his concerns. Canada advised the Indian Agent that “there is no present intention to raise the waters of Lac Seul” (Trial Reasons, at para. 127).

The fieldwork report was released in 1916 and noted that the Project would flood portions of the Reserve. In 1917, Canada recommended to Ontario that it obtain flowage rights over the land that would need to be flooded. In 1919, Canada informed itself about the procedure for granting flowage rights on reserve land:

If after negotiation the offer is accepted on behalf of the Indians, or amended and so accepted, the amount of compensation agreed upon is deposited with the Minister of Finance for the use of the band of Indians and the land is surrendered. (Trial Reasons, at para. 132)

Canada wrote to Ontario again in 1921 urging that they reserve the flooding rights. There is no record of a response.

In 1924, Chief Paul Thomas met with Indian Agent Frank Edwards to express the LSFN’s concerns. Agent Edwards told Chief Thomas that Canada would “protect their interests as far as possible” (Trial Reasons, at para. 137 (emphasis in original)).

In February 1928, Canada, Ontario, and Manitoba entered into the Lac Seul Storage Agreement which governed the construction and ownership of the Project. The agreement apportioned the capital costs among the governments, which included “the cost of acquiring flooding privileges or other necessary easements” and “compensation for timber, buildings and improvements, including Ontario Crown Lands, Indian Lands and lands owned by private individuals” (Trial Reasons, at para. 147).

In April 1928, Ontario wrote to affected landowners regarding the Project. Ontario also notified the Department of Indian Affairs and indicated that the water levels would be raised by approximately 12 feet. In the summer of 1928, H. J. Bury, the Supervisor of Indian Timber Lands, appraised the value of the LSFN’s anticipated losses at $120,200. Ontario disagreed with the estimate. Mr. Bury reiterated his position in two internal memoranda. On May 14, 1929, he wrote that “[t]he reserve is ruined for any purpose [for] which it was set aside ... for the Indians” (Trial Reasons, at para. 156). Two days later, he wrote:

There are 688 Indians on the reserve, who are helpless to avert this calamity, and who view the future with utter dismay, but I feel that the associated governments concerned, will not permit these Indians to be deprived of their livelihood, robbed of their natural resources, and driven out of their home[s], without not only allowing them generous monetary compensation, but also make provision, during the period of years in which they will have to re-adjust themselves to new and strange conditions, for exclusive trapping rights for them in a district remote from civilization. (Trial Reasons, para. 156)

On May 17, 1929, the Deputy Superintendent General of Indian Affairs wrote to his superior that “[t]he situation is certainly serious; and hardship and disaster appear to face these poor Indians unless some arrangement is made at once, providing for reasonable compensation and the allocation of suitable hunting and fishing grounds elsewhere” (Trial Reasons, at para. 157). No agreement regarding compensation to the LSFN was reached with Ontario.

Ontario applied for necessary approvals in July 1928. The application noted that “[i]t will be necessary in connection with the proposed work to acquire flowage rights over lands on an Indian Reserve” (Trial Reasons, at para. 159 (emphasis deleted)). Even though those rights were never acquired, the dam was completed by June 1929. The power site, the Ear Falls Generating Station, was completed and began delivering power in February 1930.

The flooding of Lac Seul was delayed by disagreements between Canada and Ontario regarding timber clearing. Ontario wanted to harvest its Crown timber prior to flooding. To resolve the impasse, Canada proposed that the timber clearing could be accomplished as an unemployment project under Canada’s depression-era . As negotiations for this relief project unfolded, Canada assured the LSFN’s members that “their interests will be protected to the fullest possible extent” (Trial Reasons, at para. 181 (emphasis in original)).

In July 1933, Canada’s Minister of the Interior signed the agreement for the relief project. A week later, the local Indian Agent and the timber supervisor assured the LSFN that the water would not be raised “for several years to come” (Trial Reasons, at para. 183). The relief project was a failure. Less than 700 acres were cleared at a cost of over $850,000 to Canada. Members of the LSFN were excluded from employment in the project.

Despite the assurances given to the LSFN, the waters of Lac Seul began to rise in 1934. The damage was extensive. Agent Edwards estimated that at least 29 houses would need to be rebuilt — in total, one-quarter to one-third of the houses ultimately had to be moved or replaced. Between 1935 and 1939, additional damage was documented. In August 1936, Canada’s Superintendent General of Indian Affairs wrote to Ontario’s Minister of Lands and Forests:

... the Lac Seul Indian Reserve has been flooded to such a serious extent that we have been compelled already to construct many new houses for the Indians at a cost of $25,000 and the flood conditions have not only submerged the Indian hay lands, gardens and cultivated land, but have also seriously impaired the efforts of these Indians to earn their livelihood.

... The Indians of this Reserve have been definitely assured that their interests would be fully protected and they are at present much disturbed and alarmed at the damage already caused. [Emphasis deleted.] (Trial Reasons, at para. 192)

In March 1937, Mr. Bury wrote a memorandum regarding the ongoing failure to provide compensation. He wrote:

I desire to again draw your attention to the serious breach of faith that our Department has made with the Indians of the Lac Seul Reserve, respecting promises made to them regarding flooding compensation ...

[…]

I consider that these Indians have been very shabbily treated. Their Reserve lands, timber, houses, gardens, rice beds, musk-rat swamps have been flooded now for some years, and we still procrastinate[.] [I]f it had been a white settlement, no person would have dared to flood the property, without paying compensation before flooding took place. [Emphasis deleted.] (Trial Reasons, at para. 194)

Negotiations between Canada and Ontario continued. In 1940, Ontario determined that $50,000 would be a “fair valuation” of compensation, but Ontario also claimed it was owed compensation for what it viewed as excess acres on the Reserve as well as outstanding claims for timber clearing. The LSFN was not consulted nor informed of the impending settlement.

In 1943, Canada and Ontario finally agreed to a claim amount of $72,539, with deductions of $5,000 to pay a timber claim submitted by a lumber company and $17,276 to pay Ontario for “excess acres” on the Reserve. The balance, $50,263, was deposited into the LSFN’s trust account on November 17, 1943.

By contrast, Ontario and Canada negotiated compensation with other non-Indigenous groups whose property fell within the flood plain of the dam project, such as the Anglican Church Missionary Society, the Hudson’s Bay Company, and the Canadian National Railway. For instance, the Anglican Church Missionary Society received compensation for the timber destroyed in the floods and for the costs of relocating its church and cemetery. Similarly, the Hudson’s Bay Company engaged in protracted negotiations with the federal government that resulted in compensation not only for “Flowage Rights” over the company’s territory, but also for the value of the buildings and other facilities.

Canada’s conduct towards the LSFN also differs from its conduct in three earlier projects that impacted another First Nation. In the early 1910s, Calgary Power and Transmission sought permission from Indian Affairs to flood reserve lands of the Stoney Indian Band in Alberta for three hydroelectricity projects (Kananaskis Falls Projects). For all three projects, Canada negotiated a surrender on behalf of the First Nation and insisted on compensation reflecting the value of the land to hydroelectricity generation. Calgary Power entered into three agreements which provided two forms of compensation: a one-time payment for flooded land and a yearly water power rental agreement. This compensation was based upon the value of the land to the project.

Here, there was never a negotiated surrender of the land by the LSFN and Canada did not at any point expropriate the land in accordance with the provisions of the Indian Act. Nonetheless, the Project was completed in 1929 and the lands were steadily flooded throughout the 1930s. A total of 11,304 acres, approximately 17 percent of the Reserve, is now flooded. The flooding destroyed wild rice fields, gardens, and haylands for livestock. It impacted fishing and damaged homes, campsites, and shoreline infrastructure. The flooding damaged and exposed graves that were not relocated prior to the flooding. One of the LSFN’s communities, Kejick Bay, became an island separated from the other communities.

In September 1985, the LSFN submitted a claim for flooding damages to the Specific Claims Branch of the Department of Indian and Northern Affairs Canada. In 1991, Roger Southwind, for himself and on behalf of the members of the Lac Seul Band of Indians, filed a civil claim against Canada. In November 2006, 63 years after the settlement, the LSFN entered into an agreement with Ontario Power Generation (OPG), the current operator of the Ear Falls Generating Station. The agreement included $11,200,000 in compensation for losses arising from the Ear Falls Generating Station on the LSFN’s traditional territory, but expressly excluded damages caused by the flooding in the 1930s. The settlement included a plan to open a new generating station and provided the LSFN with the opportunity to purchase an equity position of 25 percent. In February 2009, OPG opened the new generating station in partnership with the First Nation. In 2009, a causeway was built to finally reconnect Kejick Bay Island and the Reserve mainland. The LSFN contributed $1,750,000 to this and a related project.

[…]

III. Analysis #

A. Canada’s Fiduciary Duty to Indigenous Peoples #

The existence of a fiduciary duty is not in dispute in this appeal. Canada does not contest the trial judge’s determination that Canada owed a fiduciary duty to the LSFN and breached that duty. However, the specific nature of the Crown’s fiduciary duty to Indigenous Peoples, especially over reserve land, informs how equitable compensation must be assessed.

The Crown’s fiduciary duty is rooted in the obligation of honourable dealing and in the overarching goal of reconciliation between the Crown and the first inhabitants of Canada (Haida Nation v. British Columbia (Minister of Forests) 2004 SCC 73, [2004] 3 S.C.R. 511, at paras. 17-18). Professor Slattery describes the honour of the Crown as a “grounding postulate of Canadian constitutional law” (B. Slattery, “The Aboriginal Constitution” (2014), 67 S.C.L.R. (2d) 319, at p. 320). McLachlin C.J. explained in Haida Nation that the “process of reconciliation flows from the Crown’s duty of honourable dealing toward Aboriginal peoples, which arises in turn from the Crown’s assertion of sovereignty over an Aboriginal people and de facto control of land and resources that were formerly in the control of that people” (para. 32; see also R. v. Desautel, 2021 SCC 17, [2021] X S.C.R. XXX, at para. 22). This is an ongoing project that seeks the “reconciliation of Aboriginal and non-Aboriginal Canadians in a mutually respectful long-term relationship” (Beckman v. Little Salmon/Carmacks First Nation2010 SCC 53, [2010] 3 S.C.R. 103, at para. 10).

This Court first acknowledged a fiduciary duty in Guerin. In Guerin, Canada argued that it could not be subject to a fiduciary duty and, at best, the Crown’s control over Indigenous interests in land is a political trust which is unenforceable by the courts (p. 371). Dickson J., writing for a majority, rejected Canada’s argument. Instead, he found that Indigenous interests in land are “a pre-existing legal right not created by Royal Proclamation, by s. 18(1) of the Indian Act, or by any other executive order or legislative provision” (p. 379; see also J. T. S. McCabe, The Honour of the Crown and its Fiduciary Duties to Aboriginal Peoples (2008), at pp. 150-51). In other words, the Indigenous interest in land did not flow from the Crown; it pre-existed the Crown’s assertion of sovereignty.

Through the Royal Proclamation, 1763, the Crown undertook discretionary control over these pre-existing Indigenous interests in land. The Proclamation provided: “And We do hereby strictly forbid, on Pain of our Displeasure, all our loving Subjects from making any Purchases or Settlements whatever, or taking Possession of any of the Lands above reserved, without our especial leave and Licence for that Purpose first obtained.” The Indian Act and its predecessor statutes formalized the process for setting aside reserve land and the Crown’s legal control over that land. The Crown thus undertook the “historic responsibility ... to act on behalf of the Indians so as to protect their interests in transactions with third parties” (Guerin, at p. 383). In Guerin, this Court recognized that a fiduciary duty arose because the Crown interposed itself between Indigenous lands and those who want to lease or purchase the land, thereby exercising discretionary control over the land (pp. 383-84). The Crown has a duty that is “in the nature of a private law duty” (p. 385).

In Osoyoos Indian Band v. Oliver (Town), 2001 SCC 85, [2001] 3 S.C.R. 746, Gonthier J., dissenting, but not on that point, clarified that the same fiduciary duty applies even where the reserve is not situated on traditional territory in which the First Nation may have a pre-existing legal interest. He noted: “... an interest in reserve lands to which no aboriginal title attaches and an interest in non-reserve lands to which aboriginal title does attach are the same with respect to the generation of a fiduciary obligation on the part of the Crown” (para. 163).

Guerin set to rest the idea that the trust-like language of historic treaties, laws, and proclamations constituted a mere “political trust” unenforceable in courts. Instead, an enforceable sui generis fiduciary duty arose where the Crown asserted discretionary power over Indigenous Peoples' specific Aboriginal interests and assumed responsibility for those interests (R. v. Sparrow, [1990] 1 S.C.R. 1075, at p. 1108). This relationship is not paternalistic in nature; it emerged in a context where the military capacities of Indigenous Peoples were strong and the Crown needed to mitigate the risk of conflict between Indigenous Peoples and settlers (Manitoba Metis Federation Inc. v. Canada (Attorney General) 2013 SCC 14, [2013] 1 S.C.R. 623, at para. 66; Slattery, at pp. 322 and 326).

Rooted in the honour of the Crown, the Crown’s fiduciary duty exists to further a socially important relationship. It structures the role voluntarily undertaken by the Crown as the intermediary between Indigenous interests in land and the interest of settlers. Professor Rotman, in the context of fiduciary relationships generally, puts it this way: “... while it may appear that the fiduciary concept exists to protect beneficiaries' interests, that effect is merely ancillary to its protection of fiduciary relationships” (L. I. Rotman, “Understanding Fiduciary Duties and Relationship Fiduciarity” (2017), 62 McGill L.J. 975, at pp. 987-88). In the context of our national history, the relationship between the Crown and Indigenous Peoples goes to the very foundation of this country and to the heart of its identity. Indeed, the need to reconcile the assertion of Crown sovereignty with the pre-existence of Indigenous Peoples, and to reconcile Indigenous and non-Indigenous Canadians is of “fundamental importance” (R. v. Van der Peet[1996] 2 S.C.R. 507, at para. 310, per McLachlin J., dissenting, but not on this point). The honour of the Crown – and the sui generis fiduciary duty to which it gives rise – is a vital component of the relationship between the Crown and Indigenous Peoples.

However, not all aspects of this relationship are fiduciary in nature (Haida Nation, at para. 18; Wewaykum Indian Band v. Canada2002 SCC 79, [2002] 4 S.C.R. 245, at paras. 81 and 83). The fiduciary duty does not attach to every interest of Indigenous Peoples. As Binnie J. stated in Wewaykum, “[t]he fiduciary duty imposed on the Crown does not exist at large but in relation to specific Indian interests” (para. 81). The fiduciary duty imposes heavy obligations when it does arise. The fiduciary duty may arise when the Crown exercises discretionary control over cognizable Indigenous interests or where the conditions of a private law ad hoc fiduciary relationship are met (Williams Lake Indian Band v. Canada (Aboriginal Affairs and Northern Development) 2018 SCC 4, [2018] 1 S.C.R. 83, at para. 44; Manitoba Metis, at paras. 48-50; Wewaykum, at para. 85).

The fiduciary duty itself is shaped by the context to which it applies, which means that its content varies with the nature and the importance of the right being protected (Williams Lake, at para. 55; Wewaykum, at para. 86; Manitoba Metis, at para. 49). The Crown’s control over Indigenous interests in land is at the core of the relationship between the Crown and Indigenous Peoples. Consequently, a strong fiduciary duty arises where the Crown is exercising control over a First Nation’s land. The same is true where the Crown is exercising control over Aboriginal and treaty rights that are protected under s. 35 of the Constitution Act, 1982 (Ermineskin Indian Band and Nation v. Canada 2009 SCC 9, [2009] 1 S.C.R. 222, at para. 46).

In a case involving reserve land, the sui generis nature of the interest in reserve land informs the fiduciary duty. Reserve land is not a fungible commodity. Instead, reserve land reflects the essential relationship between Indigenous Peoples and the land. In Osoyoos, Iacobucci J. wrote that Aboriginal interests in land has an “important cultural component that reflects the relationship between an aboriginal community and the land and the inherent and unique value in the land itself which is enjoyed by the community” (para. 46). The importance of the interest in reserve land is heightened by the fact that, in many cases such as this one, the reserve land was set aside as part of an obligation that arose out of treaties between the Crown and Indigenous Peoples.

The fiduciary duty imposes the following obligations on the Crown: loyalty, good faith, full disclosure, and, where reserve land is involved, the protection and preservation of the First Nation’s quasi-proprietary interest from exploitation (Williams Lake, at para. 46; Wewaykum, at para. 86). The standard of care is that of a person of ordinary prudence in managing their own affairs (Williams Lake, at para. 46). In the context of a surrender of reserve land, this Court has recognized that the duty also requires that the Crown protect against improvident bargains, manage the process to advance the best interests of the First Nation, and ensure that it consents to the surrender (Blueberry River Indian Band v. Canada (Department of Indian Affairs and Northern Development)[1995] 4 S.C.R. 344, at paras. 35 and 96). In an expropriation, the obligation to ensure consent is replaced by an obligation to minimally impair the protected interest (Osoyoos, at para. 54).

[The Court went on to find that Canada breached its obligation to preserve and protect the LSFN’s interest in its reserve lands. This obligation included negotiating compensation based on the value of the land for the hydroelectricity project. The Court concluded that the LSFN was entitled to compensation for the opportunity it lost in negotiating an agreement based on this value.]

Appeal allowed