If you don’t operate a meat processing plant or a sandwich franchise, you might think that the Supreme Court’s recent decision in 1688782 Ontario Inc. v. Maple Leaf Foods Inc. does not affect your business. That is a mistake.
The Maple Leaf Foods case had the potential to expand tort liability for business activity far beyond its historical scope. Four Supreme Court judges endorsed such an expansion. Fortunately, the majority in this 5-4 decision disagreed, and instead maintained the rule that “pure economic loss” caused by negligence can only be collected in a relatively narrow set of circumstances.
Despite the narrow majority win, Maple Leaf Foods provides a clear lesson for businesses as they head into 2021: comprehensive contracts governing your obligations remain the best way to protect against tort liability.
Torts and economic loss
Every law student remembers learning about Donoghue v. Stevenson, the House of Lords’ 1932 decision about a snail in a bottle of ginger beer. Donoghue stood for the idea that manufacturers have a duty of care to their ultimate consumer of their products, not just those parties with whom they are connected by contract. It did so by establishing a general principle that a duty of care could be applied to anyone who could be foreseeably affected by negligent conduct. This idea—sometimes called the “neighbour principle”—is the foundation for almost all modern negligence law. It is now (inelegantly) known as the “Anns/Cooper test” and it requires the court to ask two questions to establish a novel duty of care: first, are the parties in a sufficiently proximate relationship that one party’s actions could foreseeably harm the other’s interest; and second, are there any policy reasons why a duty should not be imposed even if the parties are sufficiently proximate?
Determining whether the sufferer should be reimbursed by the careless is at the heart of a negligence case.
Like many common law concepts, the “neighbour principle” and the Anns test raise more questions than answers. One of the questions that courts still struggle with today is what kind of harms should be compensable as a result of negligent conduct. Donoghue is itself related to physical injury. The principle was readily extended to property damage. But the question that has given the courts the greatest difficulty is when liability for negligence should be extended to so-called “pure economic loss”—that is, when should one person’s careless conduct result in liability for losses that do not flow from an underlying injury to a person or property? Although this sounds like a technical legal question, its consequences are quite far-reaching for businesses, as the Maple Leaf Foods case demonstrates.
Background to the Maple Leaf Foods case
In 2008, Maple Leaf Foods suffered a listeria outbreak in one of its manufacturing plants, resulting in a national recall of processed meats. At the time, Maple Leaf had an exclusive supply contract with Mr. Submarine for certain meat products. In turn, Mr. Sub franchisees were required to purchase Maple Leaf products under their individual franchise agreements, but had no privity of contract with Maple Leaf itself. As a result of the outbreak and recall, the franchisees claimed to have suffered business and reputational harm from the lack of supply and the association with contaminated products. They commenced a class action to collect those losses from Maple Leaf, alleging that it had been negligent and failed to provide goods fit for human consumption. Maple Leaf opposed certification and brought a summary judgment motion to have the claim dismissed on the basis that it owed the franchisees no duty of care and, alternatively, that the pure economic losses suffered by the franchisees were not the type that could be collected under tort law. The motion court declined to strike or summarily dismiss the claim, but the Court of Appeal overturned.
Recovery for pure economic loss in tort
One of the reasons assigning liability for pure economic loss in tort is controversial is because it can circumvent the more traditional mechanism by which parties allocate economic risks, i.e., contracts. Contracts require parties to specifically turn their mind to their rights and obligations as against one another. The law of negligence developed with a certain anxiety that it not supplant the voluntary private ordering that contracts allow, which is why Donoghue was initially so controversial. However, the impetus behind the evolution of negligence law—responding to situations where someone’s careless conduct has caused someone else to suffer loss—has a certain appeal. Determining whether the sufferer should be reimbursed by the careless is at the heart of a negligence case.
Although it was framed in a number of different ways, the question for the Supreme Court in Maple Leaf Foods was whether the rule against pure economic loss had outlived its usefulness as a limit on recovery in tort. There is no doubt that the law as it stood was confusing and difficult to apply. The Court had previously indicated that economic losses could be collected if they fell into one of three categories: (1) negligent misrepresentation or performance of a service; (2) negligent supply of shoddy goods or structures; and (3) so-called “relational” economic loss. The Mr. Sub franchisees argued that their losses were covered by both categories (1) and (2).
Maple Leaf Foods: the outcome
The majority of the Supreme Court confirmed that the franchisees could not collect their business losses from Maple Leaf. It held that the correct starting point for evaluating whether economic loss is recoverable is the existence of a duty of care—i.e., the “proximity” analysis. This remains an absolute pre-requisite to liability, regardless of whether the losses fit into one of the three previously articulated categories.
The majority reasoned that any undertaking made by Maple Leaf about its meats being safe and fit for human consumption was made to end-consumers (i.e., the public), not to “commercial intermediaries” like Mr. Sub franchisees.
The majority reiterated its prior holding that in the context of a negligent misrepresentation, proximity arises from the defendant giving an undertaking and the plaintiff relying on it. In this case, the majority reasoned that any undertaking made by Maple Leaf about its meats being safe and fit for human consumption was made to end-consumers (i.e., the public) not to “commercial intermediaries such as … the franchisees.” Because the franchisees’ business interests lay outside of the purpose of the undertaking, there was no proximate relationship. Moreover, the franchisees could not establish reliance since the undertaking would not have changed their position: they were required by their franchise agreements to purchase Maple Leaf products.
The plaintiffs’ argument that this case fell into the “negligent supply of shoddy goods” category was also rejected. The majority reiterated that that duty is narrow and predicated on the plaintiff’s establishing a “real and substantial danger” of “personal injury or damage to other property.” Although there was a clear risk to consumers, the tainted meat posed no risk to franchisees, and in any event, the risk was eliminated by the recall.
Finally, the majority asked whether this was a circumstance where the court should recognize a novel duty of care. Its Anns/Cooper analysis turned heavily on the contracts between the franchisees, Mr. Sub, and Maple Leaf, and in particular, the policy concern that contracting parties should not circumvent a voluntary allocation of risk by deploying tort claims: the franchisees could have, but did not, protect their interests through contract, and instead agreed to Maple Leaf as their exclusive supplier of the meat products. Because of the contractual arrangements, the majority concluded that there was insufficient proximity between the franchisees and Maple Leaf. This was a significant point of departure for the four dissenting judges, who thought that the nature of the business relationship and the franchisees’ lack of bargaining power justified imposing a duty of care.
Tort law often seems like a black box, and the box is never more opaque than in economic loss cases. Trying to find consistent trends or principles is remarkably difficult. That said, Maple Leaf Foods provides a clear lesson for businesses, which is that a comprehensive series of contracts governing your obligations is the best way to protect against tort liability. That said, there is no guarantee that this 5-4 decision will come out the same way the next time such an issue is before the Court.
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