Another Loss for a Pure Economic Loss Claim in 1688782 Ontario Inc. v. Maple Leaf Foods Inc.

Since their inception in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 SCR 85 [Winnipeg Condominium], negligence claims relying on pure economic loss arguments have seldom been successful. The recent case of 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 [Maple Leaf Foods] was no exception. In a 5-4 split, the Supreme Court of Canada (“SCC”) held that Maple Leaf Foods Inc. (“Maple Leaf”), a food supplier, owed no duty of care to Mr. Sub franchisees for the financial costs incurred in the recall of its contaminated meat products.

The majority decision allowed the motion for summary judgment and dismissed the appeal on the grounds that the relationship between the parties lacked the requisite proximity to prove that Maple Leaf owed a duty of care grounded in existing categories and to establish a novel duty of care. By contrast, the strongly worded dissent proposed the creation of a novel duty of care that accounts for the power imbalance in contractual dealings between a franchise, a franchisee, and a third-party goods supplier, which courts have been reluctant to consider. Had the dissent prevailed, Maple Leaf Foods could have expanded the narrow scope of application of the pure economic loss argument and opened the door to negligence claims by franchisees against third parties that would have been dismissed otherwise.

Factual Background

1688782 Ontario Inc. is a former franchisee of Mr. Submarine Limited (“Mr. Sub”) and a class representative of 424 Mr. Sub franchisees. At the time when 1688782 was a Mr. Sub franchisee, Mr. Sub and Maple Leaf’s relationship was governed by an agreement in which Maple Leaf was an exclusive supplier of ready-to-eat (“RTE”) meats for 14 core Mr. Sub menu items (Maple Leaf Foods, para 8). There was no direct contract between Mr. Sub franchisees and Maple Leaf, and orders were placed through a distributor; however, there was a dedicated phone hotline for franchisees to contact Maple Leaf should any issues arise (Maple Leaf Foods, para 84). Though Mr. Sub franchisees were contractually bound to purchase from suppliers approved by Mr. Sub, they could rely on other suppliers if Mr. Sub approved of their request to do so (Maple Leaf Foods, para 91).

On August 16, 2008, the Canadian Food Inspection Agency (“CFIA”) informed Maple Leaf of a finding of listeria in one of its products and in the subsequent weeks, Maple Leaf voluntarily recalled its meat products, including the RTE meat products used by Mr. Sub franchisees (Maple Leaf Foods, para 105). Mr. Sub was publicly associated with Maple Leaf during the recall and a settlement was reached by the two parties to cover the inconvenience caused by the voluntary recall (Maple Leaf Foods, para 107). The Mr. Sub franchisees, however, felt the direct consequence of Maple Leaf’s recall, experiencing a significant decrease in sales and profits following the listeria outbreak (Maple Leaf Foods, para 108). 1688782 Ontario Inc. filed a class action lawsuit, accusing Maple Leaf of six to eight weeks of economic loss and reputational injury. Despite the ability to do so, Mr. Sub franchisees had not sought a different supplier in that period (Maple Leaf Foods, para 11).

Trial and Appellate Court Decisions

              Subsequent to the class action certification, Maple Leaf brought a motion for summary judgment to dismiss the claim that they owed a duty of care to Mr. Sub franchisees. At the Ontario Superior Court of Justice (ONSC), the motion judge defined the duty owed by Maple Leaf to the franchisees as “a duty to supply a product fit for human consumption” (2016 ONSC 3368, para 40), which she deemed to be in the negligent representation category of pure economic loss claims, citing Plas‑Tex Canada Ltd. v. Dow Chemical of Canada Ltd., 2004 ABCA 309 [Plas-Tex], 376599 Alberta Inc. v. Tanshaw Products Inc., 2005 ABQB 300 [Tanshaw], and Country Style Food Services Inc. v. 1304271 Ontario Ltd. (2005), 200 OAC 172 [Country Style]. Even if the claim did not fall in this category, Justice Leitch found that since there was a “special relationship” between the parties and the contaminated RTE meats posed a “foreseeable real and substantial danger to consumer’s health and safety”, economic losses accrued as a consequence should be recoverable (para 53).

              The Court of Appeal reversed the motion judge’s decision and ruled that she had erred in finding that the current case fell within an existing  category of duty of care cases, and in her application of the Anns/Cooper framework in finding a new duty of care (Maple Leaf Foods, para 14). The primary distinguishing feature of Plas-Tex, Tanshaw and Country Style was that the negligent misrepresentation directly affected the plaintiff in an adverse manner, while in the current case, the damage flowed from the publicization of the negligence, not the negligent act itself (2018 ONCA 407, para 59). Similarly, the danger posed by Maple Leaf’s RTE meat products was one towards the consumers and thus, the franchisees could not “bootstrap their claim for damages for reputational loss” onto the shoddy products (para 66). The Court of Appeal concluded by allowing the appeal, granting summary judgment, and dismissing the finding that the economic losses were recoverable (Maple Leaf Foods, para 16).[1]

SCC Decision

              Writing for the majority, Justices Brown and Martin begin their analysis of Maple Leaf Foods by distinguishing pure economic loss from consequential economic loss, the latter in which results from the damage of the plaintiff’s rights (Maple Leaf Foods, para 17). They then set out the three categories of pure economic loss incurred between private parties: “negligent misrepresentation or performance of a service; negligent supply of shoddy goods or structures; and relational economic loss” (Maple Leaf Foods, para 21). However, they add a disclaimer to these categories by citing Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 [Livent] in stating “the invocation of a category, by itself, offers no substitute for the necessary examination that must take place ‘of the particular relationship at issue in each case’ between the plaintiff and the defendant” (Maple Leaf Foods, para 22).

Negligent Misrepresentation

              Proceeding to the assessment of whether the appellant’s claim falls within the first category of pure economic loss—resulting from negligent misrepresentation—Justices Brown and Martin review that the general Anns/Cooper framework of establishing prima facie duty of care looks at “the conjunction of proximity of relationship and foreseeability of injury” (para 30). They then examine the factors that determine proximity in cases of negligent misrepresentation, as defined in Livent: the defendant’s undertaking, and the plaintiff’s reliance. Livent dictated that a defendant could only be found liable for a plaintiff’s reliance on the undertaking if its purpose was directed to the plaintiff (Maple Leaf Foods, para 35). This was not the case in the current undertaking: Maple Leaf had undertaken to provide safe meat products to customers and not to the Mr. Sub franchisees (Maple Leaf Foods, para 39). Therefore, the appellant cannot claim negligent misrepresentation in this category of pure economic loss.

Negligent Supply of Shoddy Goods or Structures

              Similarly, the Court dismisses the second argument raised by 1688782 Ontario Inc., that the RTE meat products were negligently supplied, as they were contaminated goods. The SCC cites Winnipeg Condominium in stating that the rule for recovery “is for the cost of averting a real and substantial danger of ‘personal injury or damage to other property’” (Maple Leaf Foods, para 49). Consequently, they dismiss the appellant’s reliance on Plas-Tex, Tanshaw and Country Style for the same reason as the Court of Appeal—that the danger posed by the RTE meats only affects the consumers and the associated economic costs were not borne to mitigate a danger to the franchisees (Maple Leaf Foods, para 57). Rather casually, Justices Brown and Martin suggest that little expense was borne in the destruction of the RTE meats—too little to render economic loss (Maple Leaf Foods, para 58).

              The Court explains that Maple Leaf would not have owed the franchisees a duty of care even if the meats had not been destroyed, because there was no proximate relationship between the parties. Here, Mr. Sub franchisees and Maple Leaf were linked by series of contracts, which could have provided adequate protection from the risks (Maple Leaf Foods, para 68). If the risks could have been addressed by contractual terms, a recognition of a proximate relationship would circumvent contractual remedies (Maple Leaf Foods, para 71). Justices Brown and Martin assert that doing so “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” (Maple Leaf Foods, para 90). In other words, the majority decision is reluctant to recognize a prima facie duty of care in this case largely because of the contractual relationships between Mr. Sub franchisees and Maple Leaf.

Dissent

              Interestingly, it is precisely because of the contractual relationships between the parties that the four dissenting justices ruled for a recognition of a novel duty of care. Justice Karakatsanis, writing for the dissenting justices, agrees with the majority decision that the current set of facts do not fit neatly into the existing categories of pure economic loss. However, applying the Anns/Cooper framework for determining reasonable foreseeability and proximity, she states that 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 those goods” (Maple Leaf Foods, para 154). Justice Karakatsanis finds that the financial costs of being publicly associated with Maple Leaf was foreseeable to the supplier, and that the contractual relationships are key to establishing a proximate relationship, though a direct relationship can also be grounded in the establishment of the hotline (Maple Leaf Foods, para 139). Contrary to the majority opinion, the dissenting opinion finds that the plaintiff would not have been able to allocate for this risk due to the inherent power imbalance between the franchisee and the franchisor (Maple Leaf Foods, paras 146–148). Justice Karakatsanis aptly puts it when she says,

“An overly formalistic appeal to protection through contract therefore risks failing to take into account the parties’ actual circumstances, including their commercial sophistication and bargaining power”

(Maple Leaf Foods, para 145).

Without concretely defining the novel category of the pure economic loss, she concludes by quashing the summary motion judgment.

Is a Pure Economic Loss Argument a Lost Cause?

Maple Leaf Foods is another case in a long line of cases that confirms the Supreme Court of Canada’s reluctance to recognize negligence claims within contractual relationships. Though the balancing of contractual legitimacy and remedies through tort law is important, the dissenting view of a more “realistic” approach to dealing with contractual provisions would ensure that standard form contracts do not prematurely restrict contractors or franchisees from seeking recourse through alternative means. This is especially topical considering the challenging economic circumstances many business owners find themselves in currently, in which third-party negligence could cause more financial harm to franchise owners than during periods of economic stability. That said, the 5-4 split in the decision suggests that there is a shift in attitude as to how the Court will account for economic inequalities in contractual relationships moving forward.

Concluding Remarks

             Although 1688782 Ontario Inc. v. Maple Leaf Foods Inc may not be the decision to broaden the categories of pure economic loss that many were hoping for, the majority decision provides clarity on the existing case law. With the invaluable dicta provided by the dissenting opinion of Maple Leaf Foods, it seems that it will only a matter of time before the courts hear another attempt to expand recourse for economic losses which arise from negligent acts.

[1] A more in-depth article on the ONCA decision can be found in this earlier theCourt.ca post.

Grace Shin

Grace Shin

Grace is a second-year law student at Osgoode Hall Law School interested in issues dealing with administrative law, Aboriginal law, and corporate governance. Prior to law school, Grace obtained a B.Sc in Psychology from McGill University, where she conducted research on human attention and attraction. Her science background has helped Grace develop an eye for detail and a critical approach to analyzing physical and witness evidence in constitutional cases. In her free time, Grace likes to read, sing, do yoga, or go on runs.

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