Ghost in the Machine – Pure Economic Loss in the Time of Recalls
Plaintiffs are, in certain circumstances, able to recover pure economic loss caused by the negligent supply of dangerous products from the manufacturers of those products.  As long as the defect poses a “real and substantial danger” to persons or property, the plaintiff may recover for lost profits and for the costs of avoiding the danger posed by the defective products.
Generally, however, these product liability cases arise on the supply of the defective products. Is pure economic loss recoverable in the product liability context when a dangerous good is recalled and no longer supplied precisely because it has been identified as dangerous? In other words, is the absence or spectre of the dangerous good enough to ground liability for the manufacturer? In recent decision of the Ontario Superior Court on a motion to certify a class proceeding, fittingly released on Halloween, Justice Leitch opens the door to this possibility.
In the summer of 2008, an outbreak of listeriosis, a food-borne illness, was reported in Ontario. In early to mid-August, the outbreak was linked to pre-cooked, ready-to-eat deli meats produced and packaged at a Toronto-area Maple Leaf Foods plant. Upon discovering this link, Maple Leaf Foods promptly issued recalls for all products (dating back to January 2008) that had been produced at the implicated plant and took the further precaution of shutting down the plant itself.
Maple Leaf Foods was the exclusive supplier of 14 core deli meat menu items to franchisees of Mr. Submarine Limited (“Mr. Sub”), a franchisor of quick-service restaurants specializing in deli sandwiches. Two of these 14 core menu products were affected by the Maple Leaf Foods recall and plant shutdown. All affected deli meat inventory was promptly retrieved from Mr. Sub franchisee locations and there is no evidence that any of the affected products were actually supplied to customers or that any customers were harmed by such supply. As a result of the plant shutdown, Maple Leaf Foods was not able to provide the two affected core menu products to Mr. Sub franchisees until October 2008.
Certification proceedings do not involve an assessment of the merits of a claim. So long as a cause of action is made out in the pleadings, and common issues requirements are met, a class proceeding must be certified pursuant to section 5(1) of the Class Proceedings Act, 1992.
The representative plaintiff sought to certify a class proceeding on behalf of all Canadian Mr. Sub franchisees as against Maple Leaf Foods for damages resulting from its alleged negligence, misrepresentation, and failure to warn. Maple Leaf Foods objected to certification on the grounds that the plaintiff’s pleadings disclosed no reasonable cause of action, in part as no customers of Mr. Sub franchisees had been harmed by the recalled products.
The plaintiff argued, among other things, that Maple Leaf Foods should be held liable for the economic loss resulting from its negligent supply of dangerous goods. It relied on two previous product liability decisions for the principle that manufacturers have a duty to supply fit goods to the intermediaries who ultimately provide them to the end customer. In both of the cited cases, the defective product had actually been supplied to the end customer and caused harm resulting in economic losses for the intermediary who had supplied the product.
Maple Leaf Foods acknowledged (for the purposes of the certification motion) that, as a manufacturer, it owed a duty of care to the intermediaries that distributed its goods. It argued, however, that manufacturers had only been found liable to intermediaries for the negligent supply of dangerous goods when those goods had actually been supplied to the end users. As the recalled deli meat products had not actually been supplied to Mr. Sub franchisee customers, and therefore no customers had actually been harmed, Maple Leaf Foods argued it could not be held liable, and therefore the class action should not be certified.
Justice Leitch disagreed, holding that the mere supply of dangerous goods by a manufacturer to an intermediary, even if those goods were recalled prior to the supply to end users, poses a “real and substantial danger” and qualifies as a cause of action in negligence that may allow the intermediary to recover from the manufacturer:
In my view, the defendants' position leads to a situation where an intermediary, such as the plaintiff, could only sue in tort if its customer was harmed. That should not be a necessary prerequisite to a finding that a manufacturer has a duty to an intermediary to take reasonable care not to distribute a product that is dangerous to the consumer of that product. The harm in issue here is the risk of danger (that is illness or death) that could occur from consumption of the product. That risk of danger led to the recall of the RTE meats and the resulting alleged losses.
An order was issued certifying the class action, allowing the litigation to proceed.
This preliminary decision may expand the scope of liability for manufacturers who “do the right thing” and move quickly to protect the public and recall dangerous goods. By allowing this action to proceed, the court has opened a door to the possibility that manufacturers may be held liable not only when the negligent supply of dangerous goods actually does harm end users, but when the supply of such goods could harm end users (even if such goods were never actually supplied to them).
15-word takeaway: Manufacturers might be held liable even if defective products are recalled before any harm occurs.
 See Winnipeg Condominium Corporation No. 36 v. Bird Construction Co.,  1 SCR 85 and Rivtow Marine Ltd. v. Washington Iron Works,  SCR 1189. Canada’s approach diverges significantly from that of other common law jurisdictions in this regard.
dangerous products defective products economic loss intermediary lost profits negligent supply product liability