Supreme Court of Canada clarifies the law of tort for pure economic losses and highlights the necessity of contracts

In 1688782 Ontario Inc. v. Maple Leaf Foods Inc. 2020 SCC 35, the Supreme Court of Canada concluded that franchisees could not make a claim against a supplier, Maple Leaf Foods, for the purely economic losses caused by potentially contaminated meats because they had not entered into a contract directly with Maple Leaf and Maple Leaf never undertook to provide them with edible meats.

The Plaintiffs were franchisees of Mr. Sub. Under the franchise agreement, the franchisees were only allowed to purchase meat from the defendant unless they had Mr. Sub’s permission. While Mr. Sub had entered into a contract with the defendant to supply the meats to the franchisees, none of the franchisees had a direct contractual relationship with the defendants.

In 2008, the defendant recalled some products after learning that they might be contaminated by listeria. The franchisees were required to dispose of the contaminated products and, for some weeks, they had difficulty finding replacements. The Plaintiffs sued the defendants for the economic losses they sustained as a result of the recall.

As the Plaintiffs never entered into any contracts with the defendants, their claim was that the defendant committed a “tort”. Tort law was traditionally intended to compensate for injuries to a person or property. While the Courts have expanded this somewhat, there are still limited instances where a plaintiff can sue for pure economic losses. Currently there are only three recognized categories of purely economic loss against private entities that can be compensated in tort:

(1)  negligent misrepresentation or performance of a service;

(2)  negligent supply of shoddy goods or structures; and

(3)  relational economic loss.

However, falling within these categories does not end the analysis. Even where a plaintiff sues for one of these types of loss, they must still establish a duty of care – in other words a sufficiently proximate relationship.

A majority of the Supreme Court did not believe there was sufficient proximity between the plaintiffs and the defendant.

The Court concluded that in the case of negligent misrepresentation or negligent performance of a service, the hallmark of a proximate relationship was that there was some undertaking by the defendant to the plaintiff in relation to the alleged breach and that a duty of care would only exist within the scope of that undertaking. The Court recognized that there would be a duty of care owed by the defendant to the end consumer, who relies on the manufacturer to produce safe food products that will not make them ill, but there was no such undertaking made to the vendors of those products.

Turning to the category of economic loss in cases of negligent supply of shoddy goods or structures, the Court concluded that this only extended to the costs of averting the danger. In this case, once the vendor was aware of the recall and disposed of the products, no one was at risk from the products; the danger was averted. As such, the plaintiffs could not seek damages for lost sales

The Court also did not believe that the plaintiffs could establish a new duty of care beyond those above.  The court has traditionally respected the rights of commercial entities to enter into whatever agreements they want, regardless of how improvident. So, it is perhaps not surprising that the Court was reluctant to allow the plaintiffs to obtain rights in tort that they had not agreed to contractually. The only contract that required the Plaintiffs to purchase Maple Leaf’s meat was the contract between the franchisees and Mr. Sub. The defendant was not a party to that agreement and had never agreed to provide the products to the franchisees.

While this clarifies the rights of parties in tort, this decision really highlights the necessity of contracts. If parties want to ensure that their financial interests are protected, they should be protecting themselves with a direct contractual relationship. In the case of franchisees, they cannot necessarily rely on contracts that the franchisor enters into with other parties.