Recoverable Losses In Tort: How The Supreme Court's Final Word On Maple Leaf Foods Impacts Canadian Business - Professional Negligence

If you don't operate a meat processing plant or a sandwich franchise, it could be easy to overlook the Supreme Court's recent decision in 1688782 Ontario Inc. v. Maple Leaf Foods Inc.¹ That would be a mistake.

The Maple Leaf Foods might have expanded tort liability for business activity far beyond its historical scope, if one more Supreme Court judge had agreed. However, the 5-4 decision went against the plaintiffs, and the Court maintained the long-standing rule that "pure economic loss" caused by negligence can only be collected in a relatively narrow set of circumstances.

Maple Leaf Foods affirms that contract, not tort, remains the primary mechanism for allocating economic risks. It therefore has significant implications for Canadian class actions, which often engage issues of tort law.

Torts and economic loss

Every law student remembers learning about Donoghue v. Stevenson, the House of Lords' 1932 decision about a snail in a bottle of ginger beer. Donoghue stood for the idea that manufacturers have a duty of care to their ultimate consumer of their products, not just those parties with whom they are connected by contract. It did so by establishing a general principle that a duty of care could be applied to anyone who could be foreseeably affected by negligent conduct. This idea –sometimes called the "neighbour principle" – is the foundation for almost all modern negligence law. It is now (inelegantly) known as the "Anns/Cooper test" and it requires the court to ask two questions to establish a novel duty of care: first, are the parties in a sufficiently proximate relationship that one party's actions could foreseeably harm the other's interest; and second, are there any policy reasons why a duty should not be imposed even if the parties are sufficiently proximate?²

Like many common law concepts, the "neighbour principle" and the Anns test often raise more questions than answers. Courts continue to struggle with the question of what kind of harms should be compensable as a result of negligent conduct. Donoghue itself related to personal injury. The principle was then readily extended to property damage. But the question that has given the courts the greatest difficulty is when liability for negligence should be extended to so-called "pure economic loss" – that is, when should one person's careless conduct result in liability for losses that do not flow from an underlying injury to a person or property, such as loss of profits? Although this sounds like a technical legal question, its consequences are quite far-reaching for businesses, as the Maple Leaf Foods case demonstrates.

Background to the certification decision

In 2008, Maple Leaf suffered a listeria outbreak in one of its manufacturing plants, resulting in a national recall of processed meats. At the time, Maple Leaf had a contract to exclusively supply Mr. Submarine for certain meat products. Mr. Sub franchisees were required under their franchise agreements to purchase Maple Leaf products from Mr. Sub "corporate," but had no privity of contract with Maple Leaf.

As a result of the outbreak and recall, Mr. Sub's franchisees claimed to have suffered business and reputational harm from the lack of supply and the association with contaminated products. One former franchisee launched a proposed class action on behalf of itself and 424 other franchisees, seeking to collect those losses from Maple Leaf. The franchisees claimed that Maple Leaf had been negligent in discharging its alleged duty to the franchisees to supply a product fit for human consumption. They further alleged that Maple Leaf's recall caused them to experience economic losses due to their association with contaminated meat products, resulting in lost sales and profits, a decrease in the capital value of the franchises, and a depreciation of goodwill. The class action was certified at first instance.³

Motion for summary judgment

Following certification, both parties brought summary judgment motions. Maple Leaf's motion sought a dismissal of certain claims on the basis that it owed no duty of care to the franchisees. The representative plaintiff, in turn, asked for summary judgment that Maple Leaf had committed actionable negligence against the class.

The motion judge initially found that Maple Leaf owed a duty of care to the franchisees in relation to the production, processing, sale and distribution of the contaminated products, and a duty of care with respect to its representations that the products were fit for human consumption and posed no risk of harm.⁴

The Court of Appeal reversed, finding in favour of Maple Leaf and granting its motion for summary judgment.⁵ This was a significant result for the class actions defence bar – and not just because of the Court's substantive commentary on the issue of pure economic loss in tort. The decision also demonstrated that post-certification dismissals of class actions on questions of tort law may be possible, if issues around proximity and duty of care may be ripe at an early stage in a class proceeding. Where such issues arise, defence counsel may have an opportunity to seek summary judgment immediately following the certification decision (as counsel did here) or, possibly, at the same time as the certification motion.

Question before the Supreme Court of Canada

Ultimately, it was the substantive question of tort liability for economic loss – not the strategic question of when to bring a motion for summary judgment – that went to the Supreme Court.

One of the reasons assigning liability for pure economic loss in tort is so controversial is because it can circumvent the more traditional mechanism by which parties allocate economic risks, i.e., contracts.

Contracts require parties to specifically turn their mind to their rights and obligations as against one another, and to the risks they are undertaking in the course of business. The law of negligence developed with an anxiety that it not supplant the voluntary private ordering that contracts allow, which is why Donoghue was initially so controversial. However, the impetus behind the evolution of negligence law—responding to situations where someone's careless conduct has caused someone else to suffer loss—has a certain appeal. Determining whether and when the sufferer should be reimbursed by the careless is at the heart of a negligence case.

The key question for the Supreme Court was whether the rule against awarding damages in negligence for pure economic loss had outlived its usefulness. There is no doubt that the law as it stood was confusing and difficult to apply. The Supreme Court had previously indicated that economic losses could be collected if they fell into one of three categories: (1) negligent misrepresentation or performance of a service; (2) negligent supply of shoddy goods or structures; and (3) so-called "relational" economic loss.⁶ The Mr. Sub franchisees argued that their losses were covered by both categories (1) and (2).

The Supreme Court decision

The majority of the Supreme Court confirmed that the franchisees could not collect their business losses from Maple Leaf. They noted that in Canadian tort law, the scope for recovery for pure economic loss is narrower than for losses related to negligent interference with and injury to the rights in bodily integrity, mental health and property. There is no general right, in tort, protecting against pure economic loss.⁷

Instead, the majority affirmed that the correct starting point for evaluating whether economic loss is recoverable is the existence of a duty of care—i.e., the "proximity" analysis. A defendant is only liable for losses to a plaintiff to whom it owes a duty of care. This is an absolute pre-requisite to liability, regardless of whether the losses fit into one of the three previously articulated categories.⁸

No duty of care based on negligent misrepresentation

The majority reiterated its prior holding that in the context of a negligent misrepresentation, proximity arises from the defendant giving an undertaking and the plaintiff relying on it. In this case, the majority reasoned that any undertaking made by Maple Leaf about its meats being safe and fit for human consumption was made to end-consumers (i.e., the public) not to "commercial intermediaries such as ... the franchisees."⁹ Because the franchisees' business interests lay outside of the purpose of the undertaking, there was no proximate relationship. Moreover, the franchisees could not establish reliance, since the undertaking would not have changed their position: they were required by their franchise agreements to purchase Maple Leaf products.

No duty of care based on the negligent supply of shoddy goods or structures

The plaintiffs' argument that this case fell into the "negligent supply of shoddy goods" category was also rejected. The majority reiterated that that duty is narrow and predicated on the plaintiff's establishing a "real and substantial danger" of "personal injury or damage to other property."¹⁰

Although there was a clear risk to consumers, the tainted meat posed no health risk to franchisees. Where the plaintiff can simply discard the defective product (or where repair of the product is impossible, as would be the case with the meats at issue), the necessary "danger" has been averted and there is no basis for recovery – except to the extent the plaintiff has incurred costs related to the disposal itself.¹¹ Because any danger the ready-to-eat meats posed dissipated when they were recalled and destroyed, the franchisees could not show the requisite danger necessary to establish a duty of care under this category.

No novel duty of care following an Anns/Cooper proximity analysis

Finally, the majority asked whether this was a circumstance where the court should recognize a novel duty of care. Its Anns/Cooper analysis turned heavily on the contracts between the franchisees, Mr. Sub, and Maple Leaf. The Court focused on the policy concern that contracting parties should not circumvent a voluntary allocation of risk by deploying tort claims. The franchisees could have, but did not, protect their interests through contract, and instead agreed to have Maple Leaf as their exclusive supplier of the meat products. Because of these contractual arrangements, the majority concluded that there was insufficient proximity between the franchisees and Maple Leaf.¹² This was a significant point of departure for the four dissenting judges, who thought that the nature of the business relationship and the franchisees' lack of bargaining power justified imposing a duty of care.

The dissenting view

The four dissenting judges agreed that the franchisees' claim did not fall within an existing category of proximity. However, they would have imposed a novel duty of care. Although the dissent acknowledged that contractual arrangements could be an important factor in finding a lack of proximity, they noted that it should not be used to override an analysis that takes into account the parties' actual circumstances, including their commercial sophistication and bargaining power: "[i]f a plaintiff's contractual 'ability' to allocate risk is illusory, relief in tort may be arbitrarily and unfairly foreclosed."¹³ The minority would have held that the franchisees could not meaningfully allocate for the risks at issue, given the power imbalance that exists between franchisees and franchisors and the fact that franchisees are generally unable to negotiate more favourable terms with their franchisor.¹⁴

Conclusion

Tort law often seems like a black box, and the box is never more opaque than in economic loss cases. Trying to find consistent trends or principles is remarkably difficult. That said, for now, Maple Leaf Foods provides a clear lesson for businesses, which is that a comprehensive series of contracts governing your obligations is the best way to protect against tort liability, including class actions based in tort. It also invites class action defendants to think critically, and early, about the tort law underpinnings of any proposed class action involving purely economic losses.

Footnotes

1. RSC 1985, c C-36.

1. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35.

2. Cooper v. Hobart, 2001 SCC 79 at para. 30.

3. 1688782 Ontario Inc. v Maple Leaf Foods Inc., 2016 ONSC 4233.

4. 1688782 Ontario Inc. v Maple Leaf Foods Inc., 2018 ONCA 407 at paras. 22 to 31.

5. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2018 ONCA 407 at para. 88.

6. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para. 20; see also Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63.

7. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para. 19.

8. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para. 23.

9. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para. 39.

10. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para. 49.

11. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para. 55.

12. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at paras. 73 and 91.

13. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para. 145.

14. 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para. 146.

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