December 23, 2020
You should, if you operate a business.
If you want protection from business financial losses caused by shoddy products, you better have a contract. That is the message that the Supreme Court of Canada is sending in 1688782 Ontario Inc. v. Maple Leaf Foods Inc.
This case arises out of the 2008 Listeria event, which forced Maple Leaf Foods to shut down and deep clean its major processing facility for cold cut meats. To consumers, this was a nuisance. To Mr. Sub franchisees this was a financial disaster, as their contracts with the parent company required them to use Maple Leaf products. However, the individual franchisees did not contract directly with Maple Leaf – they purchased from Mr. Sub. The franchisees commenced a class action against Maple Leaf for losses during the six to eight weeks they were shut down, plus additional losses due to loss of goodwill by being associated with the contaminated meats.
With no contract, they relied on tort law – the law of private wrongs, and in particular, the law of negligence.
A successful negligence action starts by requiring that the Defendant (Maple Leaf) owe a “duty of care” to the injured party. Maple Leaf sought to shut down the action right at this first stage of the test, and were successful.
Historically, the law did not allow for recovery of losses in negligence unless there was some sort of physical injury or property damage. There is no absolute bar against recovering pure economic loss, but if the fact situation is not similar to existing cases where a duty of care has been found to exist, the court considers whether or not the losses were foreseeable and whether “proximity” exists – a sufficiently direct connection between the losses and the Defendant’s conduct.
In this case, it was foreseeable that Mr. Sub franchisees would suffer losses due to tainted meat.
However, to the surprise of many, the Court found a lack of proximity – the absence of a direct contract prevents the franchisees from recovering their losses from Maple Leaf. This is surprising because one of the existing recognized categories for recovery was “negligent supply of shoddy goods or structures”.
However, this category has only been applied by the Supreme Court in one case, involving the defective construction of a condominium building. Since the builder had worked for the developer which sold the building, it claimed no duty of care. In that case, the court intervened, because everybody knew that the building was intended to be a condo, so the builder would know that the condominium corporation and unit owners would be the ultimate parties at risk. The builder’s actions put their property at risk, and tort law serves to protect property interests.
In the Maple Leaf case, a slim five judge majority of the Court decided that the factor which fits a claim into the category is not the manner of the loss, but the relationship between the parties. They reasoned that the relationship between the franchisees and Maple Leaf was too remote. There was no property interest at risk, just the profit interest. The judges reasoned that the franchisees as “commercial actors”, not consumers, could and should have better protected themselves through contract.
Four judges dissented, arguing that the proposition that the franchisees had any power to alter the relationships was illusory. To anyone familiar with franchising, this rings true – franchisees are often vulnerable and lack bargaining power. Their franchise agreements prevented them from suing Mr. Sub, and they had no realistic ability to have contracted with Maple Leaf.
However, the majority ruled, and the lawsuit is over.
In addition to the general message about the limits of negligence as protection for economic losses, this case illustrates the importance of carefully considering the limitations of liability created by both your franchise agreement, and any surrounding circumstances over which you as a franchisee may not have control. If you are considering investing in a franchise, having an experienced franchising lawyer review the agreement with you is a sold investment to reduce the risk of future disappointment. Franchising can be a wonderful opportunity for many, but the proliferation of franchisee lawsuits illustrate that many people go into it without their eyes open.
More broadly, the Court’s very narrow reading of the extent of the protection that tort law offers for loss of profit:
- increases the vulnerability of all those who are not in a position to protect themselves through contract.
- emphasizes the importance of taking any opportunity to obtain contractual protection that exists.
- Illustrates the importance of excellent risk assessment and risk management in your business.
And a footnote: purchasing business interruption insurance may not help you, as standard policies require physical damage to property before they reimburse lost profits. If you wish to buy insurance to manage the sort of risk seen in this case, you will need to purchase a policy that covers the specific risk.