Pure economic loss is a crucial yet poorly understood concept in tort law that often arises in construction law. In basic terms, pure economic loss is loss of a financial nature not accompanied by physical damage to an individual or property. Courts have distinguished pure economic loss from loss “suffered as a consequence of conduct which causes, or was capable of causing, foreseeable personal injury to physical property damage”[i]. In the recent Supreme Court of Canada (“SCC”) decision of Maple Leaf[ii], the SCC confirmed there is no general right in tort protecting against the negligent or intentional infliction of pure economic loss, which the SCC defined as loss “unconnected to a physical or mental injury to the plaintiff’s person or physical damage to property”. The SCC in Maple Leaf also distinguished between dangerous and non-dangerous defects, and clarified whether a plaintiff can claim damages for defects that are not “dangerous”.
The Maple Leaf decision stems from a dispute between Mr. Sub franchisees and Maple Leaf Foods. In 2008, several franchisees were affected by Maple Leaf Foods’ decision to recall meat products that had been processed in one of its factories where an outbreak of listeria had occurred. Following the recall, the franchisees experienced a shortage of meat products for 6-8 weeks. At the time, the relationship between Mr. Sub and Maple Leaf was governed by an exclusive supply agreement pursuant to which Maple Leaf was made the exclusive supplier of ready-to-eat meat products served at all Mr. Sub locations. To give effect to this arrangement, the franchise agreement between Mr. Sub and the franchisees mandated that the franchisees purchase these meats exclusively from Maple Leaf. However, no contractual relationship existed between the franchisees and Maple Leaf directly.
A class action against Maple Leaf on behalf of the franchisees was certified, in which the franchisees claimed to have suffered economic loss and reputational injury due to their association with contaminated meat products, and advanced claims in tort law seeking compensation for past and future sales, past and future profits, capital value of the franchises, and goodwill. Maple Leaf unsuccessfully brought a motion for summary judgment dismissing these claims. The motions judge held that Maple Leaf owed the franchisees a duty to supply a product “fit for human consumption”, and that the contaminated meat products posed a “real and substantial danger” on which to ground a duty of care. Maple Leaf’s appeal was allowed, and the Court of Appeal found no duty of care was owed to the franchisees. The Court of Appeal determined the motion judge’s decision to allow the franchisees’ claims to proceed to a full trial was in error considering the SCC’s decision in Livent[iii], whereby the Court refined the legal test for proximity that the franchisees had not met in this case.
The SCC refined several key principles relating to pure economic loss in its decision that extend far beyond the supply chain relationship. First, the SCC confirmed the concept of legal “proximity” as the core analytical tool to determine whether a duty of care in negligence extending to pure economic loss exists. For such a duty to arise, the SCC confirmed there must be a meaningful relationship of proximity, consisting of conduct showing some express or implied undertaking to safeguard a particular interest, coupled with reasonable reliance on that undertaking by the plaintiff. Further, the contractual matrix, or lack thereof, between the parties to an action occupies a central role in the proximity analysis, and is ultimately determinative of whether a duty of care arises between commercial parties.
The SCC also confirmed three general categories of recognized pure economic loss between private parties:
1. negligent misrepresentation or performance of a service;
2. negligent supply of shoddy goods or structures; and
3. relational economic loss.
The SCC reiterated that a duty of care cannot be established merely by demonstrating a claim falls within one of these categories, as they are only analytical tools used by the courts. Thus, invoking one of these categories offers no substitute for the necessary examination into whether the parties in question were, at the time of the loss, in a sufficiently proximate relationship. The SCC emphasized that it is the proximity between the parties that remains the controlling concept of this analysis. Ultimately, the SCC concluded there was no proximate relationship between Maple Leaf and the franchisees.
In the context of construction law, the Maple Leaf decision upheld two important categories in which a claim of pure economic loss can foreseeably arise.
Negligent Misrepresentation or Performance of a Service.
The SCC, citing Livent, referred to the two factors determinative of whether proximity is established in cases of negligent misrepresentation or performance of a service: (1) the defendant’s undertaking; and (2) the plaintiff’s reliance on said undertaking. The proximate relationship necessary for a claim of pure economic loss is formed when the defendant undertakes a responsibility thereby inviting reasonable and detrimental reliance by the plaintiff on the defendant for that purpose. The reliance of the Plaintiff on the Defendant brings the two parties within the necessary relationship of proximity. This relationship of proximity, coupled with foreseeability of injury, meets the Anns/Cooper framework for a prima facie duty of care.
The SCC cautioned, as it did in Livent, that any reliance by the plaintiff which falls outside the scope of the defendant’s undertaking of responsibility also falls outside the scope of a proximate relationship, and by extension the duty of care.
Negligent Supply of Shoddy Goods or Structures
Prior to Maple Leaf, the first and only time the SCC considered a claim for pure economic loss arising from the negligent supply of shoddy structures was in the landmark decision of Winnipeg Condominium[iv]. Winnipeg Condominium stands for the proposition that a builder responsible for the negligent construction of a building resulting in a dangerous defect can be held liable to the subsequent owner(s) in tort for the cost of repairing the defect. Further, in these circumstances, the doctrine of caveat emptor does not apply to negate the building professional’s duty of care to subsequent owners.
This form of recovery is founded on the defendant’s negligent interference with the right to be free from injury to one’s person or property, and a breach of this duty exposes the defendant to liability for the cost of averting a real and substantial danger, but not just to repair a defect. The economic loss incurred in this scenario is that which is necessary to avert the danger.
The franchisees in Maple Leaf encouraged the SCC to extend this liability rule from Winnipeg Condominium to a duty owed to subsequent purchasers of meat and other products. However, the SCC declined, stating as these defects are not of real and substantial threat, these claims are better suited for the law of contract.
BC case law related to pure economic loss and construction
In addition to Maple Leaf, there are two notable, recent cases discussing pure economic loss in the context of construction law in BC. The first is Renascence Enterprises[v], wherein the plaintiffs brought a claim for damages against the structural engineer for defects in the parking area of the common property of the Strata, and alleged the structural engineer had negligently designed the parkade. However, the plaintiffs did not allege the defects in the parkade created a danger to the occupants or users of the parkade. The defendant brought an application to strike the plaintiffs’ claim on the basis the claim was one for pure economic loss, and was accordingly barred because there were no allegations the deficiencies claimed were dangerous. The court, citing evidence that there was no danger posed by the alleged defects, coupled with the failure to allege the existence of a dangerous defect, struck the claim.
The second notable decision is Globalnet Management Solutions[vi]. Here, the plaintiff brought an action for negligence and breach of contract. The plaintiff’s claim in negligence was that the negligent construction of the roof and retaining walls of the building posed a real and substantial danger to the occupants, which the defendants disputed. The trial judge found breach of contract and negligence were proven and agreed the defects in the retaining wall constituted a danger to the occupants of the house, and that the remedial steps taken by the Plaintiff were reasonable; however, the trial judge ultimately denied recovery against the defendants because the plaintiff had been under no obligation to pay the remediation expenses to repair the property, as it had not owned the property when the costs were incurred and it had received market value on the sale of the property to the trusts. The trusts were also found to have suffered no loss because they received a property that was, following the remedial repairs, defect-free. Accordingly, the trial judge found the plaintiff’s expenses to repair the property were not recoverable.
On appeal[vii], the Court held that the trial result was contrary to the central aim of the law of negligence to protect against unreasonable risks to the safety of people and property. As the defects in the building were in fact dangerous to its occupants, the trusts, as subsequent purchasers of the building, could hold the wrongdoers liable in negligence to the extent necessary to remove the danger. The Court found the trial judge erred in ruling that the appellants did not suffer loss by reason of the respondents’ negligence. Further, the repairs to the building were required to bring the building up to the standard it would have been but-for the negligence, and to prevent the building from being a dangerous defect to its subsequent owners and occupants. Accordingly, the Court overturned the trial decision and held the tortfeasors responsible for repairing the defects.
Conclusion
The SCC’s decision in Maple Leaf upheld and focused on two key categories of pure economic loss in construction. Further, while the SCC declined to expand the duty of care to repairing non-dangerous defects in building structures, it did expand the scope beyond structures to include goods. This decision underscored the SCC’s reticence to expand the narrow scope of this duty of care, and the high bar required to bring a successful claim in pure economic loss.
Written by Jeremy Ellergodt and articling student Logan Rogers.
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[i] Kripps v. Touche Ross & Co. (1992), 69 BCLR (2d) 62
[ii] 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35
[iii] Deloitte & Touche v. Livent Inc., 2017 SCC 63
[iv] Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 SCR 85
[v] The Owners, Strata Plan KAS 3575 v. Renascence Enterprises (Shannon Lake) Corp., 2017 BCSC 1136
[vi] Globalnet Management Solutions Inc. v. Aviva Insurance Company, 2017 BCSC 1580
[vii] Globalnet Management Solutions Inc. v. Cornerstone CBS Building Solutions Ltd., 2018 BCCA 303