Proximity and Pure Economic Loss

  • February 06, 2021
  • Emily Assini and Sabrina Lombardi, McKenzie Lake Lawyers LLP

Historically, plaintiffs seeking damages for pure economic loss have faced multiple challenges from defendants, as well as skepticism from the Courts.  Over the last year, plaintiffs in two prospective class actions have pursued these damages with differing success.  The decisions in each of these cases are important to the jurisprudence in Canada, emphasizing that categories for claims for pure economic loss while not closed, are fact driven, and that a finding of proximity is key.  These cases could have important implications on the success of future class proceedings.

Notwithstanding the different analyses undertaken by the Courts in each of these cases (the most recent and the topic of this commentary being 1688782 Ontario Inc. v. Maple Leaf Foods Inc. et al., 2020 SCC 35 (CanLII) https://canlii.ca/t/jbg4h (“Maple Leaf”) and Darmar Farms Inc. v. Syngenta Canada Inc., 2019 ONCA 789 (CanLII) https://canlii.ca/t/j2pp1 (leave to appeal to the SCC dismissed) (“Syngenta”)) and, in particular the differing scrutiny undertaken by the majority and dissent in Maple Leaf, proximity continues to be the defining factor in determining the viability of a claim for pure economic loss.

The history of pure economic loss claims in Canada began in the early 1990s.  Following the common law trend in the UK, the SCC released two decisions that recognized damages for pure economic loss in Canada.  In Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021 and Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85, five recognized categories of pure economic loss were explicitly set out as being applicable in Canada:

  1. negligent misrepresentation;
  2. negligent performance of a service;
  3. negligent supply of shoddy goods or structures;
  4. relational economic loss; and
  5. the independent liability of statutory public authorities.

In a subsequent decision a few years later, namely Martel Building Ltd. V. Canada, [2000] 2 S.C.R. 860, the SCC qualified that the five recognized categories are not a closed list and that there is no exclusionary rule for pure economic loss.  As such, it is permissible for a plaintiff to make a case for pure economic loss on the basis of a novel duty of care where the proximity and foreseeability requirements can be satisfied. 

In 2017, the SCC further refined the law regarding pure economic loss in Deloitte and Touche v. Livent Inc. (Receiver of), 2017 SCC 63 (“Livent”).  In Livent, the SCC upheld judgment against Deloitte flowing from a claim brought under the recognized category of negligent misrepresentation based on Deloitte’s completion of Livent’s audit and preparation of a press release which did not disclose reporting irregularities.  Importantly, in identifying that proximity existed as between Deloitte and its client, Livent, the Court cautioned that “… [a] finding of proximity based upon a previously established or analogous category must be grounded not merely upon the identity of the parties, but upon examination of the particular relationship at issue in each case” (see para. 28).  Again, the Court highlighted the importance of the factually specific relationship at issue in each case. 

In recent months, the SCC considered two prospective class actions which both seek damages for economic losses.  Following the previous decision in Livent, the outcomes demonstrate that claims for economic loss are narrowly applied and contingent upon the specific facts of each case and the establishment of proximity . 

As the SCC noted in Maple Leaf, “proximity is and remains the controlling concept” in establishing the duty of care in the context of a pure economic loss claim.  This is clearly established in the following two cases. 

In Maple Leaf, damages were sought on behalf of a Mr. Sub franchisee class alleging that the franchisees suffered losses from the supply shortage caused by listeria-tainted deli meats that were supplied and then recalled by Maple Leaf.  Based on the terms of the franchise agreement, the damages sought on behalf of the class included, inter alia, loss of profits, reputational injury, and goodwill.  In considering the previously recognized categories of pure economic loss, the SCC (on a 5-4 split) found that the proximity analysis as between Maple Leaf and the franchisee did not satisfy the duty in this case.  More specifically, the Court found that the undertaking by Maple Leaf regarding its goods being “fit for human consumption” was made to end consumers and not to franchisees and, alternatively, the danger a shoddy product posed was only relevant to the end consumer and, again, not to franchisees.  In considering whether there was a novel duty of care established, the proximity analysis again prevailed to defeat the claim.  The majority held that despite the vulnerability of the franchisee class vis-à-vis the franchise agreement, the franchisees were not the consumer and there was therefore no proximity. 

The decision in Maple Leaf  contrasts with the subsequent dismissal of the leave application in

Syngenta. In Syngenta (which in the interests of full disclosure is being litigated by McKenzie Lake Lawyers LLP), the putative class seeks damages for the premature commercialization of genetically modified corn seed and the economic damages alleged to have been caused by the slump in market prices after foreign import markets refused to purchase North American corn (which is co-mingled with the prematurely commercialized genetically modified corn seed product).  At first instance, Syngenta was successful in dismissing the action as the causes of action were found to not satisfy either an existing recognized duty of care or a novel one.  The lower Court held that the lack of proximity was fatal to the claim.  

However, the Court of Appeal allowed the appeal on one narrow duty: the novel duty of care regarding premature commercialization.  In Syngenta, the Court of Appeal found that a relationship of proximity was supported by several factors including the following: first, that the undertakings given by Syngenta were made in response to concerns from industry associations and for the purpose of protection of the public and corn market participants; and second, that the interconnectedness and interdependency of the corn market was such that Syngenta’s actions would impact the market as a whole.  Unlike Maple Leaf, putative class members in Syngenta are in a proximate relationship with Syngenta given the integrated industry and the foreseeability of harm to them in this context. 

As these cases illustrate, claims for pure economic loss continue to evolve.  Fundamental to any analysis in future cases is the question of proximity; the factually specific relationship between the parties will continue to be determinative of a duty of care.

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