Introduction
On November 6, 2020, the Supreme Court of Canada released its split decision (5-4) in 11688782 Ontario Inc. v. Maple Leaf Foods Inc. et al, 2020 SCC 35. This decision is significant for two reasons. First, it affirms the strict proximity analysis necessary to establish a duty of care, which limits the circumstances in which a duty of care will be recognized. Second, it suggests that courts are unlikely to impose a duty of care to protect against pure economic loss in circumstances where the parties did or could have protected themselves through contract, but did not.
Background
In August 2008, Maple Leaf learned that one of its products contained listeria. Within several days, it voluntarily recalled several products, including two meat products used by Mr. Sub franchisees (the “franchisees”). The recall left them without the recalled products for a period of six to eight weeks.
The franchisees commenced a class action against Maple Leaf, seeking compensation in tort for pure economic losses including lost past and future sales, past and future profits, diminution of capital value of the franchises and loss of goodwill. The action was certified, following which, Maple Leaf moved for summary judgment on the basis that it did not owe the franchisees a duty of care. The Ontario Superior Court of Justice held that Maple Leaf owed a duty of care to the franchisees. The Court of Appeal for Ontario reversed this decision.
At the Supreme Court, the franchisees alleged that Maple Leaf, as a manufacturer, owed them a duty of care to supply a product fit for human consumption and that this claim fit within two established categories of pure economic loss: (1) negligent misrepresentation or performance of a service; and (2) negligent supply of shoddy goods or structures. Maple Leaf denied owing any duty of care to the franchisees.
Negligent misrepresentation or performance of a service
The majority first considered the claim for negligent misrepresentation or performance of a service. This issues turns on whether the parties were at the time of the loss in a sufficiently proximate relationship.
Here, the proximity analysis is determined by two factors: (1) the defendant’s undertaking; and (2) the plaintiff’s reliance. As described by the court, “the proximate relationship is formed when the defendant undertakes responsibility which invites reasonable and detrimental reliance by the plaintiff upon the defendant for that purpose.”[1]
The franchisees argued that Maple Leaf undertook to provide ready-to-eat meats fit for human consumption. The Supreme Court accepted that Maple Leaf provided the undertaking but held that it was “made to consumers, with the purpose of assuring them that their interests were being kept in mind, and not to commercial intermediaries such as Mr. Sub or Mr. Sub franchisees.”[2] As such, the claims advanced by the franchisees were outside the scope and purpose of the undertaking. In any event, an undertaking alone does not form a proximate relationship.
Even if Maple Leaf provided the undertaking to the franchisees, the majority held that they failed to establish any reasonable and detrimental reliance. Detrimental reliance “is manifested by the plaintiff altering its position, thereby foregoing more beneficial courses of action that it would have taken, absent the defendant’s inducement.”[3] In this case, the franchisees were bound by the terms of a franchise agreement with Mr. Sub (as franchisor) that required them to purchase Maple Leaf products. It was not possible for the franchisees to have changed their position in reliance on Maple Leaf’s undertaking. In the result, the franchisees failed to establish proximity.
Negligent supply of shoddy goods
The majority then considered the claim for pure economic loss arising from the negligent supply of shoddy goods. This is only the second occasion on which the Supreme Court has considered this issue.[4] The majority found that a duty of care in respect of the negligent supply of shoddy goods is predicated upon a defect posing a real and substantial danger to the plaintiff’s rights in person or property.
The majority found that any danger arising from the contamination of the meats could pose a danger only to the consumer and not to the franchisees. Even if the franchisees could establish an imminent risk to their own rights in person and property, their recovery would have been limited to the cost of averting the danger and not to the pure economic losses sought to be recovered in this case. The majority also held that Maple Leaf’s recall of the products removed any danger to consumers and the franchisees.[5]
The majority also found that the contractual relationships between the parties were “crucial” to the proximity analysis and for that reason the franchisees’ claim would still fail in any event. The reasonable availability of adequate contractual protections from the risk of loss in a commercial relationship “militates strongly against the recognition of a duty of care.”[6] In other words, the “courts will not lightly impose a duty in tort to insure against pure economic loss, in circumstances where the parties could have but chose not to provide for such insurance in contract.”[7] While the majority clarified that contractual silence will not automatically foreclose the recognition of a duty of care, they cautioned that courts must be careful not to disrupt the allocations of risk that are reflected, even implicitly, in the relevant contracts.
Under those contracts, the franchisees were able to seek Mr. Sub’s (the franchisor’s) permission to secure an alternative supply of products, but chose not. The majority also noted that the franchisees could have obtained insurance, which they did not. As described by the majority:
To allow the appellant to circumvent the strictures of that contractual relationship by alleging a duty of care in tort in a manner that undermines and even contradicts those strictures (in that the proposed duty would impose an obligation to supply upon Maple Leaf Foods whereas its agreement with Mr. Sub imposed no such obligation) would not only undermine the stability of such arrangements, but also of the appellant’s particular arrangement, which was predicated upon an exclusive source of supply.[8]
The dissent
The dissenting justices agreed with the majority that the franchisees failed to establish their claims in negligent misrepresentation or performance of a service and the negligent supply of shoddy goods. However, the dissenting justices would have recognized a novel duty of care: “Maple Leaf owed the franchisees a duty to take reasonable care not to place unsafe goods into the market that could cause economic loss to the franchisees as a result of reasonable consumer response to the health risk posed by the goods.”[9]
Notably, the dissenting justices disagreed as to the effect of the relevant contracts on the proximity analysis. In their view, “Maple Leaf knowingly operated as an exclusive supplier to a restaurant operating as a franchise — a business arrangement in which the franchisee typically has almost no power to bargain for contractual protection, either with the supplier or the franchisor.”[10] In this regard, the franchisees were not actually able to bargain for such contractual protections.
Key takeaways
The majority’s decision declined to expand the categories of pure economic loss and adhered to its prior analytical framework for recognizing a duty of care. Accordingly, commercial parties and litigators should be mindful of the following:
- Torts will not be used to circumvent contractual relationships: Where the parties’ relationships are governed by contract, even in a multipartite contractual relationship, courts will be cautious not recognize a duty of care that is inconsistent with the contractual relationship. Whether the parties did or could have addressed the risk in contract may effect the court’s determination to recognize a duty in tort.
- Proximity analysis is strict and tends to limit the recognition and scope of tort duties: The Supreme Court described the categories of pure economic loss as analytical tools used to identify particular types of pure economic losses. But whether such losses are recoverable depends on establishing a proximate relationship between the parties.[11] Importantly, the defendant’s undertaking and the plaintiff’s reliance featured prominently in negating the recognition of a duty of care respecting claims of negligent misrepresentation or performance of a service.
[1] 11688782 Ontario Inc. v. Maple Leaf Foods Inc. et al, 2020 SCC 35 at para. 32.
[2] Ibid, at paras. 37 and 39.
[3] Ibid, at para. 40.
[4] Ibid, at para. 41. The first occasion was Winnipeg Condominium Corp. No. 36, [1995] 1 SCR 85.
[5] Ibid, at paras. 57-58.
[6] Ibid, at para. 68.
[7] Ibid, at para. 70.
[8] Ibid, at para. 90.
[9] Ibid, at para. 167.
[10] Ibid, at para. 152.
[11] Ibid, at para. 22.
