SCC delivers landmark decision on economic loss recovery

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Any active business is exposed to financial risks beyond those connected with damage to its own person or property. Many of these risks do not flow from direct contractual relationships and recovery is only possible in negligence. For example, negligence by a third party might result in supply disruptions, restrictions on access to transportation, or the need to replace or repair products and structures. False information or representation might also be relied on and lead to loss. Financial losses arising from these types of common occurrences - unconnected to damage to one’s own person or property – are referred to as “pure” economic losses. In 1688782 Ontario Inc. v Maple Leaf Foods Inc. (Maple Leaf), the Supreme Court of Canada has provided significant new guidance on the principles governing recovery for these pure economic losses.

Three categories of pure economic loss as between private parties, as earlier established in Deloitte & Touche v Livent Inc.,1 (Livent) were recognized in Maple Leaf as:

  1. Negligent misrepresentation or performance of a service;
  2. Negligent supply of shoddy goods or structures; and
  3. Relational economic loss – due to damage to third party property or persons.

Though Maple Leaf focused largely on the second category – losses due to negligent supply of shoddy product – the majority decision established (or perhaps merely clarified) the underlying rationale governing when recovery of pure economic loss will be allowed under all three categories and when it will be rejected. Maple Leaf represents an important milestone in the evolution of the law in this respect as it rationalizes the seemingly disparate approaches to claims for various different types of pure economic loss in such seminal cases as Hedley Byrne,2 Winnipeg Condominium3 and Maple Leaf should also define the standard for any future potential categories of pure economic loss recovery.

Maple Leaf involved a claim by “Mr. Sub” restaurant franchisees against Maple Leaf for their losses arising from a listeria outbreak at a Maple Leaf production facility. There was no direct contract between Maple Leaf and the franchisees but the franchisees were required by their Franchise Agreements to use Maple Leaf products as exclusive supply. The franchisees did not receive any contaminated product but claimed losses due to decreased supply and market association with listeria tainted Maple Leaf products.

The majority in Maple Leaf noted that any recovery of damages in negligence depends on a duty of care, the elements of which are foreseeability, a proximal relationship between the parties, and an absence of a policy reason to exclude a duty. For pure economic losses, the controlling principle has generally been proximity. This has been established where there is a relationship of undertaking and reliance,4 where financial loss is incurred to mitigate an imminent risk of physical harm to persons or property,5 and where the plaintiff has a sufficient interest in third party property or persons that is physically damaged or injured.6 Courts have been legitimately concerned with guarding against indeterminate liability given that indirect economic impacts arising from an act of negligence can extend almost indefinitely.

The five judge majority noted that proximity will generally define both the existence and scope of the duty of care in pure economic loss. The majority specifically endorsed the view that the existence and the scope of legal proximity are determined according to the oft cited reasoning of Cardozo C.J. in Palsgraff v Long Island Railroad Co.7 that “[n]egligence is not actionable unless it involves the invasion of a legally protected interests, the violation of a right”. That is, recovery of pure economic loss must be based on injury to a right of the plaintiff that is protected by tort law. The majority stressed that it is this principle, and not whether the mechanism for loss corresponds to a pre-existing category of duty relationship, that governs pure economic loss recovery in negligence. Concerns about indeterminacy of liability for purely economic losses were considered to be properly addressed by reliance on this principle.

The majority found no legally protected right with the Mr. Sub franchisees. There was no undertaking by Maple Leaf to Mr. Sub franchisees. The Mr. Sub franchisees had no interest in the damaged property (the tainted meat) and it posed no health or property risk to them. There was thus no legally protected right in the franchisees on which pure economic loss recovery could be justified.

The Supreme Court’s express recognition that the concept of proximity in negligence law is based on interference with a legally cognizable right is a significant clarification and evolution of the law. Future claims of recovery of pure economic loss claims should be determined based on this principle.

As pure economic losses are common for any active business and can arise in a variety of circumstances, businesses and counsel should become familiar with Maple Leaf and the important role it will play in future adjudication of pure economic loss claims. Key takeaways include:

  • Proximity requires an interference with a legally cognizable right: In the context of allegations of negligent misrepresentation or negligent performance of a service, consider the scope of the defendant’s “undertaking” and the plaintiff’s “reliance” – properly considering these issues will allow counsel and businesses alike to assess any risk.
  • The contractual relationship between the parties features prominently in the proximity analysis: A critical review of the contractual relationship between the relevant parties is important when assessing risks associated with pure economic loss. When the parties did, or could have addressed the risk in contract may impact a court’s determination when considering the proximity analysis. Where the risk has been allocated in contract, the court is likely to respect the parties’ intentions.

  1. 2017 SCC 63.
  2. Hedley Byrne & Co. Ltd. v Heller & Partners Ltd., [1964] AC 465 (H.L.).
  3. Winnipeg Condominium Corporation No. 36 v Bird Construction Co, [1995] 1 S.C.R. 85.
  4. The proximity analysis in negligence misrepresentation/performance of service has focused on the scope and nature of the defendants’ undertaking and the plaintiff’s reliance: Maple Leaf at para 20.
  5. This is the basis for recovery of pure economic loss for negligence supply of shoddy goods and structures: Maple Leaf at para 45.
  6. The nature of the interest of the plaintiff in third party property has defined the exceptions to the general rule against recovery for pure economic loss: Bow Valley Husky (Bermuda) Ltd v Saint John Shipbuilding Ltd [1997] 3 SCR 1210 – cited in Maple Leaf at para 22.
  7. 162 N.E. 99 at 99 (NYCA 1928).

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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