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Damages - Pure Economic Loss

Negligence - Duty of Care

Mandeville v. The Manufacturers Life Insurance Company (Ont CA, 2014)

In this case the Court of Appeal expounded on two legal points, the first being the nature of damages for "pure economic loss" and when courts will award them:
[146] Pure economic loss is loss suffered by an individual that is not accompanied by physical injury or property damage: Martel Building Ltd. v. Canada, 2000 SCC 60 (CanLII), 2000 SCC 60, [2000] 2 S.C.R. 860, at para. 34; D’Amato v. Badger, 1996 CanLII 166 (SCC), [1996] 2 S.C.R. 1071, at para. 13; and Design Services Ltd. v. Canada, 2008 SCC 22 (CanLII), 2008 SCC 22, 1 S.C.R. 737, at para. 30.

[147] In the present case, the appellants are claiming damages equivalent to the benefits the class members would have received had they been treated as eligible policyholders upon Manulife’s demutualization. The damages sought are “not causally connected to physical injury to their persons or physical damage to their property”: Design Services, at para. 30. The injury or damage complained of consists of alleged harm to the class members’ economic interests, rather than any physical harm or damage to their person or property. As such, the claim is seeking recovery for pure economic loss.

[148] What difference does it make to this action that the appellants’ claim is for pure economic loss? The Supreme Court answered these questions in Martel, at para. 35, saying that such claims require greater scrutiny when the court is deciding whether to recognize a duty of care:
As a cause of action, claims concerning the recovery of pure economic loss are identical to any other claim in negligence in that the plaintiff must establish a duty, a breach, damage and causation. Nevertheless, as a result of the common law’s historical treatment of economic loss, the threshold question of whether to recognize a duty of care receives added scrutiny relative to other claims in negligence. [Emphasis added.]
[149] At para. 37 of Martel, the Court set out the policy reasons underlying the common law’s traditional reluctance to permit recovery for pure economic loss:
First, economic interests are viewed as less compelling of protection than bodily security or proprietary interests. Second, an unbridled recognition of economic loss raises the spectre of indeterminate liability. Third, economic losses often arise in a commercial context, where they are often an inherent business risk best guarded against by the party on whom they fall through such means as insurance. Finally, allowing the recovery of economic loss through tort has been seen to encourage a multiplicity of inappropriate lawsuits.
[150] Nonetheless, the Canadian jurisprudence shows that there is no automatic bar to recovery for pure economic loss. Over time, recovery for pure economic loss has been permitted in five categories of negligence claims:
1. the independent liability of statutory public authorities;

2. negligent misrepresentation;

3. negligent performance of a service;

4. negligent supply of shoddy goods or structures; and

5. relational economic loss.

See Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 CanLII 105 (SCC), [1992] 1 S.C.R. 1021, at p. 1049; and Martel, at para. 38.
The second issue was the criteria applicable to determining when a duty of care was owned under the law of negligence:
2. The Anns Test Considered

[163] In Cooper, at para. 30, the Supreme Court explained the Anns test in the following terms, making it clear that policy considerations arise at both stages of the analysis:
In the first stage of the Anns test, two questions arise: (1) was the harm that occurred the reasonably foreseeable consequence of the defendant’s act? and (2) are there reasons, notwithstanding the proximity between the parties established when answering the first question, that tort liability should not be recognized? The proximity analysis involved in the first stage focuses on factors arising from the relationship between the plaintiff and the defendant. These factors include questions of policy, in the broad sense of that word. If foreseeability and proximity are established, a prima facie duty of care arises. At the second stage of the Anns test, the question still remains whether there are residual policy considerations outside the relationship of the parties that may negative the imposition of a duty of care. [Emphasis in original omitted.]
The First Stage of the Anns Test

[164] As indicated in the above quote, the first stage of the Anns test focuses on the relationship between the plaintiff and the defendant. The overarching question at this stage is whether the circumstances disclose the reasonable foreseeability of harm and proximity sufficient to establish a prima facie duty of care: Cooper, at para. 31.

[165] While the first stage of the Anns test involves a consideration of both reasonable foreseeability and proximity, the Supreme Court has made it clear that proximity remains the foundation of the modern law of negligence: Design Services, at para. 25. As McLachlin J. stated in Norsk, at p. 1152, “Proximity is the controlling concept which avoids the spectre of unlimited liability”.

[166] When an overt act of the defendant causes physical injury to the plaintiff or the plaintiff’s property, proximity is indicated by the fact of the physical injury. As McLachlin J. stated in Norsk, at p. 1153: “if one is close enough to someone or something to do physical damage to it, one is close enough to be held legally responsible for the consequences.”

[167] How does the analysis change when the claim that is being advanced is one for pure economic loss? McLachlin J.’s reasons in Norsk assist in answering this question.

[168] First, at p. 1152, McLachlin J. emphasized that there must be “sufficient proximity between the negligent act and the loss”. That is, the court must pay special attention to the proximity between the defendant’s conduct and the loss suffered.

[169] Second, at p. 1153, McLachlin J. stated that, in the absence of the usual indicator of proximity – the infliction of physical injury or property damage – the court must take a probing look at the relationship between the parties, and “insist on sufficient special factors to avoid the imposition of indeterminate and unreasonable liability” before recognizing a new duty of care. These factors can include “expectations, representations, reliance, and the property or other interests involved”: Cooper, at para. 30. The court must also consider at this stage questions of policy, insofar as they pertain to the relationship between the parties: Cooper, at para. 30. This approach ensures “a principled, yet flexible, approach to tort liability for pure economic loss … [which] allow[s] recovery where recovery is justified, while excluding indeterminate and inappropriate liability”: Norsk, at p. 1153.

[170] If the court finds that the foreseeability and proximity are established, a prima facie duty of care arises. The court must then move to the second stage of the Anns test.

The Second Stage of the Anns Test

[171] At the second stage, the court must determine “whether there are residual policy considerations outside the relationship of the parties that may negative the imposition of a duty of care” (emphasis added): Cooper, at para. 30. The court is concerned, at this stage, with “the effect of recognizing a duty of care on other legal obligations, the legal system, and society more generally”: Cooper, at para. 37.

[172] In Norsk, at pp. 1154-55, McLachlin J. explained that while proximity is critical to establishing the right to recovery for pure economic loss, it does not always indicate liability. Proximity is a necessary, but not necessarily sufficient, condition of liability because there may be residual policy considerations that call for a limitation on liability. These residual policy considerations permit the courts to reject liability for pure economic loss for policy reasons that are not taken into consideration in the proximity analysis.

[173] When dealing with claims for pure economic loss, the court must be mindful of the more generalized policy reasons for precluding liability, including the “spectre of indeterminate liability” and the potential for encouraging “a multiplicity of inappropriate lawsuits”: Martel, at para. 37. Both of these policy considerations have social implications that extend beyond a particular tort relationship. At paras. 63-69, Martel pointed to several other policy considerations that apply at the second stage of the Anns test. Recognition of a duty of care that might tend to deter socially useful commercial activity is an example of one such policy consideration: Martel, at para. 64.

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