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Supreme Court of Canada Revisits Pure Economic Loss

17-Nov-20

By Marco Baldasaro and Justine Bell

Historically, pure economic loss – economic losses unconnected to personal injuries or property damage – was not recoverable by a claimant in a negligence action. Over time, courts in Canada have recognized three exceptions to this prohibition: negligent misrepresentation or performance of a service; negligent supply of shoddy goods and structures; and relational economic loss. The Supreme Court of Canada recently reviewed these exceptions and considered a possible fourth exception in 1688782 Ontario Inc. v Maple Leaf Foods Inc., 2020 SCC 35 (“Maple Leaf Foods”).

Facts

In 2008, Maple Leaf Foods (“Maple Leaf”) voluntarily recalled two of its ready-to-eat meat products due to potential listeria contamination. This decision impacted several hundred Mr. Sub franchisees (the “Franchisees”) who were required by their franchise agreement to purchase the ready-to-eat meat products from Maple Leaf. The Franchisees sued Maple Leaf asserting that they had suffered loss of capital value, goodwill, profits and sales as a result of the recall. As there was no contract between Maple Leaf and the Franchisees, the Franchisees framed their action in negligence, even though they had not sustained damage to property or bodily injury.

The Franchisees sought to establish Maple Leaf’s liability by asserting that their claim fell within two of the accepted pure economic loss exceptions: negligent misrepresentation (i.e., that Maple Leaf had represented that its ready-to-eat meat products were “fit for human consumption”) and the negligent supply of a shoddy good (i.e., the ready-to-eat meat products may have been contaminated with listeria). The Franchisees also asserted, in the alternative, that their claim should be allowed on the basis of a newly established fourth exception.

Law

To recover for negligently caused loss (including pure economic loss), a claimant must prove all of the elements of the tort of negligence: (1) that the defendant owed the plaintiff a duty of care; (2) that the defendant’s conduct breached the standard of care; (3) that the plaintiff sustained damage; and (4) that the damage was caused by the defendant’s breach. The majority decision in Maple Leaf Foods is chiefly concerned with the first branch of this test, namely whether Maple Leaf owed the Franchisees a duty of care.

To establish a duty of care, a claimant must show either a previously recognized duty or both a relationship of sufficient proximity and foreseeability of injury. In essence, if the courts have already recognized a particular duty (or an analogous duty), a claimant doesn’t need to establish it for a second time. However, if the duty has not yet been recognized the court will perform a full proximity analysis which includes a consideration of the expectations, representations, and reliance of the parties in the circumstances. Ultimately a claimant must prove a close and direct relationship with the defendant to establish a new duty of care.

The trial judge concluded that a duty of care existed because the claim fell within two of the previously established exceptions to the prohibition against recovering for economic loss, namely negligent misrepresentation and the negligent supply of a shoddy good. The Supreme Court of Canada disagreed with this analysis. The fact that a claim arises from a recognized type of pure economic loss does not necessarily mean that the loss is recoverable. Sufficient proximity must still be established to ground the duty.

Assessing the negligent misrepresentation portion of the claim, the Supreme Court observed that establishing proximity for this exception turns on the undertaking given by the defendant and the plaintiff’s reliance on that undertaking. On the facts of the case, the Supreme Court found neither. Any undertaking made by Maple Leaf in relation to the ready-to-eat meat products was to the consumers and not to the Franchisees. It also found a complete absence of detrimental reliance on the part of the Franchisees. The Franchisees did not alter their behaviour as a result of Maple Leaf’s undertaking. They were simply obliged to obtain the ready-to-eat meat products by operation of the franchise agreement.

In addressing the negligent supply of a shoddy good portion of the claim, the Supreme Court accepted that this exception can apply to goods and products other than buildings. However, it noted that the exception requires a defect posing a real and substantial danger to the plaintiff’s rights in person or in property. The Supreme Court observed that any danger posed by the ready-to-eat meat products was a danger posed to the ultimate consumer. No such danger was posed to the Franchisees.

The Supreme Court also dismissed the negligent supply of a shoddy good portion of the claim due to the lack of proximity between the parties. It noted that the Franchisees’ vulnerability was the result of the franchise agreement, which was freely entered into by each of the Franchisees. It reviewed this contract in assessing the parties’ reasonable expectations and observed that the Franchisees, by entering into the franchise agreement, had secured certain advantages including use of the franchisor’s trademark, the benefit of associated goodwill, and most importantly, the benefit of the franchisor’s buying power to secure better pricing from suppliers. In exchange, the Franchisees assumed certain disadvantages including a loss of control over their business operations and supply arrangements. The Supreme Court ruled that it would be unfair in the circumstances to impose a duty upon Maple Leaf at odds with this arrangement. In essence, the Supreme Court concluded that Mr. Sub and the Franchisees had already allocated the risk of this loss between themselves. In forming this conclusion, it also noted that the Franchisees were contractually entitled to seek permission from Mr. Sub to obtain replacement ready-to-eat meat products. This right was not exercised.

Absent a relationship of sufficient proximity, the Supreme Court also declined to recognize a “novel” duty of care that would have created a fourth categorical exception to the prohibition against recovery for pure economic loss. 

Maple Leaf Foods is a 5-4 split decision. The minority reached the opposite conclusion. Although agreeing with the majority that the claim did not fall within the established exceptions to the prohibition against recovery for pure economic loss, it would have established a new duty for Maple Leaf to take reasonable care not to place unsafe goods into the market that could cause economic loss to the Franchisees as a result of reasonable consumer response to the health risk posed by those goods. The minority found that the contractual matrix, the long history between Maple Leaf and Mr. Sub, the Franchisees’ vulnerability, and Maple Leaf’s direct line of contact with the Franchisees established that Maple Leaf and the Franchisees were in a close and direct relationship such that a duty of care was owed. Significantly, the minority neglected to give a name to the proposed new exception to the prohibition against recovery for pure economic loss.

Conclusion

Although courts have grouped cases seeking to recover pure economic loss into three distinct categories, whether the exception applies turns on an examination of the relationship between the parties and, in particular, the proximity of that relationship. Merely asserting that the pure economic loss falls within one of the three established exceptions is insufficient. A claimant must first establish that the defendant owed it a duty of care when the pure economic loss occurred.

The dissent is noteworthy. Four of nine Justices of the Supreme Court of Canada would have established a new duty of care on these facts. This serves as a reminder that the categorical exceptions to the prohibition against recovering pure economic loss are not closed. Future cases can be expected to push this boundary outwards.

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