Southwind v. Canada, 2021 SCC 28: Opening the Door to Flexible Approaches to Compensation

On July 16, 2021, the Supreme Court of Canada (“SCC”) released its decision in Southwind v Canada, 2021 SCC 28 (“Southwind”), a landmark ruling on equitable compensation. The issue before the SCC was how to assess compensation for losses caused by a historic breach of Canada’s fiduciary duty involving an unlawful taking of reserve lands.

The Southwind decision can be expected to have a significant impact on the negotiation, litigation and resolution of First Nation claims for historic breaches of Canada’s fiduciary duty. The decision provides much-needed clarity on principles that apply to the valuation of the historic loss resulting from the illegal taking of reserve land.

This decision adds to a body of case law that has developed in recent years on how to value and “bring forward” historic losses of First Nations to present day value. Together, this series of decisions resolves some fundamental questions concerning the quantification of equitable compensation for breaches of Canada’s fiduciary duty, which may enable historic claims to be resolved more quickly and efficiently.

For outstanding Specific Claims, we should expect to see changes to Canada’s Specific Claims Policy and negotiation mandates to integrate principles outlined by the SCC in Southwind.

Background – Illegal Flooding of Lac Seul First Nation Reserves

The Lac Seul First Nation (“LSFN”)’s claim stems from the unauthorized flooding of LSFN’s reserve lands and the catastrophic destruction that followed. In 1929, a hydroelectric dam was built to provide electricity to Winnipeg. The dam raised the water on Lac Seul by 10 feet, causing extensive damage to a fifth of LSFN’s reserve land – destroying homes, wild rice fields, gardens and gravesites. In the words of an Indian Affairs official at the time: “[t]he reserve is ruined for any purpose [for] which it is set aside…” (Southwind at para 22). Despite having prior knowledge of the significant damage that would be caused, Canada did not seek LSFN’s consent nor secure compensation for the community.

At trial, the Federal Court ruled that Canada breached its fiduciary duty to LSFN. However, the Federal Court assessed compensation as if the flooded land were fee simple land being expropriated, without regard to the value of the reserve land to the dam project or to LSFN. The Federal Court brought forward the historic losses by creating a multiplier based on the historic band trust account rates and rejected the idea of the First Nation’s spending patterns as a realistic contingency. LSFN challenged the decision on the basis of the value attributed to the flooded land. The appeal before the Federal Court of Appeal was dismissed. LSFN then appealed to the SCC.

What did the Supreme Court of Canada decide?

 The SCC held that in the case of a historic breach of Canada’s fiduciary duty to a First Nation in dealings with reserve lands, it is not enough to compensate the First Nation for the historic value of the land as if it were fee simple land that had been expropriated. Rather, the assessment of compensation should reflect the uniqueness of the First Nation’s interest in its reserve land, the impact on the community, and the value of the land to the project itself.

Importantly, the SCC recognized that the Crown’s fiduciary duty to Indigenous peoples requires more than compensation based upon expropriation principles given the unique nature of reserve land. The principles of expropriation law are “fundamentally different than those underlying Indigenous interest in land” as reserve land is not a fungible commodity (Southwind at para 94). In addition, these interests are at the centre of the relationship between the Crown and Indigenous peoples. As a result, the Court held that the “fiduciary obligations in this case must reflect the nature of the interest, the impact of the loss on the First Nation, the importance of the relationship, and reconciliation, which is the overarching goal of the fiduciary duty itself, based in the honour of the Crown” (Southwind at para 94). Canada was required to do more than meet the minimum requirements of expropriation law to fulfill Canada’s equitable obligations.

To put the LSFN in the position it would have been but for Canada’s breach, the SCC found compensation should be based on the lost opportunity to negotiate a surrender reflecting the highest value of the land, i.e., the best price that could have been obtained for use of the land for hydroelectricity generation.

Further, the SCC noted that they did not take issue with the manner in which the trial judge brought forward historic losses to present value based on the band trust account rates (Southwind at para 145).

 Why is this case important?

 There are a great many unresolved claims across the country involving historic breaches of the Crown’s fiduciary duty, including many claims related to the taking of reserve lands without legal authority. The principles established by the SCC in Southwind will have a direct bearing on the outcome of such claims as it provides First Nations a solid foundation to argue for compensation based on the highest value or best deal possible. The emphasis by the Court on the unique relationship between Indigenous peoples and the Crown, and Indigenous peoples and their land, will help to shape the nature of the duties owed and the calculation of compensation, including considering the impact of the breach on the community.

Further, this case adds clarity to a line of cases that have grappled with the approach to bringing forward the historic losses of First Nations to present day (Whitefish Lake Band of Indians v Canada (Attorney General), 2007 ONCA 744; Beardy’s and Okemasis Band No. 96 and Canada (Minister of Indian Affairs and Northern Development), 2016 SCTC 15; and Huu-Ay-Aht First Nations and Canada (Minster of Indian Affairs and Northern Development), 2016 SCTC 14). In endorsing the trial judge’s approach, the SCC approved the approach of bringing forward losses based on the historic band trust account rates. It further approved the rejection of the approach that looked at consumption and the spending patterns of First Nations as a realistic contingency that could be used to reduce the compensation owed to the Nation. Every dollar that should have been provided to the Nation should attract a compounded rate of return.

Where to from here?

The SCC sent the case back to the Federal Court to reassess compensation to include the value of the flooded land to the hydroelectricity project. As such, the amount of compensation owing to the LSFN for the flooding of their reserve lands is yet to be determined.

For other outstanding or potential First Nation claims alleging historic breaches of Canada’s fiduciary duty, the vast majority of which are brought as Specific Claims, the legal principles articulated in Southwind should bring about changes to Canada’s Specific Claims Policy and negotiation mandates.

As an example, the compensation criteria under Canada’s Specific Claims Policy and Process Guide include that “compensation shall not include any additional amount based on ‘special value to the owner’ unless it can be established that the land in question had a special economic value to the claimant band, over and above its market value.” This would appear to be directly at odds with Southwind’s affirmation that the impact to the First Nation and the importance of the land to the First Nation are relevant factors that must be (routinely) considered in assessing compensation.

Further, Canada has applied the 80/20 approach as a matter of policy in Specific Claim negotiations. Consistent with Canadian savings patterns generally falling below 20%, this approach updates 20% of an historical value by compounding band trust account rates. The remaining 80% is updated by inflation only. Since the line of cases listed above, Canada has not yet formally amended its 80/20 approach and has dealt with Specific Claims on a case-by-case basis. The 80/20 approach is no longer viable in light of the line of cases discussed above and the SCC’s confirmation of the trial judge’s approach to compensation in Southwind. First Nations should be receiving compensation for forgone consumption in the same manner as savings and investment. Canada’s policies will need to be updated to reflect the guidance from the courts.

The SCC has reiterated that Canada is to be held to a high standard in fulfilling its fiduciary obligations to Indigenous peoples, particularly where those obligations concern dealings with reserve land. In our view, the Court’s finding that compensation must reflect the nature of the interest and the impact to the community presents First Nations with an opportunity to develop fresh approaches to compensation that consider the harm to the community and better place Nations in the position that they would have been in but for Canada’s breach.