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Can An Owner Sue A Subcontractor in Negligence? The Supreme Court Decision In 1688782 Ontario Inc. v. Maple Leaf Foods Inc. Suggests the Answer Will Usually Be “No”

Where there is no privity of contract, an action in negligence is usually the avenue by which parties will advance claims. At times, these claims seek to recover pure economic losses. In 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35, the Supreme Court narrowed the scope of pure economic loss and provided further guidance as to when that loss may be recovered. In this 5-4 split decision, the Supreme Court found no duty of care was owed to the plaintiffs by Maple Leaf Foods as the relationship lacked the requisite proximity either within the existing categories or to establish a new category of duty of care. The Supreme Court also opined that where parties could have entered into a contract to allocate the risk between themselves, but elected not to, it would generally be unfair to permit them to circumvent this deliberate decision and recover in negligence.

What is the significance of this case to construction law? Consider a situation where there is no privity of contract between an owner and subcontractor. The subcontractor delays the project. Can the owner claim against the subcontractor in negligence for pure economic loss and recover damages for delay? The answer, following Maple Leaf Foods, is likely “no”: on most projects, and for most owner-subcontractor relationships, there is unlikely to be the requisite proximity sufficient to establish a duty of care. Further, if the owner wanted to have an avenue to claim against the subcontractor, it could have entered into a direct agreement with it (effectively turning the subcontractor into a contractor).

1688782 Ontario Inc was a former franchisee of Mr. Sub and the class representative of 424 other Mr. Sub franchisees. Mr. Sub and Maple Leaf Foods had agreed to an exclusive supply agreement which made Maple Leaf the exclusive supplier of 14 core Mr. Sub menu items: ready-to-eat (RTE) meats served in all Mr. Sub restaurants.

The franchisees were bound to this exclusive supply agreement as part of their franchise agreements with Mr. Sub. However, there was no direct – and no contractual – relationship between the franchisees and Maple Leaf Foods. The franchisees placed an order with a distributor, which would in turn place an order with Maple Leaf Foods.

In 2008, Maple Leaf Foods learned that one of its products had been found to contain listeria. As a result, Maple Leaf Foods recalled several products, which included two of the RTE meat products used by the franchisees. Maple Leaf Foods also released Mr. Sub from the exclusive supply arrangement. By mid-September 2008, an alternate supplier had been selected.

In deciding to recall these products, Maple Leaf Foods interrupted an important source of supply to the franchisees and left them without those products for six to eight weeks. Consequently, the franchisees advanced a claim in tort law against Maple Leaf Foods, seeking compensation for lost past and future sales, past and future profits, capital value of the franchises and goodwill. The franchisees alleged that Maple Leaf, as a manufacturer, owed them a duty of care to supply a product fit for human consumption.

The franchisees argued that their claim fell within two categories of proximity that have been previously recognized when it comes to pure economic loss: negligent misrepresentation or performance of a service; and the negligent supply of shoddy goods or structures. The franchisees also advanced a claim for a novel duty of care in the alternative.

Maple Leaf Foods simply maintained that it owed no duty of care to the franchisees and therefore was not liable for the harms suffered. Maple Leaf Foods brought a motion for summary judgement to dismiss these claims.

The franchisees were initially successful. In the Ontario Superior Court, the motions judge held that Maple Leaf Foods owed a duty of care to the franchisees. The judge also found that the contaminated RTE meats posed a “real and substantial danger” as in Winnipeg Condominium Corporation No. 36 v. Bird Construction.

The Ontario Court of Appeal allowed the appeal and granted summary judgement in favor of Maple Leaf Foods. It found the cases relied upon by the motion judge to not be truly analogous to the franchisees’ claims and held that the motion judge erred in finding that the facts in this case fell within a well-established category of duty to supply a product fit for human consumption. It was therefore necessary to review the motion judge’s conclusion under the Anns-Cooper framework regarding a novel duty of care.

On the Anns-Cooper framework, the Court of Appeal found that the alleged damages were the result of the recall and the consequent bad publicity. Recognizing a duty here would have been an unwarranted expansion of a duty owed to one class of plaintiffs, the customers, to the fundamentally different claim advanced by the franchisees. The court also found the motion judge erred in her conclusion regarding negligent misrepresentation by failing to consider the scope of the proximate relationship between the parties. The purpose of Maple Leaf Foods’ undertaking was to ensure customers would not become ill or die from eating RTE meat, not protecting the business or reputational interest of the franchisees.

The franchisees appealed to the Supreme Court of Canada, but were unsuccessful. In the majority decision, the Supreme Court reiterated that while pure economic loss may be recoverable in certain circumstances, there is no general right, in tort, protecting against the negligent or intentional infliction of pure economic loss. There are three categories of pure economic loss incurred between private parties that have been recognized by the court:

  1. Negligent misrepresentation or performance of a service;
  2. Negligent supply of shoddy goods or structures; and
  3. Relational economic loss.

These categories are analytical tools and by themselves do not replace the examination of the relationship between the parties. What matters is whether the requirements for imposing a duty of care are satisfied and, in particular, whether the parties were, at the time of the loss, in a sufficiently proximate relationship. The court analyzed the franchisees’ claims to see whether they fell in a recognized category or whether a novel duty of care should be recognized. For both of those inquiries, the court looked to the proximity between the parties.

The Court confirmed that both foreseeability of harm and proximity are required for a prima facie duty of care to be established under the Anns-Cooper framework. A party can find proximity based on a previously established or analogous category. But if none can be identified, there must be a full proximity analysis. The court also confirmed that in cases of negligent misrepresentation or performance of a service, the proximate relationship is formed when the defendant undertakes responsibility which invites reasonable and detrimental reliance by the plaintiff upon the defendant for that purpose.

The Court found that the franchisees had failed to establish that they relied reasonably, or at all, on Maple Leaf Foods’ undertaking that the RTE meats supplied were fit for human consumption. Reliance is manifested by the party changing its position and foregoing more beneficial courses of action. However, here there was no evidence of such a change and based on the exclusive supply agreement the franchisees could not have changed their position. They did not seek Mr. Sub’s permission to find alternate suppliers. Given that there was no reasonable reliance, there was no proximity established under this category.

The franchisees also sought to rely on the principles established in Winnipeg Condominium and argue that a duty of care existed because Maple Leaf negligently supplied shoddy goods. The Court agreed with the franchisees that this principle is not limited to buildings and structures, as was the case in Winnipeg Condominium. However, in recognizing that, the Court also stated that the scope of the duty recognized here is narrow and exposes the defendant to liability for the cost of averting a real and substantial danger, and not of repairing a defect. For most goods, unlike buildings, averting danger can be done by simply discarding the goods.

In this case, firstly the court found that any danger by the supply of the RTE meats could only be a danger to the ultimate consumer, not the franchisees. Even if there was a real and substantial danger, the most the franchisees could recover would be the cost to avert the danger. Secondly, any danger posed by the RTE meats evaporated when they were recalled.

The Court went on to conduct an analysis on whether the parties were in a relationship of proximity. The Court found that proximity could not be established by reference to a recognized category of proximate relationship and went on to conduct a full proximity analysis. The Court found no proximity: the franchisees had entered into the franchise agreement and obtained certain advantages and assumed certain risks. The fact that their franchise contract left them “vulnerable” was not a sufficient basis for a tort law duty. The court went on to say:

The appellant was not a consumer, but a commercial actor whose vulnerability was entirely the product of its choice to enter into that arrangement, and whose choice substantially informed the expectations of that relationship to which the proximity analysis must have regard. To allow the appellant to circumvent the strictures of that contractual relationship by alleging a duty of care in tort in a manner that undermines and even contradicts those strictures (in that the proposed duty would impose an obligation to supply upon Maple Leaf Foods whereas its agreement with Mr. Sub imposed no such obligation) would not only undermine the stability of such arrangements, but also of the appellant's particular arrangement, which was predicated upon an exclusive source of supply.

Therefore, the court found that the parties were not in a proximate relationship that would give rise to a duty of care, which also defeated a finding that there was a novel duty.

This case is significant to construction law as there is no contractual privity between many of the parties to a project. The Supreme Court’s decision will limit the ability of these parties to recover pure economic losses, outside of any presently established categories. So far, the courts have not recognized the “owner-subcontractor” relationship as one of these categories.

Maple Leaf Foods thus suggests that courts will be hesitant to allow a party who is not in a direct contractual relationship to bring negligence claims against another party in the contractual pyramid. To allow these types of claims would be akin to rewriting contractual distributions of risk and incorrectly imposing a duty of care in tort law, beyond the contract, which the parties almost certainly never contemplated.