Majority says duty of care to supply a product fit for human consumption was owed to customers
Maple Leaf Foods does not owe a duty of care for pure economic loss to Mr. Sub franchisees resulting from tainted meat sales during a 2008 listeriosis outbreak, the Supreme Court of Canada ruled on Friday.
In a 5/4 decision in 1688782 Ontario Inc. v. Maple Leaf Foods Inc., the Supreme Court upheld the Ontario Court of Appeal’s finding that a duty of care to supply a product fit for human consumption was owed to the franchisees' customers rather than to the franchisees.
Historically, the common law has not allowed for recovery for losses in negligence that were not consequences of physical injury or property damage, and the Supreme Court’s majority decision was consistent with this.
“Tort law will protect … the bodily integrity or the personal safety of consumers, or property damage,” says Elizabeth Bowker, a partner at Stieber Berlach LLP in Toronto who, with Steve Stieber, represented the respondents in the case. “But tort law is not necessarily going to [protect] the economic interests of other people in the marketplace where there's no undertaking to look out for those economic interests.”
This decision “is continuing [the] emphasis of the courts on protecting bodily integrity and property under tort law, and being reluctant to extend that too much into the economic loss realm.”
To determine whether a duty of care is owed in tort law, the court must decide whether there is sufficient foreseeability of harm, and sufficiently close and direct proximity in the relationship between a plaintiff and defendant.
In this case the majority found that there was insufficient proximity between the franchisees and Maple Leaf Foods to result in a duty of care. Maple Leaf Food’s contract to supply meats was with the franchisor Mr. Sub, and not with Mr. Sub’s franchisees.
The majority “applied a more restrictive approach towards a determination of proximity and found that … the test was not met in the circumstances of this case,” says Peter Kryworuk, a partner at Lerners LLP in London, Ont., who represented the appellant Mr. Sub franchisees.
“The four-judge minority would have found that Maple Leaf owed a duty of care to the franchisees who relied upon Maple Leaf to supply safe products to conduct their businesses, but the five-judge majority … basically said the franchisees could have protected themselves by contract or insurance.”
In May 2005, Maple Leaf Foods entered into a contract with the Mr. Sub chain, which agreed to buy its food items from Maple Leaf. The appellant is a franchisee of Mr. Sub, bound by the terms of its franchise agreement to buy exclusively from suppliers to Mr. Sub. The franchisees purchased the meat through the distributor, and there was no direct relationship between the franchisees and Maple Leaf.
In 2008 Maple Leaf learned of a listeria outbreak that contaminated its products, and issued a recall. Mr. Sub and other chains were affected by the publicity surrounding this, and claimed their sales were badly affected both during the outbreak and afterwards. A class action was then commenced against Maple Leaf on behalf of franchisees, who claimed to have suffered reputational and economic loss, and sought compensation for loss of past and future sales, profits, and good will.
Maple Leaf brought motion for summary judgment and said it owed franchisees no duty of care.
The motion judge found that Maple Leaf owed a duty of care to the franchisees, to supply a product fit for human consumption. The Ontario Court of Appeal overturned the decision. To prove negligence a plaintiff must show there is a foreseeability of injury, meaning that one can foresee one’s action will produce a certain negative outcome, and must show proximity: that a relationship is so close that one would expect one party to provide for the safety of the other.
The appellate court found that any duty to supply a product for human consumption was owed to the customers, not to the franchisees, so there was no proximity between the franchisees and Maple Leaf. It found that the motion judge did not consider that Maple Leaf’s undertaking of responsibility was not to protect the reputational interests of the franchisee, but to ensure customers did not fall ill. So, there was no foreseeability.
Established categories where pure economic loss is recoverable include negligent representation and a negligent supply of shoddy goods. In this case the Supreme Court looked to its 1995 decision in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., which recognized that recovery for economic loss in cases of negligent supply of shoddy goods or structures is founded on the defendant’s negligent interference with a right to be free from injury to one’s person or property.
“Whether … one is considering defects in a building structure or a good, it is the feasibility of discarding the thing as the means of averting the danger which will determine whether the plaintiff’s loss is recoverable,” wrote Justices Russell Brown and Sheilah Martin for the majority.
“We reiterate that a breach of the duty recognized in Winnipeg Condominium exposes the defendant to liability for the cost of averting a real and substantial danger, and not of repairing a defect per se.”
No one became ill from eating contaminated meat at a Mr. Sub restaurant, and just two of the meats affected by the recall were used by Mr. Sub shops.
“The court in this case makes it clear that in some circumstances a plaintiff might be entitled to the cost of fixing a dangerous product, but if you can easily throw away the product, then there's really no damages,” says Bowker. “It does show that Winnipeg Condominium is still good law for economic loss that could cause danger to property or to persons’ bodily integrity.”
The minority of the court, in reasons written by Justice Andromache Karakatsanis and agreed in by Chief Justice Richard Wagner and Justices Rosalie Abella and Nicholas Kasirer, indicated that while the traditional test for pure economic loss was based on a relationship between parties — or proximity — it was appropriate to create a new category of claim where a duty of care exists, says Kryworuk.
“Maple Leaf submits that imposing a tortious duty of care in this case would have a negative impact on the Canadian marketplace,” wrote Justice Karakatsanis for the minority, “in that manufacturers would be liable for the economic losses of anyone in their supply chain upon a recall and thereby risk indeterminate potential loss. I disagree that this duty would so disrupt the marketplace and raise the spectre of indeterminate liability for manufacturers. The value and temporal scopes of the franchisees’ damages are limited to economic losses caused by reasonably foreseeable consumer responses to an identifiable safety concern about a particular type of product during a particular period of time. In my view, such a narrowly defined duty of care would remove the time and value indeterminacy that might otherwise arise for this type of claim. And, importantly, the class indeterminacy here is virtually eliminated. The duty does not capture any down-the-line merchant of Maple Leaf products, but rather a branded Mr. Sub restaurant in a context where Maple Leaf contracted with Mr. Sub. Put more generally, it captures franchisees bound to use an exclusive supplier for a product on which their business and identity is predicated.”
The minority opinion addressed the “power imbalance and loss of control that exists in a franchise context,” says Kryworuk, and held that a new category for a duty of care for pure economic losses was established. Franchisees are small business owners, often in business for themselves for the first time.
The majority doesn’t disagree that franchisees were vulnerable, says Bowker, but franchisees realized benefits from their position, including discounted prices on products through the franchisor, the Mr. Sub chain. Other options for the franchisees, says Stieber, were to ensure that their franchisor would be responsible for them — to compensate them in such circumstances — and for the franchisor to itself have obtained protection from Maple Leaf Foods.
Based on this decision, there will have to be greater consideration given by franchisees in negotiating contracts with larger franchisors “to create additional protections for them, or alternatively, [to] find insurance to cover this kind of loss, which is probably not available for very many of the small businesses here,” says Kryworuk.
“So, it will have a profound impact on product liability and franchise law in Canada moving forward, in my view.”
