The Supreme Court of Canada releases a fascinating – yes, fascinating – decision on pure economic loss: Design Services Ltd. v. Canada

This post was originally published on the Blog maintained by the Faculty of Law at the University of Alberta. It is reproduced here with permission.

Last week’s decision in Design Services Ltd. v. Canada , 2008 SCC 22 marks something of a coming-of-age for the Supreme Court of Canada in its handling of claims for pure economic loss. After the difficulties of the 1990s, which included some backing and forthing on the recoverability of relational economic loss, Rothstein J. (for the Court) demonstrates a welcome maturity and confidence in Design Services.

Public Works Canada (PWC) launched a design-build tendering process, which requires the bidder to congregate the necessary design and construction sub-contractors at the bidding stage. The plaintiff/appellant, Design Services Ltd., was identified within the bid of the head contractor (Olympic Construction Ltd.) as part of Olympic’s design-build team. For the purposes of the litigation, the Court was asked to assume (and did assume) that PWC awarded the contract to a non-compliant bidder and that it should have awarded the contract to Olympic. As a result, Olympic and Design Services sued PWC. Olympic settled out, and Design Services continued with its litigation.

The trial judge found for the plaintiff, finding that Design Service’s relationship with Olympic was “analogous to a joint venture” (claims by joint venturers being a category of “recoverable” relational economic loss in Canadian law). The trial judge also found that Design Services was “proximate” to PWC, as it would have been known to PWC as being a participant, through Olympic, in the tendering process. At the Federal Court of Appeal, the appeal was allowed, the court finding that there was no proximity between Design Services and PWC, and that the situation was not analogous to that of a joint venture.

At the Supreme Court of Canada, Design Services was also unsuccessful. The first half of Rothstein J.’s reasons are (allowing for slight quibbles here and there which I’ll not mention) a model of clear, juridical reasoning. For the purposes of explanation, recall the distinction that has operated since The Queen v. Ron Engineering,[1981] 1 S.C.R. 111 between “Contract A” which is formed when the bidder submits, and “Contract B” which is the contract awarded to the successful bidder. Here, Contract A subsisted from the time of Olympic’s bid. For Design Service’s loss to be relational economic loss, its loss must have been relational to physical damage of some kind – to property or to person – suffered by Olympic. Obviously no personal injury was involved, so: was Olympic’s rights under Contract A proprietary? No, said Rothstein J. Contract A only imposed in personam obligations between PWC and Olympic, not in rem rights meant to exclude the rest of the world. Because no property was damaged, Design Services’ claim was not for relational economic loss and thus it could not take advantage of the joint venture claim. Moreover, the “joint venture” exception, Rothstein J. correctly pointed out, was designed where the joint venturers are the property owner and the claimant, not the claimant and a third party.

(Note: I have elsewhere argued that the joint venture claim should not properly be understood relational economic loss, but as direct harm to a right. See “Justifying the Impossibility of Recoverable Relational Economic Loss” (2006) 5 Oxford U. Comm. L.J. 155. I am not resiling from anything in that article, but rather am making the point that, to the extent it remains viewed in Canadian law as an exceptional and recoverable category, the court in Design Services was correct in not applying it).

My criticisms of this judgment apply to everything written from paragraph 45. Having determined that this was not a case of relational economic loss, recoverable or not, Rothstein J. then felt compelled to consider whether a new duty of care – specifically, between owners and subcontractors – should be established. This brought him to the duty of care inquiry in Anns, as modified in 2001 by the Supreme Court of Canada in Cooper v. Hobart, [2001] 3 S.C.R. 537. Ultimately, he applied the test faithfully (foreseeability, then proximity, then “policy” reasons – whatever those are – that negate a duty of care) and found that no such duty of care exists. One of those “policy” reasons (sigh – why even bother electing legislators, if we have courts to come up with policy, anyways?) is, we are told, that an action in tort law in circumstances where “commercial parties have deliberately arranged their affairs in contract” is “an unjustifiable encroachment of tort law into the realm of contract”.

Two points: (1) while the court was extremely concerned, when it came to matters of taxonomy, about the nature of the right (in a true, juridical sense) that Olympic had as against PWC, nowhere in this judgment is there any concern for the nature of the putative right that the actual plaintiff, Design Services, had as against Olympic. Where was the allegation of infringed right in property or person in Design Service’s claim? Cooper v. Hobart (and its predecessor, Anns) detract us from the salient question of rights, and point us to the nebulous and less intellectually satisfying world of judges’ idiosyncratic policy preferences. It seems to me that the only hope that Design Services could have harboured would have been to shape its claim into one for negligent mispresentation, based on some assumption of responsibility by PWC towards Design Services, engendering reasonable and detrimental reliance on its part. The facts as reported disclose no such assumption of responsibility, but it would have been interesting had Design Services tried to advance such an allegation, as that might have brought it within one of Cooper v. Hobart‘s “analagous grounds” of proximity.

(2) The court’s sudden concern to respect the contractual ordering of affairs is to be welcomed, but it would be interesting to see how the court rationalizes its statement about tort law’s “unjustifiable encroachment” in such situations with the majority’s clear preference in BG Checo v. BC Hydro, [1993] 1 S.C.R. 12 for concurrency in tort and contract (absent an express contractual term ousting tort liability).

In sum, a clear, doctrinally stable and sound decision from the Supreme Court of Canada in pure economic loss is a welcome development. I think my criticism about the court’s resort to Cooper v. Hobart is a more fundamental one, and I cannot reasonably expect the Court as it is currently composed to jettison its current policy-oriented focus on duty of care in favour of a juridical focus on rights and obligations. And, to be fair, my second criticism may be a prelude to a reconsideration of BG Checo, in which case the question of assumption of responsibility may yet receive some profile in cases of this sort.