Carscallen Blog

Negligence and the duty of care for pure economic loss

Posted by Carscallen LLP on Mar 11, 2021 1:46:16 PM

Written by Glenn C. Blackett and Urvil Thakor

The Supreme Court of Canada (“SCC” or the “Court”) recently released its reasons for judgment in the case of 1688782 Ontario Inc. v. Maple Leaf Foods Inc.[1], denying a class action claim in negligence for pure economic loss in the context of a franchisee and supplier relationship. The claim was brought by a former franchisee of the restaurant chain Mr. Submarine Limited (“Mr. Sub”) as a class representative of Mr. Sub franchisees (the franchisees collectively referred to as the “Appellants”) after Maple Leaf Foods Inc. (“Maple Leaf”) recalled some of its deli meat products due to a listeria outbreak in 2008.

As a result of the recall, the Appellants had no deli meat products from Maple Leaf for their restaurants for a period of six to eight weeks and claimed for economic losses against Maple Leaf, seeking compensation for lost past and future sales, past and future profits, capital value of the franchises and goodwill.

PURE Economic loss in canada

Courts in Canada have narrowly limited recovery for tort claims of “pure economic loss”, which is an economic loss (such as lost profit) that is not a consequence of an otherwise actionable injury to the plaintiff’s person or property. On that basis, “pure economic loss” is distinguished from “consequential economic loss”[2].

For example, a company that purchases and uses equipment that fails due to negligent manufacturing would suffer the loss of the equipment and consequential economic loss arising from not having functional equipment for some time. Conversely, “pure economic loss” means there is no loss except the economic loss. Traditionally, the common law has offered little protection in negligence for a party’s economic losses, and there are still very few categories of pure economic loss that Canadian law recognizes.

The current recognized categories of pure economic loss are:

  • negligent misrepresentation or performance of a service;
  • negligent supply of shoddy goods or structures; and
  • relational economic loss.

The Court emphasized that, in order to recover a pure economic loss, whether or not the plaintiff fits into one of these existing categories matters less than the “proximity” of the relationship between the plaintiff and defendant. That turns on whether the defendant has “undertaken” some responsibility which invites reasonable and detrimental reliance by the plaintiff.

No duty of care owned by maple leaf as supplier to the appellants

The main issue for the Court to determine in this case was whether Maple Leaf as supplier owed the Appellants (as a class of franchisees) a duty of care in negligence for pure economic loss. Owing to the fact that the Appellants were franchisees (and former franchisees), Maple Leaf did not have any direct contractual relationship with them and was instead linked indirectly to them through a “chain of contracts” (Maple Leaf had an exclusive supplier contract with the franchisor and the franchisor had franchise agreements with its franchisees).

After closely examining the relationship between Maple Leaf as supplier and the Appellants as franchisees of the Mr. Sub chain, the SCC found that Maple Leaf did not owe a duty of care to the Appellants with respect to their pure economic loss arising from the recall.

This will have implications for future supplier-franchisee relationships, including the consideration of certain factors by the courts when determining whether a duty of care between a supplier and franchisee exists.

relevant factors considered by the scc in the franchisee-supplier relationship

In finding that Maple Leaf owed no duty of care to the Appellants as a class of franchisees, the SCC examined a number of factors related to the franchisee-supplier relationship between the parties. These include the SCC’s findings that:

  • The multipartite arrangement between Maple Leaf as supplier, the Appellants and Mr. Sub as franchisor comprised a chain of contracts that was typical of franchisor-franchisee relationships;
  • There was no direct contractual relationship between Maple Leaf and the Appellants;
  • An exclusive supply agreement between Mr. Sub and Maple Leaf required the Appellants to purchase deli meats produced by Maple Leaf through a distributor, and this requirement was included in the franchise agreement between the franchisor and the Appellants (“Franchise Agreement”);
  • The Franchise Agreement provided that the Appellants could not sue Mr. Sub for delays in the supply of the deli meats, and could not buy deli meats from alternate sources without first seeking Mr. Subs permission;
  • Significantly, despite the obligation on the Appellants to purchase their deli meats from Maple Leaf, Maple Leaf was under no corresponding obligation to supply to the Appellants;
  • There was no undertaking of responsibility by Maple Leaf directly to the Appellants on which the Appellants could reasonably and detrimentally rely. In other words, there was no “proximity” between Maple Leaf and the Appellants with respect to this kind of economic loss and, as such, no duty of care owed by Maple Leaf.
  • The Court was heavily influenced by principles of freedom of contract, including the freedom to allocate risk among contractual parties. Although the Franchise Agreement put the Appellants in a vulnerable position vis-a-vis the franchise relationship, the Appellants chose to operate as part of the Mr. Sub franchise and not as independent restaurants. In doing so, the Appellants secured advantages they could not have obtained on their own, including the use of the franchisor’s trademark (and the benefit of associated goodwill), an established and proven system of operation, training, co-operative advertising and marketing, and - significantly - the benefit of the franchisor’s buying power to secure better pricing for supplies;
  • Like any franchisee, the Appellants also assumed certain disadvantages by operating through a franchise, all of which are typically necessary to securing the advantages;
  • Although the Appellants were vulnerable to interruptions in supply caused by their suppliers, such vulnerability was not a basis for a duty of care. Rather, the SCC characterized this vulnerability of the Appellants as “an unremarkable incident of the franchise model of business in which the Appellants operated”[3]; and
  • Such “vulnerability” could have been addressed by the Appellants obtaining insurance - an option which was not pursued in this case.
Mitigating arrangements available to the parties

Considering the connection between contract law and negligence, one of the factors considered by the SCC in determining whether Maple Leaf should be liable in negligence to the Appellants was whether and to what extent contractual protections or remedies were available to the Appellants as franchisees.

The SCC commented that the reasonable availability of adequate contractual protections must be considered, and the failure to pursue available arrangements to mitigate or avoid damage can be fatal to pursuing a claim in negligence. Here, the Appellants had the option in the Franchise Agreement of seeking alternate sources of supply for the deli meats (subject to Mr. Sub approval). That right was sufficient for the Court to reject any duty of care, and the Court’s finding was furthered by the Appellants’ failure to avail themselves of that alternative.

Further legal considerations relevant to the franchisee-supplier relationship

This judgment, a 5-4 split between the Court, demonstrates that the law is far from settled in relation to claims in negligence for pure economic loss. The dissenting panel of four judges recognized a novel duty of care in this franchisee-supplier relationship, reasoning that it was “just and fair” to do so.[4]

Ultimately, although the majority of the Court in this case did not expand upon any existing categories of pure economic loss (or recognize a novel duty of care), it leaves open the possibility that a duty of care could be recognized for suppliers in distinguishing circumstances. For example, if a supply arrangement in a franchise relationship imposed a clear obligation on the supplier to the franchisees, the courts could potentially recognize a duty of care in negligence for the damages a franchisee may suffer due to supply interruptions.

This judgment also illustrates the importance of a party obtaining insurance where available in order to minimize damages due to supply chain interruptions, the importance and potential finality of the express or implied “allocation of risks” when entering into contracts, and the responsibility of a party to pursue any available arrangements to mitigate or avoid damages (such as the Appellants’ ability to seek out alternate sources of deli meats). In future cases, this consideration could potentially be a distinguishable factor for claims of pure economic loss.

 

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*This update is intended for general information only on the subject matter and is not to be taken as legal advice.

 

[1] 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 [Maple Leaf].

[2] Maple Leaf at para 17.

[3] Maple Leaf at para 89.

[4] Maple Leaf at para 101.

Topics: Insurance and Tort Liability

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