Recovery for Pure Economic Loss: A Narrow Right of Recovery

by Iain Peck, Alanna Brogan | Oct 26, 2021

INTRODUCTION

A ‘pure economic loss’ is a financial loss suffered by a person or corporation which is not accompanied by bodily injury or property damage.

As a matter of common law, courts have historically limited recovery for pure economic losses to certain, defined, categories. The result was that smart plaintiff’s counsel would attempt to craft their client’s case to fit within one of the recognized categories; and, smart defence counsel would attempt to prove the plaintiff’s case did not fit within one of the recognized categories.

In 2020, the Supreme Court of Canada in a split 5-4 decision in 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 (“Maple Leaf”) provided guidance on the legal principals to be considered when a court is faced with the decision of whether, or not, to award damages for pure economic losses.

This article provides a brief historical recitation of categories of pure economic losses and canvasses several decisions which the courts have issued since the Maple Leaf decision was rendered last year.

WHAT IS PURE ECONOMIC LOSS?

The Supreme Court in Maple Leaf said the following about pure economic loss:

[17] As the lower courts recognized, the claims of the appellant and other Mr. Sub franchisees are for pure economic loss, in the form of lost profits, sales, capital value and goodwill. Pure economic loss is economic loss that is unconnected to a physical or mental injury to the plaintiff’s person, or to physical damage to property (Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860, at para. 34; DAmato v. Badger, 1996 CanLII 166 (SCC), [1996] 2 S.C.R. 1071, at para. 13; Saadati v. Moorhead, 2017 SCC 28, [2017] 1 S.C.R. 543, at para. 23). It is distinct, therefore, from consequential economic loss, being economic loss that results from damage to the plaintiff’s rights, such as wage losses or costs of care incurred by someone physically or mentally injured, or the value of lost production caused by damage to machinery, or lost sales caused by damage to delivery vehicles.[1]

THE HISTORIC CATEGORIES

Prior to the Maple Leaf decision being issued, common law courts had generally outlined certain categories of claims where claims for pure economic loss might be allowed. Three of those categories are:

(1) negligent misrepresentation or performance of a service;

In Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, Livent’s personnel had committed fraud by manipulating the company’s financial records to make it appear more profitable than it was to attract investment. Livent’s receiver sued the company’s auditor arguing it had breached the duty of care it owed by failing to detect and expose the fraud. The receiver argued that Livent had relied on the auditor’s representation of Livent’s financial health and continued operations, artificially extending the company’s life and causing its assets to disappear. The Supreme Court of Canada split 4-3 in awarding damages for some of the company’s financial losses caused by an audit which was negligently performed.

(2) negligent supply of shoddy goods and structures; and,

A good example of this category is the Supreme Court of Canada’s decision in Winnipeg Condominium Corp. No. 36 v. Bird Construction Co., [1995] 1 SCR 85. In that case, more than 15 years after the construction of a high-rise building, part of the building’s stone cladding fell off requiring the owner to not only fix the cladding which fell off; but, to investigate and repair the cladding in the entire building to ensure that it was not at risk of failure. The plaintiff condominium corporation was not the party which contracted with the defendant general contractor for construction of the building. As such, the plaintiff only had a claim against the general contractor in negligence.

The Supreme Court of Canada held that the costs of repairing the defects in the building were recoverable because they posed a ‘real and substantial danger to the occupants’ of the building. This ‘real and substantial danger’ language remains a requirement to this day to recover damages for pure economic loss.

(3) relational economic loss – due to damage to third party property or persons.

The best Canadian example of this category is the 1992 decision of the Supreme Court of Canada in Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 SCR 1021In that case, a barge towed by the defendant had smashed into a railway bridge owned by Public Works but used by the plaintiff railway. The railway had to re-route trains while the bridge was repaired. The plaintiff railway’s own property was not damaged; rather, property of another which it used was damaged.  The railway successfully sued the defendant barge operator for the cost of re-routing its trains.

EMPHASIS ON PROXIMITY

Although the Supreme Court’s analysis in Maple Leaf focused on the second category (i.e. losses resulting from negligent supply of shoddy goods and structures), the majority decision clarified the that the correct starting point for determining whether economic loss is recoverable is the existence of a duty of care with specific emphasis on the “proximity” analysis. This is regardless of whether the loss fits into any one of the three categories outlined above.

MAPLE LEAF – GUIDANCE ON WHEN PURE ECONOMIC LOSS IS RECOVERABLE

Mr. Sub restaurants are franchises and the franchise owners were required in their franchise agreement to purchase certain, specified, meats from Maple Leaf. A listeriosis outbreak occurred in one of Maple Leaf’s production facilities which caused a product recall and meat shortage to the Mr. Sub franchises. The franchises commenced a class action seeking recovery of pure economic losses: lost past and future sales, lost past and future profits, lost franchise value and lost goodwill. Maple Leaf defended the action arguing, inter alia, that it did not owe a duty of care to the Mr. Sub franchises for economic losses.

The Supreme Court of Canada held that the starting point for considering whether damages can be awarded for pure economic loss is to determine whether a duty of care is owed in the circumstances of the case.

When considering whether a duty of care exists, the court will examine not only whether it is reasonably foreseeable that the defendant’s conduct could injure the plaintiff; but also, whether the relationship between the parties is labelled as one of ‘proximity’.

In determining whether the relationship is one of proximity, the court will first examine the defendant’s undertaking – that is, what did the defendant do or fail to do in the context of its dealing with the plaintiff. Next, the court will consider the plaintiff’s right or ability to rely on the defendant’s undertaking.

In Maple Leaf the Supreme Court held that undertakings are not given at large and the court must consider whether the undertaking is made to the plaintiff; and, if so, for what purpose. Where the defendant undertakes to do something it assumes the task of doing so reasonably which manifests in the intention to induce the plaintiff’s reliance. It is the “intended effect” of the defendant’s undertaking which brings the parties into a relationship of proximity.

The proximity analysis can be done before the foreseeability analysis, particularly when it will inform the foreseeability analysis.

This can be an intensive exercise which relies on a significant evidentiary record.

DECISIONS SINCE THE RELEASE OF MAPLE LEAF

Charlesfort Developments Limited v. Ottawa (City), 2021 ONCA 410

The plaintiff was a developer who conditionally purchased property in Ottawa on which to construct a condominium project. One of the conditions of the purchase was the City of Ottawa’s approval of a re-zoning application which had been filed by the prior owner but not yet issued by the City.

The property had an easement in favour of the City of Ottawa which ran along the northern edge of the property. During the rezoning process, the City of Ottawa failed to accurately inform the plaintiff that the easement was for a trunk watermain which was four feet in diameter; and, instead represented it was for a trunk sewer. The re-zoning application was granted and it appears from the reasons for decision that during the re-zoning process staff at the City of Ottawa noted the mistake; but, never corrected the plaintiff’s understanding of the easement.

With the re-zoning condition satisfied, the plaintiff closed the property and began to obtain site plan approval so the site could be redeveloped into a 15 story condominium tower with a large underground parking garage. The parking garage was to run right to the northern boundary of the property, to maximize the amount of parking spaces for residential unit purchasers.

The result of the trunk watermain’s presence was the developer could not construct the project as intended. Instead, the plaintiff had to construct a smaller parking garage with less parking spots for the purchasers of the condominium’s residential units. This required both re-design of the parking garage and changes in the construction methodology. The condominium was ultimately finished two years later than planned with extra construction and redesign costs incurred during that time.

The plaintiff sued the City of Ottawa for misrepresentation and claimed damages for economic losses, including its extra design costs, extra carrying costs from the delayed development of the land, lost profits from selling less parking spots and lost profits generally from not being able to sell the development as it was originally intended.

The trial judge held that there was a duty of care owed by the city when it made representations to the plaintiff about the easement during the zoning review process; and, the trial judge awarded damages to the plaintiff.  The City appealed. Maple Leaf was released after the trial but before the appeal was decided.

The Court of Appeal allowed the appeal and dismissed the plaintiff’s action. The Court of Appeal found that there was no relationship of proximity between the plaintiff and the City in the circumstances; and, as a result, the City did not owe the plaintiff a duty of care and could not be liable for the plaintiff’s damages.

In reaching this conclusion, the Court of Appeal carefully examined both the ‘undertaking’ the City of Ottawa took on; and, the plaintiff’s reasonable reliance on that undertaking. The following factors were critical to the court’s analysis:

(1) Zoning laws are for regulating land use to protect the public interest. The purpose of zoning reviews is not for the City to guarantee or protect the plaintiff’s economic interests; but, to ensure the City discharges its statutory obligation to enforce zoning laws.

(2) The entire legislative regime which governs land-use planning and zoning reflect the need to ensure public goals are considered, not the private interests of developers.

(3) The zoning application was early in the in the redevelopment process. There were a number of subsequent steps which also had to be completed by the plaintiff before construction could commence. The re-zoning process was only to consider whether a by-law could be passed for the site, not to ensure the project would be built or be as profitable as the plaintiff would like.

(4) This was not a unique relationship. The plaintiff had to submit information to the City and the City had to respond and engage in dialogue to complete the process. This was not done to induce the plaintiff to rely on the City; but, rather, to complete the re-zoning application.

Subway Franchise Systems of Canada, Inc. v. Canadian Broadcasting Corporation, 2021 ONCA 25

The action arose out of a February 2017 episode of the Canadian Broadcasting Corporation’s (“CBC”) television show called “Marketplace”. The Marketplace episode featured an investigative report about the composition of chicken sandwiches sold by Subway and other fast-food restaurants. The episode reported that Subway’s chicken sandwiches were composed of “only slightly more than 50% chicken”. Subway commenced litigation against: (1) CBC for defamation; and (2) Trent University for defamation and negligence. Trent ran the laboratory that tested the sandwiches and provided results to CBC. Subway alleged that Trent carelessly performed its laboratory testing and carelessly communicated its faulty results causing pure economic loss.

The Ontario Court of Appeal considered the claim for pure economic loss and whether a duty of care existed between Trent University and Subway within the framework of analysis for an anti-Strategic Litigation Against Public Participation (“SLAPP”) motion.

Subway contended that Trent, as a laboratory, owed it a duty of care in testing even though it did not engage Trent to do the testing and even though it was CBC and its consumers that relied on the results. Notably, Subway did not characterize its claim as falling within an established category of pure economic loss. While the court accepted that a claim for pure economic loss can fall outside the three categories, in name and in substance, it highlighted:

[98] … even for such a claim, it is necessary to give effect to the implications of the framework in Livent and Maple Leaf. That framework and its particular emphasis on what is necessary to find proximity and why, follows from the basic proposition that there is no right to be free of negligently caused pure economic loss absent interference with a legally cognizable right.

The Court of Appeal in Subway noted that Subway’s negligence claim had certain attributes similar to a claim in the category of one for pure economic loss that came about through negligent misrepresentation or performance of a service. However, totally missing were the determinative elements of proximity in this category. The court concluded (1) Trent gave no express undertaking to Subway; and (2) Subway was not induced to, and did not change its position, in reliance upon any undertaking of Trent.

The court did not accept that relationships of proximity recognized in previously decided cases were analogous to Subway’s relationship with Trent or that a novel duty of care should be recognized. The critical factor in establishing a duty of care, a proximate relationship, was not made out between the parties. Accordingly, the court determined that Subway’s negligence claim lacked a real chance of success for the purposes of the anti-SLAPP analysis.

The action in negligence was dismissed; however, the claims of defamation against both Trent and CBC remain a live issue for the court.

Eisenberg v. City of Toronto, 2021 ONSC 2776

This was a proposed class action which was dismissed at the certification stage.

The proposed representative plaintiffs sought to bring a class action on behalf of people who held taxicab licenses between 2014 and the date of certification.

The plaintiffs claimed that the City of Toronto had regulated the taxi industry since 1957 and that it required taxis to be licensed to operate in the City. The plaintiffs claimed that the City was negligent in its enforcement of the taxi licensing regime after Uber began to operate in 2014 because Uber and its drivers were treated differently than taxi owners and taxi drivers.

The plaintiffs tried to demonstrate a relationship of proximity by pleading specific interactions with the City, such as staff congratulating them when they obtain a taxi license and suggesting they had a ‘pension’. The pleading of the interactions was to try to demonstrate that the City’s ‘undertakings’ in the interactions were to induce the drivers to rely on the City.

The certification judge dismissed the certification motion because there was no cause of action.

The reason there was no cause of action is that the claim was one of pure economic loss and the plaintiffs did not fall within an established category for recovery for pure economic loss. They failed to demonstrate that they fell within either an established category where recovery for pure economic loss has been permitted; and, they failed to establish an exception by demonstrating the relationship was one of proximity in that the plaintiffs were relying on an undertaking given by the City which they were entitled to rely on. The court held that the City was merely exercising its statutory role as the regulator of the taxi industry.

Carter v. Ford Motor Company of Canada, 2021 ONSC 4138

This is a class action which plead a number of causes of action for three different types of sub-classes, all of which were owners of Ford vehicles. They alleged that Ford “designed, engineered, developed, researched, manufactured, marketed, distributed, sold, and leased vehicles containing defective water pumps.

There were three proposed classes of plaintiffs, including:

Group ‘A’ those who experienced water pump failure and suffered personal injury.

Group ‘B’ those who experienced water pump failure and their vehicle was damaged.

Group ‘C’ those who have not experienced water pump failure and are now aware there are dangers as a result of an allegedly defective water pump.

The class action was not certified against Group ‘C’ because their claim was for pure economic loss and they did not cite an established exception to the general rule barring recovery for pure economic losses. The specific exception they did not fall within was that the water pump did not create an ‘imminent real and substantial danger’. The certification judge cited Maple Leaf and pointed out the Supreme Court of Canada allowed an exception to recover for pure economic loss in defective product or construction cases only when there is a real and substantial danger.

Del Giudice v. Thompson, 2021 ONSC 5379

This is a class action where the issue was the hacking of data at Capital One, which is a financial institution that had data on approximately $6 million Canadians’ personal information stored electronically.

There were a significant number of causes of action claimed; but, for the purpose of this paper, the only one to discuss is negligence – i.e. that Capital One owed the plaintiff class members a duty of care to protect their personal information.

The alleged damages included the potential for future pure economic loss claims given there was a risk data would be misappropriated and a person’s identity ‘stolen’, which would then result in financial costs to address those stolen identity and the problems which come with it. Some of the claims which were made were for:

  1. The increasing risk of inevitable data breach – i.e. identity theft, using financial information to purchase goods or services illegally.
  2. The increased risk of publication of someone’s personal data on the internet.

The court struck the statement of claim on a number of grounds; but, with respect to the claim for economic losses, pointed out that the law does not recognize a claim for damages of increased risk of harm. Only real and substantial danger is compensable.

TAKE AWAY POINTS

While Canadian courts recognize a right to recover damages for pure economic loss, there remain only a small handful of recognized categories under which a plaintiff can recover damages.

The categories are not closed but the guidance from the Supreme Court makes it clear that the proximity analysis is a fact-driven, intensive, exercise that is required to identify a clear ‘undertaking’ by the defendant that the plaintiff must be entitled to rely on before a duty of care will be found.

[1] 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35 at para 17