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."