Supreme Court Rules Manufacturer Does not Owe Franchisees a Duty of Care for Pure Economic Loss

  • November 16, 2020
  • William Main, McCarthy Tétrault LLP

In a 5-4 judgment, the Supreme Court recently released its long awaited decision in 1688782 Ontario Inc. v. Maple Leaf Foods,[1] in which it dismissed the Mr. Sub franchisees’ appeal and upheld the Ontario Court of Appeal’s decision that Maple Leaf, a manufacturer of ready-to-eat meats, did not owe a duty of care to prevent pure economic loss to the franchisees it supplied. The decision is significant for franchisors and franchisees with respect to the Majority’s analysis of the nature and scope of the franchise relationship, and the relationship between the franchisor’s contractual partners and franchisees. 

History of the Proceeding

In August 2008 Maple Leaf issued a recall of certain of its ready-to-eat (“RTE”) meat products due to a concern arising from a listeria outbreak. At that time, Mr. Sub’s franchise agreement provided that Maple Leaf was to be the exclusive supplier of a number of RTE meats that were core menu items for the franchisees. There was no suggestion of wrongfulness by Maple Leaf in issuing the recall, however it interrupted the supply of RTE meats to franchisees for a period of six to eight weeks.

The plaintiff, 1688782 Ontario Inc., a franchisee of Mr. Sub, sought certification of a class action on behalf of itself and 424 other Mr. Sub franchisees, against Maple Leaf (and not the franchisor). The franchisees alleged that they had suffered economic loss as a result of Maple Leaf’s negligence. The claim was framed as a product liability action. The plaintiffs alleged that Maple Leaf had breached its duty to franchisees to “manufacture a product fit for human consumption,” and to avoid making negligent misrepresentations regarding the safety of the product.

The action was certified in 2016,[2] with the motion judge holding that Maple Leaf owed the franchisees a duty to supply a product fit for human consumption. The motion judge also accepted that Maple Leaf owed the franchisees a duty of care in respect of pure economic loss based on the negligent misrepresentation paradigm. The motion judge stated, in the alternative, that she also would have recognized a novel duty of care (i.e. if the aforementioned two categories had not applied) in the circumstances based on the fact that Maple Leaf and the franchisees had a close and direct relationship through the exclusive supply arrangement, and the foreseeability of the injuries.

Maple Leaf appealed. The Ontario Court of Appeal allowed the appeal and granted summary judgment dismissing the action. The Court of Appeal held that the franchisees’ claims did not fall within the previously recognized category of the negligent supply of defective or dangerous goods because the case was distinguishable from the line of cases in that category which involved the knowing or intentional supply of dangerous goods into the market that caused actual harm. Here, there was no evidence that anyone was harmed by RTE meats from a Mr. Sub restaurant. The Court held that any duty owed by Maple Leaf to supply a safe product was owed to customers, and not to the franchisees.

The Court of Appeal similarly found that the negligent misrepresentation category was also not applicable on the facts of the case. In Deloitte & Touche v. Livent (Receiver of),[3]  the Supreme Court affirmed that the duty of care for negligent misrepresentation is determined by two factors; the defendant’s undertaking and the plaintiff’s reliance. The scope of the undertaking informs the scope of the duty of care. Reliance that falls outside of the scope of the defendant’s undertaking of responsibility – that is, of the purpose for which the representation was made or the service was undertaken – necessarily falls outside the scope of the proximate relationship and, therefore of the defendant’s duty of care. The Court of Appeal accepted that Maple Leaf had undertook to provide meat that was safe for human consumption, but held that the nature and purpose of the undertaking was “to ensure that Mr. Sub customers who ate RTE meats would not become ill or die as result of eating the meats” and was not to protect the reputational interests of the franchisees. As a result, the franchisees’ claim and reliance fell outside of the scope of Maple Leaf’s undertaking, and therefore outside of Maple Leaf’s duty of care.

The Court of Appeal held that a novel duty of care should not be recognized in the circumstances, and that doing so would impermissibly expand the duty owed to consumers by extending it to “the fundamentally different claim advanced by the franchisees”.[4] The Court of Appeal relied on the Supreme Court of Canada’s decision in Livent which had been released after the motion decision was rendered, in finding that the motion judge had erred by failing to consider the scope of the proximate relationship between the parties, including any undertaking provided by the defendant. In Livent the Supreme Court had cautioned that courts should be reticent to take an “overly broad characterization of an established category of proximity."

The Supreme Court’s Decision

In its 5-4 decision, the Supreme Court upheld the Court of Appeal’s decision granting summary judgment, and dismissed the franchisees’ appeal.

The Majority (per Brown and Martin JJ) held that Maple Leaf did not owe a duty of care to the franchisees in respect of the reputational harm and pure economic loss they suffered as a result of the recalls because there was no sufficiently proximate relationship.

The Majority made three key findings with respect to the duty of care:

  1. The Majority confirmed the rationale from its decision in Livent that for cases of negligent misrepresentation or performance of a service, two factors are determinative of whether proximity is established: the defendant’s undertaking, and the plaintiff’s reliance. The Majority agreed with the Court of Appeal’s analysis that the undertaking here was directed in its scope and purpose to consumers, and not to commercial intermediaries.
  2. The Majority held that the line of cases dealing with the duty of care for economic loss caused by the negligent supply of shoddy goods or structures did not apply in the present case. The Majority found that the normative force behind that category of duties in respect of pure economic loss was the need to avert danger where the good or structure posed a danger to the community, and could not be easily disposed of. The point of this category of duty was to provide for the cost of averting the danger that personal injury or damage to property could occur. The Court stated that this is a narrow category of duties and, while it can apply to dangerously defective goods, it does not apply where the good can be easily disposed of, leaving only pure economic loss for the disposing party (though the costs of disposal of the dangerous good or structure may be recoverable). The majority also held that these duties did not arise in this case because any physical danger posed by the products was only to the end consumer, rather than the intermediary franchisees.
  3. The Majority went on to undertake a full proximity analysis after finding that the franchisees’ claims did not fit into an existing category of duty. The focus of the analysis was on the chain of contracts between the franchisees, Mr. Sub, and Maple Leaf. The Court warned that, where the parties are linked by way of contracts that, taken together, reflect a multipartite allocation of risk, courts must be cautious about allowing parties to circumvent that allocation by way of tort claims. The Court considered the fact that the parties could have protected their interests under a direct contract with Maple Leaf, or insurance, but did not do so. Further, the Court noted, the franchisees here did have means in the form of contractual rights—albeit conditional upon obtaining Mr. Sub’s permission—to avoid the risk of interrupted supply by seeking out alternative sources of supply

The Dissent (per Karakatsanis J) held that there was a sufficiently proximate relationship to ground a duty of care. In coming to this conclusion, the Court focused on the fact that “Maple Leaf knowingly acted as an exclusive supplier of products integral to and closely associated with the franchisees’ businesses”, and that Maple Leaf had some direct involvement with the franchisees in the form of providing support.

Implications for Franchising

In considering the parties’ relationship, the Majority considered and made a number of important determinations that have a bearing on the franchise relationship, and the relationship between franchisees and franchisor partners.

First, the Majority acknowledged that the “franchising agreement worked a ‘vulnerability’” on the franchisees. However, the Majority found that this was a choice by the franchisees to operate its business through a franchise. The consequent vulnerability of a franchisee was in exchange for securing the advantages of franchising that it could not have obtained on its own.

Second, the Majority found that the vulnerability to interruptions in supply was not the basis for a tort law duty from the manufacturer to the franchisees. Rather, the Majority held this was “an unremarkable incident of the franchise model of business in which the franchisee operated.” The Majority went on to note that if the risks posed by exclusive supply were sufficiently serious, the franchisees could have obtained insurance in order to protect against losses in this type of situation.

Third, the specifics of the agreements provided that the franchisees did have the option under the franchise agreement to seek the franchisor’s permission to find alternative sources of supply. The Majority held that there was no evidence that they had done so, and found no basis to conclude that the franchisor would have denied any such request. The Majority acknowledged that the franchisor had a duty of fair dealing under franchise legislation, and suggested that the failure to accede to such a request in these types of circumstances could have been considered a breach of that duty.

The Dissent disagreed with the Majority’s conception of the franchisees as having an actual ability to protect themselves through contract. Focusing on the power imbalance and nature of the relationship as being governed by a contract of adhesion, the dissent held that the “contractual matrix points to a particular dependency and proximity in their relationship." When combined with the background facts that the defendant had been dealing with the franchisees for almost twenty years, the Dissent found that there was a “direct line of contact with the franchisees” that established a relationship of proximity.

The decision is significant as one of the few occasions on which the Supreme Court of Canada has considered the nature of the franchise relationship. While it harkens back to the generally accepted framework of recognized vulnerability as between franchisors and franchisees, the Majority raised important considerations that signal for franchisees that they make a commercial choice to enter into a franchise relationship. The Majority’s conclusion suggest that a franchisee has an obligation like any other commercial actor to acknowledge and work to minimize risks to the extent it is able to do so, through contracts, insurance, or by other available means. Though the decision was not a ruling about franchise legislation or the franchise relationship specifically, it provides further guidance from the nation’s top Court for considering more specific franchising issues in the future.  

 

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