SCC Rules No Duty of Care Between Manufacturers and Commercial Intermediaries for Economic Losses

November 13, 2020

In 1688782 Ontario Inc. v. Maple Leaf Foods Inc. et al., 2020 SCC 35, the Supreme Court of Canada held that Maple Leaf owed no duty of care to the Mr. Sub franchisees for economic losses that occurred after a 2008 product recall that left Mr. Sub restaurants without their exclusive supply of meat for up to eight weeks.

Summary

  • The Court ruled that the duty of care between manufacturers and consumers does not extend to commercial intermediaries in the context of pure economic loss.
  • The 5-4 majority endorsed that the right to recovery in tort for pure economic loss remains limited, and the imposition of a duty of care to enable such recovery will be predicated largely on proximity.
  • As it concerns commercial actors, including those in multipartite arrangements, the Court will exercise restraint in disrupting allocations of risk which are or reasonably ought to have been contemplated in contract.

Background

In 2008, Maple Leaf Foods (the “Manufacturer”) voluntarily recalled meat products across Canada following a listeria outbreak at one of its processing centers. At the time, the Manufacturer was party to an exclusive supply agreement with Mr. Sub (the “Franchisor”) and, indirectly, Mr. Sub franchise locations (the “Franchisees”) pursuant to which it was the exclusive supplier of ready-to-eat (“RTE”) meats to all Mr. Sub restaurants. The recall caused a shortage of product for six to eight weeks. The Franchisees brought a class action against the Manufacturer seeking compensation for economic loss and reputational injury.

Decision of the Motion Judge

The motion judge held that the Manufacturer owed a duty of care to the Franchisees for economic losses. The motion judge found that a “special relationship” existed between the Manufacturer who represented that its supply of RTE meats were fit for human consumption and the Franchisees who relied upon this representation. The motion judge also conducted a novel duty of care analysis, determining that the foreseeability-based test in Anns v. London Borough of Merton (“Anns”), as refined in Cooper v. Hobart (“Cooper”) had been satisfied on the factual matrix of the case.

Decision of the Court of Appeal for Ontario

The Court of Appeal held that the motion judge erred in establishing that a duty of care existed between the parties. The Court reasoned that such a finding could not withstand the reframed analysis for the claims of negligent misrepresentation and negligent supply of dangerous or shoddy goods in Deloitte & Touche v. Livent Inc. (Receiver of) (“Livent”).

The Court of Appeal held that recognizing a duty between the Franchisees and Manufacturer would constitute an “unwarranted expansion of a duty” owed strictly to the consumers of the RTE meats and would have the effect of “bootstrapping it” to a fundamentally different class – the Franchisees.

Supreme Court Analysis

A 5-4 majority at the Supreme Court held that the Manufacturer did not owe a duty of care to the Franchisees for the protection of purely economic interests. 

Negligent misrepresentation and negligent performance of a service

Justices Brown and Martin, writing for the majority, clarified the analytical framework for determining pure economic losses through negligent misrepresentation and negligent performance of a service, which is largely predicated on proximity analysis. In doing so, the majority found that two factors are determinative of proximity:

  • the defendant’s undertaking; and
  • the plaintiff’s reliance on that undertaking.

A proximate relationship will be formed when a defendant undertakes responsibility, which invites reasonable and detrimental reliance by the plaintiff for that purpose. Any reliance outside the scope of the undertaking will necessarily fall outside the scope of the proximate relationship as it is not reasonably foreseeable.

To this end, the majority held that any undertaking by the Manufacturer to supply meat fit for human consumption had been made solely to the ultimate consumer – not to commercial intermediaries like the Franchisees.

Negligent supply of shoddy or dangerous goods

Justices Brown and Martin found that in cases arising from the negligent supply of shoddy goods, the presence of danger remains the linchpin of the analysis, in line with earlier jurisprudence of the Supreme Court of Canada in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co. (“Winnipeg Condominium”).

The majority held that any danger posed by the supply of RTE meats was to the ultimate consumer alone. Consequently, there was no basis for the Franchisees to claim for economic loss as there had been no interference with their rights. The Franchisees could not “bootstrap” their claim to the rights of consumers. In any event, any such danger posed by the RTE meats evaporated when they were recalled and destroyed.

The majority noted that this analysis conformed to the old Anns test and needed to be refined to account for developments in the law governing negligence actions following Cooper and Livent, and to distinguish more clearly between proximity and reasonable foreseeability.

Proximity and duty of care

Justices Brown and Martin endorsed existing jurisprudence for assessing proximity, which requires determining whether the nature of the relationship between the parties is sufficiently “close and direct” that it would be “just and fair” to impose a duty of care in law. This determination follows a two-step analysis:

  • whether proximity can be established on the basis of an existing or analogous category of proximate relationship, or
  • where no existing or analogous proximate relationship can be identified, whether it can be established on a full proximity analysis.

Analogous category of proximity

The Franchisees sought recognition of a duty of care for pure economic loss arising from negligent manufacture and supply of a dangerous product, effectively invoking the liability rule previously recognized by the Supreme Court of Canada in Winnipeg Condominium.

Justices Brown and Martin emphasized that existing jurisprudence on the liability rule confers a duty of care strictly between manufacturers and consumers who are physically harmed by the manufacturer’s negligence. No such principle governs the relationship between manufacturers and intermediaries for economic loss, irrespective of how those losses arise. Accordingly, a proximate relationship between the Franchisees and Manufacturer could not be established on an existing or analogous category as no such category of proximity yet exists. 

Full proximity analysis

The majority affirmed that a full proximity analysis will require the courts to examine all relevant factors in the relationship between the parties, which may include the “expectations, representations, reliance, and the property or other interests involved” (citing to Anns/Cooper and Livent).

In this case, the proximity analysis was heavily informed by the multipartite risk allocation reflected in the contractual arrangements between the Franchisee, its Franchisor, and the Manufacturer. Specifically, the majority was cautious to recognize proximity within its duty of care analysis in a commercial transaction where there was a “clear tripartite understanding of where the risk is to lie”.

The majority identified two specific concerns which must be addressed in a proximity analysis where risk allocation has been previously contemplated by the parties in contract:

  • The “reasonable availability of adequate contractual protection within a commercial relationship” – including tripartite relationships – should militate strongly against the recognition of a duty of care. This includes circumstances in which it is open to contracting parties to address risk through contractual terms and voluntarily forego such protection; and
  • The actual allocation of risk through contractual terms by commercial parties who have “deliberately arranged their affairs” in contract should attract due consideration by the courts, and will weigh heavily against recognizing a duty of care in tort law.

With a view to these concerns, the majority concluded that any vulnerability alleged by the Franchisees in relation to the Manufacturer’s negligence was entirely a product of its own choice. First, the Franchisees had made the commercial decision to enter into “typical arrangements” between franchisee, franchisor and exclusive supplier, having regard to the advantages and disadvantages which flow from such an arrangement. Second, it was open to the Franchisee to seek alternative sources of supply following the listeria outbreak and voluntary recall of the affected meats, and it failed to do so.

Taken together, these circumstances militated against finding a proximate relationship between the Franchisee and Manufacturer, and thus, precluded recovery.

Dissent

While the dissenting judges agreed with the majority that the Franchisees’ claim did not fall within an existing category of economic loss, or an established or analogous relationship of proximity, they would have allowed the appeal and imposed a novel duty of care on the Manufacturer. Justice Karakatsanis, writing for the dissent, found that there was a proximate relationship between the Manufacturer and Franchisees as defined by the Franchisees’ dependency on the Manufacturer as the exclusive supplier of meats for their restaurants. Further, Justice Karakatsanis noted that the commercial sophistication and bargaining power of the parties attracted due consideration, and the contractual matrix strengthened the Franchisees’ claim to a duty of care. 

Implications

The majority decision in Maple Leaf is a cautionary tale to commercial actors in multipartite relationships, particularly for the allocation of liability in the supply chain. The Supreme Court has made it clear that proximity reigns supreme, and a duty of care between a manufacturer and ultimate consumer will not extend to commercial intermediaries absent evidence that such a duty was contemplated between parties.

To this end, the Maple Leaf decision confers a greater deference to risk allocation in contract than previously seen in tort. It requires commercial parties to take stock of their supply chain contracts to ensure their obligations and entitlements are more comprehensively defined. Notably, where it is reasonably possible for parties to allocate risks in contract by incorporating necessary protections in contractual terms, they should make efforts to do so. Failure to take reasonable steps to mitigate risks through contract will militate strongly against allowing recovery in tort.

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