Unless you’re running a meat processing plant or sandwich franchise, you might think that the recent Supreme Court ruling of 1688782 Ontario Inc. v Maple Leaf Foods Inc. won’t affect your business. This is a mistake.
The Maple Leaf Foods case had the potential to extend tort liability for business activities well beyond its historical framework. Four Supreme Court justices advocated such an extension. Fortunately, the majority in this 5-4 decision disagreed and instead kept the rule that “sheer economic loss” caused by negligence can only be recovered in relatively narrow circumstances.
Despite the narrow majority win, Maple Leaf Foods offers companies a clear lesson as they head into 2021: Comprehensive contracts on your obligations remain the best way to protect yourself from tort.
Pies and economic loss
Every law student remembers Donoghue v. Stevenson, the 1932 House of Lords decision on a snail in a bottle of ginger beer. Donoghue stood for the idea that manufacturers have a duty of care towards the end user of their products, not just towards the parties with whom they are contractually related. It did this by establishing a general principle that due diligence could be applied to anyone who could foreseeably be affected by negligent behavior. This idea – sometimes referred to as the “neighbor principle” – is the basis for almost all modern negligence laws. It is now (inelegantly) known as the “ldquo; Anns / Cooper test,” and it requires the court to ask two questions in order to establish a novel due diligence: First, the parties are in a sufficiently close relationship that the acts making one party predictable could harm the interests of the other; and second, are there political reasons why a duty should not be imposed even when the parties are sufficiently close together?
The decision as to whether the person concerned should be reimbursed by the careless is the focus of a negligence case.
Like many common law concepts, the “neighbor principle” and Anns test raise more questions than answers. One of the questions that courts still grapple with today is what kind of damage should be compensated for by negligent behavior. Donoghue has itself been linked to physical injuries. The principle was easily extended to property damage. The question that has given the courts the greatest difficulty, however, is when should liability for negligence be extended to so-called “sheer economic loss”, that is, when a person’s negligence should lead to liability for losses that do not arise from a person Underlying results in injury to a person or property? While this sounds like a technical legal issue, the ramifications for businesses are far-reaching, as the Maple Leaf Foods case shows.
Background to the Maple Leaf Foods case
In 2008, Maple Leaf Foods suffered a listeria outbreak at one of its manufacturing facilities that resulted in a national processed meat recall. At the time, Maple Leaf had an exclusive supply contract with Mr. Submarine for certain meat products. In return, Mr. Sub’s franchisees had to purchase Maple Leaf products under their individual franchise agreements, but had no contract with Maple Leaf. As a result of the outbreak and the recall, franchisees said they had suffered business and reputational damage from the lack of supplies and the association with contaminated products. They filed a class action lawsuit to recover those losses from Maple Leaf. They claimed it was negligent and failed to deliver goods fit for human consumption. Maple Leaf declined certification and filed a summary judgment motion to dismiss the lawsuit on the grounds that it owed no duty of care to franchisees and that the sheer economic losses suffered by franchisees were not the kind that could be confiscated under tort. The appellate court declined to strike or simply dismiss the action, but the appeals court overturned.
Recovery for pure economic tortious losses
One of the reasons for assigning liability for purely economic tort loss is controversial because it can circumvent the more traditional mechanism by which parties assign economic risk, i.e. contracts. Contracts require the parties to expressly oppose their rights and obligations. The law of negligence developed with a certain concern that it was not intended to replace the voluntary private ordering that contracts allow, which is why Donoghue was so controversial at first. However, there is some appeal to the impetus for developing the Law of Negligence, which responds to situations where someone’s careless behavior has resulted in loss. The decision as to whether the person concerned should be reimbursed by the careless is the focus of a negligence case.
Though framed in various ways, the question for the Supreme Court at Maple Leaf Foods was whether the pure economic loss rule had outlived its usefulness as a tort recovery limit. There is no doubt that the law in force was confusing and difficult to apply. The Court had previously indicated that economic losses could be recovered if they fell into one of three categories: (1) negligent misrepresentation or the provision of a service; (2) negligent delivery of substandard goods or structures; and (3) so-called “relational” economic loss. Mr. Sub’s franchisees argued that their losses were covered by both categories (1) and (2).
Maple Leaf Foods: the result
A majority in the Supreme Court confirmed that the franchisees could not collect their business losses from Maple Leaf. The correct starting point for assessing whether an economic loss is recoverable is the existence of a duty of care, ie the “proximity” analysis. This remains an indispensable condition for liability, regardless of whether the losses fit into one of the three previously formulated categories.
The majority justified this by stating that any promise by Maple Leaf that the meat was safe and fit for human consumption was addressed to end users (ie the public) and not to “commercial intermediaries” such as Mr. Sub’s franchisees.
The majority reiterated their previous finding that in the context of negligent misrepresentation, proximity arises from the defendant giving a promise and the plaintiff relying on it. In this case, the majority argued that any promise by Maple Leaf that its meat would be safe and fit for human consumption was made to end users (i.e. the public) rather than “commercial intermediaries such as franchisees”. Since the business interests of the franchisees were outside the corporate purpose, there was no direct relationship. In addition, the franchisees could not rely on it because the company would not have changed their position: they were required by their franchise agreements to buy Maple Leaf products.
Plaintiffs’ argument that this case falls under the category of “negligent supply of substandard goods” was also rejected. The majority reiterated that this obligation is narrow and is based on the plaintiff establishing a “real and significant risk” for “personal injury or damage to other property”. While there was a clear risk to consumers, the spoiled meat posed no risk to franchisees and in any case the recall eliminated the risk.
Finally, the majority asked whether this was a circumstance under which the court should recognize a novel duty of care. The Anns / Cooper analysis made heavy reference to the contracts between the franchisees, Mr. Sub and Maple Leaf, and specifically to the political concern that contracting parties should not circumvent voluntary risk sharing by using tort claims: the franchisees could protect you however, did not contract their interests and instead agreed to Maple Leaf as the exclusive supplier of the meat products. Based on the contractual arrangements, the majority came to the conclusion that the proximity between the franchisees and Maple Leaf was insufficient. This was an important starting point for the four dissenting judges, who felt that the nature of the business relationship and the franchisees’ lack of bargaining power justified the exercise of due diligence.
Tort law often appears like a black box, and the box is never more opaque than in cases of economic loss. It is remarkably difficult to find consistent trends or principles. Even so, Maple Leaf Foods offers a clear tenet for businesses: A comprehensive set of contracts that govern your obligations is the best way to protect yourself from tort. However, there is no guarantee that this 5-4 decision will be made the same the next time such a matter comes before the Court.
The content of this article is intended to provide general guidance on the subject. A professional should be consulted about your particular circumstances.