The Duty of Care for Pure Economic Loss: How Far Does it Extend? The Supreme Court Delivers its Judgment in 1688782 Ontario Inc. v. Maple Leaf Foods Inc. et al.

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Twelve years after the listeria outbreak at the heart of the case, the Supreme Court of Canada released a 5-4 decision in 1688782 Ontario Inc. v. Maple Leaf Foods Inc. et al., 2020 SCC 35, on November 6, 2020, ruling in favour of the defendant Maple Leaf Foods Inc. This is a consequential decision on economic loss in tort that confirms that there is no general right in tort protecting against the negligent or intentional infliction of pure economic loss in Canadian law, and that the circumstances in which pure economic loss may be recovered remain limited.

The decision is significant for reasons including:

  • The confirmation that, as a general matter, a manufacturer’s implied undertaking as to the safety of its goods is made to the end consumer. Absent some evidence that the undertaking was also made with the interests of a supply chain intermediary in mind, duties flowing from the undertaking will not extend to the pure economic loss of such intermediaries; and
  • The reminder of the courts’ reluctance to afford commercial parties in a chain of contracts with extra-contractual rights against the other parties to the chain, where the parties did or had an opportunity to address and distribute risk through contract.

Sandwich Shortages: What Happened?

In 2008, Maple Leaf was the exclusive supplier for 14 core ready-to-eat meat menu items served in all Mr. Sub restaurants, and Mr. Sub franchisees were required to purchase such products exclusively from Maple Leaf. This relationship was governed through a multipartite arrangement comprising a chain of contracts: a franchise agreement between Mr. Sub (as franchisor) and Mr. Sub franchisees, and a supply agreement between Mr. Sub and Maple Leaf. The franchisees had an exclusivity arrangement through the franchise agreement to purchase Maple Leaf products, but purchased these through distributors and had no direct contractual relationship with Maple Leaf.

Following a listeria outbreak in one of its factories, Maple Leaf recalled several of its products, including two ready-to-eat meat products used by the Mr. Sub franchisees. The franchisees experienced a product shortage for six to eight weeks, which they alleged caused them economic loss and reputational injury (due to their association with contaminated meat products). The franchisees could not sue Mr. Sub for the supply shortage as a result of terms in the franchise agreements.

Instead, the franchisees sued Maple Leaf in a class action, seeking compensation for lost past and future sales, past and future profits, capital value of the franchises, and goodwill. The franchisees alleged that Maple Leaf, as a manufacturer, owed a duty to Mr. Sub franchisees to supply a product fit for human consumption, and that Maple Leaf had been negligent in its discharge of that duty. Maple Leaf denied that it owed such a duty of care to the Mr. Sub franchisees for economic losses, and brought a motion for summary judgment on that basis.

Proximity and the Duty of Care

Writing for the majority, Justices Brown and Martin held that Maple Leaf did not owe a duty of care to the franchisees of Mr. Sub in respect of the reputational harm and pure economic loss that they suffered as a result of the recalls. As Maple Leaf did not owe the franchisees this duty of care, the franchisees could have no claims in negligence and those claims were dismissed.

The foundational element of claims in negligence is that the defendant owed the plaintiff a duty of care. Whether a duty of care exists is a function of whether there was sufficient relevant proximity between the parties, and whether the injury was foreseeable. A plaintiff can establish a proximate relationship in one of two ways. First, by establishing that the facts fall within or are analogous to a previously recognized category of proximity. Second, if no such category exists, a plaintiff may seek to establish a “novel” duty of care through a full analysis of the relevant test, which in Canadian law is called the Anns/Cooper test.[1]

Where the claims being made relate to situations of “pure economic loss”, the circumstances in which a duty of care will be found to exist are more confined as a matter of law. “Pure economic loss” occurs where a party’s injury is only economic or financial in nature. It is contrasted to situations in which economic or financial loss may exist, but is consequent on a physical injury to the person or damage to property. Here, the franchisees’ loss was pure economic loss and the key question before the Court was whether the law recognized a duty of care for economic loss in these circumstances.

In assessing proximity, the overarching question is whether the parties are in such a close and direct relationship that it would be just and fair, having regard to the relationship, to impose a duty of care in law. The factors to assess that relationship are diverse and depend on the circumstances of each case, but include the expectations, representations, reliance, and the property or other interests involved.

The franchisees argued that the circumstances of its claim fell within two categories of proximity that have been recognized in respect of pure economic loss: negligent misrepresentation or performance of a service, and the negligent supply of shoddy goods or structures. In the alternative, they argued, a novel duty of care should be recognized.

Majority Finds No Proximate Relationship Between Maple Leaf and Mr. Sub Franchisees

Writing for the majority, Justices Brown and Martin held that there was no proximate relationship between Maple Leaf and the franchisees.

Proximity Based on Analogous Categories

The majority confirmed the rationale from its decision in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, that for cases of negligent misrepresentation or performance of a service, two factors are determinative of whether proximity is established: the defendant’s undertaking, and the plaintiff’s reliance. The analysis is grounded in considerations of the scope and purpose of the defendant’s undertaking, and whether the plaintiff’s reliance was reasonably within the scope of that undertaking.

Here, the majority accepted that Maple Leaf had undertook to provide ready-to-eat meats fit for human consumption. However, they held that the undertaking was made to end consumers, for the purpose of assuring them that their interests were being kept in mind. The Court held that proximity is based on determining the intended effect or purpose of the defendant’s undertaking, and here that purpose and effect did not extend to concern for the business interests of commercial intermediaries such as the Mr. Sub franchisees. The majority also found that the franchisees had not relied on the undertaking in any event, as was required to establish proximity.

The majority held that the line of cases dealing with a duty of care for economic loss caused by the negligent supply of shoddy goods or structures did not apply in the present case. The majority found that the normative force behind that category of duties in respect of pure economic loss was the need to avert danger where the good or structure posed a danger to the community, and could not be easily disposed of. The point of this category of duty was to provide for the cost of averting the danger that personal injury or damage to property could occur. The Court stated that this is a narrow category of duties and, while it can apply to dangerously defective goods, it does not apply where the good can be easily disposed of, leaving only pure economic loss for the disposing party (though the costs of disposal of the dangerous good or structure may be recoverable). The majority also held that these duties did not arise in this case because any physical danger posed by the products was only to the end consumer, rather than the intermediary Mr. Sub franchisees.

Full Proximity Analysis

Concluding that the franchisees’ claims did not fit into an existing analogous category, the majority undertook a full proximity analysis of the relationship between the franchisees and Maple Leaf.

In doing so, the majority focused on the chain of contracts between the franchisees, Mr. Sub, and Maple Leaf. The Court warned that, where the parties are linked by way of contracts with a middle party that, taken together, reflect a multipartite allocation of risk, courts must be cautious about allowing parties to circumvent that allocation by way of tort claims.

When conducting the proximity analysis, the Court crucially considered the fact that the parties could have protected their interests under a direct contract with Maple Leaf. The franchisees were not consumers, but commercial actors whose choices to enter into the franchise agreement with Mr. Sub and the supply arrangement with Maple Leaf substantially informed the expectations of the relationship. The Court qualified this, however, in writing that contractual silence will not automatically foreclose the imposition of a duty of care, and warned that courts must be careful not to disrupt the allocations of risk reflected in relevant contractual arrangements.

Further and in any event, the Court noted, the franchisees here did have means in the form of contractual rights—albeit conditional upon obtaining Mr. Sub’s permission—to avoid the risk of interrupted supply by seeking out alternative sources of supply.

Implications of the Maple Leaf Decision

The Maple Leaf decision addresses a number of issues important to manufacturers, suppliers, and businesses in commercial supply arrangements.

The Supreme Court did not expand the categories of recovery for pure economic loss, and upheld its prior framework and precedents on the limited scope of recovery. The Court reiterated the duties of care that manufacturers and suppliers owe to end customers, while clarifying that such duties will not extend to commercial intermediaries in the absence of some evidence of the specific intention that they will.

In multipartite commercial relationships such as the one in Maple Leaf, courts will consider the relevant contractual terms as a whole, so as not to defeat the expectations of all parties as to their obligations and entitlements. Parties to such types of commercial arrangements should consider the effects that third party agreement terms may have on them in the event of a litigation. More specifically, commercial parties should be careful not to rely on expectations of extra-contractual rights or protections being recognized if required, where the parties could have or did address risk in the terms governing their contractual relationship or by means such as insurance. Maple Leaf is a reminder of the courts’ reticence to allow parties to circumvent contractual distribution of risks by the imposition of extra-contractual duties of care.

Dissent

The dissenting judges agreed with the majority that the franchisees’ claim did not fall within an existing category of proximity for a duty of care in respect of economic loss. However, unlike the majority, they found it would have been just and fair to impose a novel duty of care in this case, and would have allowed the appeal. In its analysis of proximity, the dissent focused on the fact that in this case, notwithstanding the contractual arrangement, there was in fact a close and direct relationship between Maple Leaf and the franchisees. The dissent cited the facts that Maple Leaf was an exclusive supplier of a product integral to Mr. Sub’s business, knew and accepted it was an exclusive supplier, had a direct line of communication to franchisees, and provided support directly to franchisees to ground a finding that there was a sufficiently direct and close relationship.

Case information:

1688782 Ontario Inc. v. Maple Leaf Foods Inc., et al2020 SCC 35

DATE: November 6, 2020

DOCKET: 38187

William Main is an Associate and Jessica Cytryn is an Articling Student in McCarthy Tétrault’s Retail and Consumer Markets Group.

[1]Anns v. London Borough of Merton, [1977] 2 All E.R. 492 (H.L.), as refined by the Supreme Court in Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537.

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