Supreme Court of Canada Clarifies Approach to Pure Economic Loss Claims

November 16, 2020

Written By Ranjan Agarwal, Keely Cameron, Gannon Beaulne and Douglas Fenton

The Supreme Court of Canada has clarified the scope of manufacturers’ potential liability under the law of negligence to the retailers of their products for “pure economic losses”—lost profits, lost sales, and reputational harm that are not accompanied by harm to person or property—associated with selling their products.

In 1688782 Ontario Inc v Maple Leaf Foods Inc, 2020 SCC 35 [Maple Leaf], a 5-4 majority of the Supreme Court held that Maple Leaf Foods Inc. was not liable in negligence for alleged economic losses of Mr. Sub franchisees after a listeria outbreak at a Maple Leaf manufacturing plant led to a voluntary recall of meat products. The majority determined that Maple Leaf’s duty of care in negligence (to ensure the meat was safe for human consumption) did not extend to cover franchisees’ pure economic losses.

The decision has important implications for Canadian manufacturers, franchisees, retailers, and other businesses. Building on the Supreme Court’s decision in Livent v Deloitte & Touche, 2017 SCC 63 [Livent], Maple Leaf affirms that the concept of legal "proximity" is the core analytical tool to decide whether there exists a duty of care in negligence extending to pure economic loss and, if so, its scope. Canadian law previously recognized certain categories of pure economic loss recoverable in negligence claims. But those categories merely facilitate the proximity analysis—in all cases, the plaintiff must show, not only that the economic loss was reasonably foreseeable, but that the parties stood in a relationship of sufficient proximity to one another. In determining whether the parties had a relationship of sufficient proximity to ground a claim in negligence extending to pure economic loss, a key factor is the contractual arrangements in place between the parties, if any, or their capacities to arrange their affairs by contract.

Background and Procedural History

In 2008, Maple Leaf learned of a potential listeria outbreak at one of its plants. The Canadian Food Inspection Agency (CFIA) directed Maple Leaf to recall a specific product that had tested positive for listeria. Several days later, concerned about the potential scope of the contamination, Maple Leaf voluntarily expanded the recall to include two other ready-to-eat meat products used in Mr. Sub franchised restaurants.

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 made the exclusive supplier of many core Mr. Sub menu items. This included the meat products subject to the voluntary recall, supplied through a series of distributors. Separate franchise agreements between the national Mr. Sub organization and Mr. Sub franchisees required the franchisees to exclusively buy Maple Leaf meat products from distributors. The result was that franchisees and Maple Leaf had no privity of contract, and the franchisees were left to advance their damages claim in negligence.

No evidence showed that any Mr. Sub customer has become sick after eating contaminated meat. In fact, no evidence showed that either of Maple Leaf’s recalled ready-to-eat meat products contained listeria. But the CFIA’s news releases and media reports unfortunately drew a link between the listeria outbreak and Mr. Sub—identifying Mr. Sub as one of several restaurants where customers may have eaten contaminated meat. Negative publicity associated with Maple Leaf’s recall allegedly affected sales at Mr. Sub franchises.

The plaintiff in Maple Leaf, a former franchisee, started a class action against Maple Leaf, seeking to recover alleged economic losses flowing from the recall. The plaintiff argued that Maple Leaf owed a duty of care, under negligence law, to the Mr. Sub franchisees to supply meat products fit for human consumption. It also alleged that Maple Leaf’s voluntary recall and Mr. Sub’s association with the listeria outbreak had deterred customers from patronizing the plaintiff’s restaurant. The claim sought damages for lost past and future sales, lost past and future profits, loss of capital value, and loss of goodwill.

On a summary judgment motion, Maple Leaf challenged the duty of care in negligence alleged by the franchisees to be owed to them by Maple Leaf. The motion judge dismissed the motion, finding that Maple Leaf owed a duty of care in negligence to franchisees to “supply a product fit for human consumption” and that franchisees’ alleged economic losses were reasonably foreseeable. The Court of Appeal for Ontario reversed the motion judge’s decision. Applying Livent, the Court of Appeal held that Maple Leaf’s duty was defined by the purpose of Maple Leaf’s undertaking and the scope of the plaintiff’s reasonable reliance. Maple Leaf was contracted to supply meat products fit for human consumption to protect consumers’ health and safety. Thus, Maple Leaf owed a duty to Mr. Sub franchisees’ customers—but not the franchisees themselves—to ensure the meat supplied was fit for human consumption. Mr. Sub franchisees could not “bootstrap” their claim for lost profits, sales, and reputational harm to the duty that Maple Leaf owed to franchisees’ customers.

Supreme Court Clarifies the Proximity Analysis

In a 5-4 decision, the Supreme Court agreed with the Court of Appeal for Ontario. Writing for the five-judge majority, Justices Brown and Martin held 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 allegedly caused them.

Maple Leaf clarifies the analytical approach to the duty of care analysis for pure economic loss claims. Canadian law recognizes no general right to recover pure economic losses in negligence. Rather, it recognizes certain categories of recoverable loss, including negligent misrepresentation, negligent performance of a service, negligent supply of shoddy goods or structures, and relational economic loss (typically where there is a contractual relationship between the parties that does not itself relate to the matter in issue). In Maple Leaf, the Supreme Court engages with and extends its case law since its seminal decision in Cooper v Hobart, 2001 SCC 79, making clear that pre-established categories of pure economic loss in negligence are only analytical tools to facilitate the core inquiry—whether the parties are in a relationship of sufficient proximity to justify imposing a duty of care—and create no automatic right of recovery.

Courts must assess the specific proximity factors in the parties’ relationship, whether imposing a duty of care by reference or analogy to recognized categories or proceeding through a full proximity analysis. And those factors delineate both the existence and scope of the duty and the scope for recovery—for a particular type of loss to be recoverable, that loss must follow the normative reasons for imposing a duty in the first place. Applying this framework, the majority held that Maple Leaf was not liable for the Mr. Sub franchisees’ alleged economic losses under two recognized categories:

1. Under the category of negligent misrepresentation or negligent provision of a service, the defendant’s undertaking and the plaintiff’s reliance determine proximity. Maple Leaf undertook, through its contractual arrangement with the national Mr. Sub organization, to ensure that the meat it supplied was safe to be consumed by Mr. Sub customers. The undertaking was directed to consumers to protect their safety, not to Mr. Sub franchisees to protect their commercial interests. Franchisees’ business interests were outside the scope of Maple Leaf’s undertaking.
2. Under the category of negligent supply of shoddy goods or services, a plaintiff’s right to recover for pure economic loss is restricted to the cost of adverting a danger to bodily integrity or property. Franchisees could not recover for harm to their economic interests because their claims did not relate to the cost of adverting any danger. Maple Leaf voluntarily recalled its products and bore the expense of retrieving its possibly contaminated meat. Maple Leaf thus eliminated any physical risk posed by its products, absorbing the cost of adverting the danger. The majority also found no relationship of proximity between Maple Leaf and Mr. Sub franchisees from which a right to recover pure economic losses could flow. That lack of proximity also precluded the Court from recognizing a new duty under the “Anns/Cooper test” for recognizing a novel duty of care in negligence under Canadian law.

In its proximity analysis, the majority focused on the nexus of contractual documentation that defined the relationships 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 parties could have contracted for protections against a particular form of pure economic loss, but did not, that militates 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.

In Maple Leaf, the agreements 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.

Justice Karakatsanis, writing for four judges in dissent, would have recognized a novel duty on Maple Leaf to take reasonable care not to place unsafe goods into the market that could cause economic losses to the franchisees because of consumer response to health risks posed by the products. The dissent found it reasonably foreseeable that consumers would avoid patronizing Mr. Sub restaurants because of the recall, harming franchisees’ commercial interests. They noted that the core purpose of the relevant contracts was to supply franchisees with products. Because franchisees had little practical ability to protect themselves by contract, given the power imbalance inherent in franchising arrangements, the dissent found that favoured imposing a duty.

Key Takeaways

1. Maple Leaf affirms that the controlling analytical concept in the duty of care analysis in cases of pure economic loss is “proximity”. For a duty to arise, there must be a meaningful relationship of proximity, consisting of conduct showing some express or implied undertaking to safeguard a particular interest, coupled with reasonable reliance on that undertaking by the plaintiff. This determines the existence and scope of a duty.
2. The contractual matrix, or lack thereof, between the parties plays a central role in the proximity analysis and, ultimately, in determining whether a duty of care arises between commercial actors. The Court is slow to impose a duty of care when the parties could have bargained for contractual protections, but did not. That reflects an underlying reality of pure economic loss claims: economic losses incurred in the marketplace can often be cured in the marketplace. Commercial actors should carefully select business partners and, when possible, enter into comprehensive agreements that allocate risk among the parties.
3. The majority’s decision in Maple Leaf tracks the sound policy of encouraging manufacturers to launch voluntary recalls of potentially dangerous products, without risking liability for all of the incidental economic losses that a recall could occasion. Maple Leaf acted quickly to implement its voluntary recall, and helped Mr. Sub and its franchisees implement the recall. While Maple Leaf accepted that it was responsible for the costs of disposing of the potentially contaminated meats, Maple Leaf's quick and comprehensive response reduced any claim on this basis. Manufacturers initiating voluntary recalls of potentially dangerous products are well-advised to act quickly to support downstream retailers in facilitating that recall, to avoid any future claims for the cost of disposing of the product or curing the defect that inures in it.

For further information about this matter or its implications for your business or organization, please contact a member of the Bennett Jones Class Action Litigation group, Commercial Litigation group or Franchising group.

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