A Clarified Approach to Pure Economic Loss Claims

Bennett Jones LLP

Bennett Jones LLPLooking Forward: Class Actions in 2021

In November 2020, the Supreme Court of Canada released its decision in 1688782 Ontario Inc. v Maple Leaf Foods Inc. This is an important decision clarifying the analytical approach to the duty of care analysis in negligence claims for “pure economic loss”, which encompasses claims for lost profits, lost sales, reputational harm, and other economic injuries not accompanied by harm to person or property. The Court's decision affirms that the concept of legal “proximity” is the core analytical tool to decide whether there is a duty of care in negligence extending to pure economic loss and, if so, the scope of the duty.

Maple Leaf was a class action brought by franchisees of Mr. Sub after a potential listeria outbreak at a Maple Leaf manufacturing plant led to a voluntary recall of certain meat products, including meat products used at Mr. Sub restaurants.

Under the contractual agreements in place, Mr. Sub franchisees did not buy meat products directly from Maple Leaf. Rather, the national Mr. Sub organization (as franchisor of Mr. Sub restaurants) and Maple Leaf had an exclusive supply agreement, under which Maple Leaf was the exclusive supplier of many core Mr. Sub menu items. Separate franchise agreements between the national Mr. Sub organization and Mr. Sub franchisees required the franchisees to exclusively buy Maple Leaf meat products from the distributors, including the products subject to the recall.

There was no evidence that any Mr. Sub customers had become sick after eating contaminated meat, or that any meat supplied to Mr. Sub franchisees was contaminated. But a press release issued by the Canadian Food Inspection Agency in connection with the voluntary recall, identified Mr. Sub as one of several restaurants where customers may have eaten contaminated meat. The negative publicity surrounding the voluntary recall allegedly affected sales at Mr. Sub restaurants. On this basis, Mr. Sub franchisees started a class action against Maple Leaf, seeking to recover economic losses flowing from the recall.

In a 5-4 decision, the Supreme Court of Canada dismissed the franchisees’ claim, holding that Maple Leaf owed no duty of care in negligence to Mr. Sub franchisees to protect them from the pure economic losses that the voluntary recall of meat products had allegedly caused. While Maple Leaf owed a duty of care to Mr. Sub franchisees’ customers to supply a product fit for human consumption, this duty was directed to protecting the customers’ health and safety, and did not extend to protecting the franchisees’ economic interests.

In reaching this conclusion, the Supreme Court of Canada affirmed that the concept of legal “proximity” is the controlling analytical tool in determining the existence and scope of a duty in care in negligence extending to pure economic loss. To establish a duty of care, the plaintiff must show not only that the economic loss was reasonably foreseeable, but also that the parties stood in a relationship of sufficient proximity to one another for the economic loss.

The Supreme Court's focus on proximity builds on its prior decision in Livent v Deloitte & Touche, when the Court held that the existence and scope of any duty of care in negligence is defined by the nature of the defendant's undertaking, and scope of the plaintiff's reasonable reliance. For a particular type of loss to be recoverable, that loss must follow the normative reasons for imposing a duty in the first place. The contractual arrangements in place between the parties will be of central importance in determining the existence and scope of any corresponding duty of care in negligence.

In Maple Leaf, the majority focused on the contractual nexus between Maple Leaf and the national Mr. Sub organization, and between Mr. Sub and its franchisees. The majority held that commercial parties’ abilities to structure their affairs by contract helps identify the “expectations [and] other interests” that may ground proximity. If the parties could have contracted for protections against a particular form of pure economic loss, but did not, that goes against imposing a duty of care. Similarly, if the parties do order their affairs by contract, how they agreed to allocate risk informs the duty of care analysis. Courts should be slow to impose duties that would fundamentally rearrange the contractual allocation of risk.

The majority found that the contracts in place among Maple Leaf, Mr. Sub and franchisees did not disclose a relationship of sufficient proximity to justify imposing a duty of care on Maple Leaf to protect franchisees from the alleged economic losses. The alleged duty would circumvent the parties’ careful contractual arrangements which included no such duty. The franchisees were “vulnerable” to losses on Maple Leaf recalling meat products, but that vulnerability resulted from the parties’ contractual arrangements. It was not for the Court to reorder the allocation of risks.

The Supreme Court's decision in Maple Leaf is likely to have broad implications for Canadian manufacturers, franchisees, retailers, and other commercial actors. Perhaps most critically, Maple Leaf affirms that the bargained provisions of a contract between the parties plays a central role in the proximity analysis and, ultimately, in determining whether a duty of care exists in circumstances involving pure economic loss. The court may not impose a duty of care when the parties could have bargained for contractual protections but did not.

The decision will also have a critical effect on class actions in Canada. By clearly outlining the proximity analysis to be undertaken in determining a duty of care in pure economic loss claims, the Supreme Court has provided a new tool for analyzing the these types of claims, including at an early stage. Judges will now have a heightened ability to adjudicate such claims at the certification stage, preventing the certification of class proceedings which assert pure economic loss against a third-party with a lack of privity of contract, where such extended protection was not specifically bargained for.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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