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No Spooky Spectre for Franchise Suppliers: Supreme Court of Canada’s Recent Ruling on Duty of Care in Multipartite Contractual Relationships

No Spooky Spectre for Franchise Suppliers: Supreme Court of Canada’s Recent Ruling on Duty of Care in Multipartite Contractual Relationships

By:

Posted November 18, 2020

The Supreme Court of Canada (SCC) released its decision in 1688782 Ontario Inc. v. Maple Leaf Foods Inc. on November 6, 2020. In coming to their decision, the five judge majority once again reiterated the well-established Canadian approach to limiting tortious claims for pure economic loss.

Brief Facts

Maple Leaf Foods Inc. (Maple Leaf) was made the exclusive supplier of multiple menu items for Mr. Sub franchises through an exclusive supply agreement (the Agreement). Subject to the Agreement, Mr. Sub franchisees were required to purchase certain products only from Maple Leaf. These products included ready-to-eat meat products used for Mr. Sub sandwiches.

In 2008, Maple Leaf experienced a listeria outbreak at one of their facilities, which subsequently caused two of their ready-to-eat meat products to be recalled. Resultant from the recall, a class (424) of Mr. Sub franchisees brought a claim in tort against Maple Leaf for damage to reputation and economic loss. The class claimed that they suffered profit loss due to the two recalled ready-to-eat meats being unavailable for approximately 6-8 weeks. Notably, the class could not sue Mr. Sub as the lead franchisor, because their franchise agreement limited the ability to sue Mr. Sub for supply shortages.

Pure Economic Loss

Canadian courts have generally been hesitant to allow negligence tort claims for pure economic loss as compared to economic loss stemming from personal injury and/or property damage. This is part of the courts’ attempt to limit the “spectre of indeterminate liability”, and its consequences to the economy, that loom ever present where negligence is concerned. In most circumstances, the courts see contract law as the appropriate mechanism for pure economic loss.

For a plaintiff to validate a negligence claim for pure economic loss, they have an increased burden when attempting to show that the defendant owed them a duty of care. A duty of care is established if the parties at issue have sufficient proximity to one another and the injury (or economic loss) suffered by the plaintiff is reasonably foreseeable.

As the class was part of a multipartite contract, the crux of this case rested on the proximity between Maple Leaf and the class. First, the court found that a duty of care could not be established on analogous grounds. This was primarily because the ready-to-eat meat products were guaranteed to be safely eaten by the final consumer, not the franchisees themselves. Additionally, the franchisees could simply discard the ready-to-eat meats with no health risk to themselves. Further, the court did not believe this was the appropriate time to establish a novel duty of care. They believed that establishing such a duty could potentially increase the risk of indeterminate liability for franchise suppliers.

Dissent

The dissent in this case raised thoughtful considerations as to the nature of the franchisor-franchisee relationship. Notably, the dissent discussed that franchisees are not the business savvy contracting parties the common law often makes them out to be. Franchisees are regularly entering the business world for the first time and are generally at the mercy of pre-written franchise agreements. To combat the power differential at play in these relationships, the dissent would have created a novel duty of care in these specific circumstances to keep suppliers accountable to franchisees who are forced to purchase said supplier’s goods.

Considerations

The SCC provided clear direction in this case. If you are part of a multipartite agreement and want protections against all parties to said agreement, you must stipulate such protections in a contract or purchase insurance. Tort is not the correct avenue to fill the liability gaps in multi-party relationships. Whether a franchisor or a franchisee, it is crucial to speak to qualified counsel before entering such agreements as they are rife with potential liability for franchisors or lack of protections for franchisees.

Thank you to Filip Szadurski for writing this blog.  Andre Martin is a Partner in the Business Law team.  Andre can be reached at 613-369-0370 or at andre.martin@mannlawyers.com.

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