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Pure Economic Loss

. Subway Franchise Systems of Canada, Inc. v. Canadian Broadcasting Corporation (I)

In Subway Franchise Systems of Canada, Inc. v. Canadian Broadcasting Corporation (I) (Ont CA, 2021) the Court of Appeal defines 'pure economic loss':
[73] Subway’s negligence claim is one for pure economic loss, that is, “economic loss that is unconnected to a physical or mental injury to the plaintiff’s person, or to physical damage to property”: 1688782 Ontario Inc. v Maple Leaf Foods Inc., 2020 SCC 35, 450 D.L.R. (4th) 181, at para. 17.
. 1688782 Ontario Inc. v. Maple Leaf Foods Inc.

In 1688782 Ontario Inc. v. Maple Leaf Foods Inc. (SCC, 2020) the Supreme Court of Canada defined 'pure economic loss':
[17] As the lower courts recognized, the claims of the appellant and other Mr. Sub franchisees are for pure economic loss, in the form of lost profits, sales, capital value and goodwill. Pure economic loss is economic loss that is unconnected to a physical or mental injury to the plaintiff’s person, or to physical damage to property (Martel Building Ltd. v. Canada, 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; Saadati v. Moorhead, 2017 SCC 28, [2017] 1 S.C.R. 543, at para. 23). It is distinct, therefore, from consequential economic loss, being economic loss that results from damage to the plaintiff’s rights, such as wage losses or costs of care incurred by someone physically or mentally injured, or the value of lost production caused by damage to machinery, or lost sales caused by damage to delivery vehicles.

....

[21] The current categories of pure economic loss incurred between private parties are, therefore:
(1) negligent misrepresentation or performance of a service;

(2) negligent supply of shoddy goods or structures; and

(3) relational economic loss.
The distinguishing feature among each of these categories is that they describe how the loss occurred. Focussing exclusively upon how the loss occurs can, however, put strain on the analysis by obfuscating both fundamental differences and similarities among cases of pure economic loss (J. Stapleton, “Duty of Care and Economic Loss: A Wider Agenda” (1991), 107 Law Q. Rev. 249, at pp. 262 and 284). Further, it obscures the starting point in a principled analysis of an action in negligence, which is to identify what rights are at stake and whether a reciprocal duty of care exists (Livent, at para. 30). It is proximity, and not a template of how a loss factually occurred, that remains a “controlling concept” and a “foundation of the modern law of negligence” (Norsk, at p. 1152; Design Services Ltd. v. Canada, 2008 SCC 22, [2008] 1 S.C.R. 737, at para. 25).

[22] Properly understood, then, these categories are simply “analytical tools” that “provide greater structure to a diverse range of factual situations . . . that raise similar . . . concerns” (Martel, at para. 45; Design Services, at para. 31). Organizing cases in this way was and is therefore done for ease of analysis in ensuring that courts treat like cases alike. The fact that a claim arises from a particular kind of pure economic loss does not necessarily signify that such loss is recoverable.[2] Where the loss is recoverable, however, this Court has clarified that the decided cases within these categories should be regarded as reflecting particular kinds of proximate relationships (Cooper, at para. 36; Livent, at paras. 26‑27). But to be clear, the invocation of a category, by itself, offers no substitute for the necessary examination that must take place “of the particular relationship at issue in each case” between the plaintiff and the defendant (Livent, at para. 28; see also Dorset Yacht Co. v. Home Office, [1970] A.C. 1004 (H.L.), at p. 1038). In other words, what matters is whether the requirements for imposing a duty of care are satisfied ⸺ and, in particular, whether the parties were at the time of the loss in a sufficiently proximate relationship. Where they are, it may be because the relationship falls within a previously established category of relationship in which the requisite qualities of closeness and directness were found, or is analogous thereto (Livent, at para. 26; see also Childs v. Desormeaux, 2006 SCC 18, [2006] 1 S.C.R. 643, at para. 15; Mustapha v. Culligan of Canada Ltd., 2008 SCC 27, [2008] 2 S.C.R. 114, at para. 5). Or, a plaintiff may seek to establish a “novel” duty of care after undertaking a full Anns/Cooper analysis.
. Wright v. Horizons ETFS Management (Canada) Inc.

In Wright v. Horizons ETFS Management (Canada) Inc. (Ont CA, 2020) the Court of Appeal made these comments regarding pure economic loss in negligence and the role of establishing a negligence duty of care:
[74] Canadian courts have limited tort recovery for cases involving pure economic loss where there is no physical harm or damage to property: Arora v. Whirlpool Canada LP, 2013 ONCA 657, 118 O.R. (3d) 113, at para. 52, leave to appeal refused, [2013] S.C.C.A. No. 498. While there is no automatic bar to recovery for pure economic loss, “such claims warrant more rigorous examination than other claims for negligence”: Lavender v. Miller Bernstein LLP, 2018 ONCA 729, 142 O.R. (3d) 401, at para. 72, leave to appeal refused, [2018] S.C.C.A. No. 488, citing Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860, at para. 35; and Mandeville v. The Manufacturers Life Insurance Company, 2014 ONCA 417, 120 O.R. (3d) 81, at paras. 148-50, leave to appeal refused, [2014] S.C.C.A. No. 390.

[75] As noted by the late Honourable Allen M. Linden et. al. in Canadian Tort Law, 11th ed. (Toronto: LexisNexis Canada, 2018), at p. 408:
[R]ights-based torts theorists … take the position that negligence duties exist to protect correlative legal rights. The law recognizes a person's right to personal security and it recognizes property rights. These are protected by negligence law. However, neither the law nor acknowledged philosophical thinkers have ever recognized a primary right related to purely economic interests.

The rights-based theorists do support recovery for economic loss in misrepresentation cases by either grounding the claim in the right to personal integrity or by treating the misrepresentation action as equivalent to contract. However, they hold that other types of pure economic loss ought not to be recoverable at all in negligence.
[76] Some of the reasons for the refusal to recognize claims for pure economic loss include the possibility of indeterminate liability, the difference between social loss (such as physical harm) and the transfer of wealth from one person or group to another, the relevance of existing and potential contractual allocation of loss, and the fact that negligently-caused purely financial injury does not constitute a violation of a recognized legal right. When looking at a claim for pure economic loss, it is therefore important to consider whether the plaintiff had an opportunity to protect itself by contract from the risk of economic loss and declined to do so.

[77] The Supreme Court recently reviewed the approach to determining the existence and extent of a duty of care in a claim for economic loss. The two-step process is:
a. whether the parties are in a sufficiently close and direct (or proximate) relationship and whether the harm suffered is reasonably foreseeable such that a prima facie duty of care exists; and if so,

b. whether there are residual policy considerations that should insulate the defendant from liability.
See Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 S.C.R. 855, at paras. 23-45 and Darmar Farms Inc. v. Syngenta Canada Inc., 2019 ONCA 789, 148 O.R. (3d) 115, at para. 54, leave to appeal to S.C.C. requested, 38915.

[78] The first issue to be determined is whether the claim fits within or is analogous to a recognized duty of care. If a relationship falls within a previously established duty of care or is analogous to one, then the requisite close and direct relationship is shown: Livent, at para. 26.

(a) The Duty of Care Analysis Where There Is a Previously Established Duty of Care

[79] Determining whether a proposed duty of care fits within an existing or analogous duty is a matter of precedent:
[W]here a case is like another case where a duty has been recognized, one may usually infer that sufficient proximity is present and that if the risk of injury was foreseeable, a prima facie duty of care will arise.
Childs v. Desormeaux, 2006 SCC 18, [2006] 1 S.C.R. 643, at para. 15.

[80] When a court relies on an established duty of care, “there are no overriding policy considerations that would [negate] the duty of care”: Livent, at para. 28, citing Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537, at para. 39. The majority in Livent further instructed, at para. 28, that:
A consequence of this approach however, is 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. Otherwise, courts risk recognizing prima facie duties of care without any examination of pertinent second-stage residual policy considerations.
[81] The Supreme Court has recognized five categories of cases in which plaintiffs may recover in negligence for economic loss not causally connected to physical or property harm. These categories were first discussed in Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 CanLII 105 (SCC), [1992] 1 S.C.R. 1021, at p. 1049, per La Forest J., citing Bruce Feldthusen, “Economic Loss in the Supreme Court of Canada: Yesterday and Tomorrow” (1990-91) 17 Can. Bus. L.J. 356, at pp. 357-58, and were later adopted by the full court: see, for instance, Martel, at paras. 38, 45. The five categories are:
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.
[82] Mr. Wright asserts that this claim falls under the category of negligent supply of shoddy goods and/or negligent performance of a service.

[83] Professor Feldthusen points out that these categories are helpful when analyzing liability for pure economic loss to the extent that the cases within each category rely on a common justification for imposing liability. Categorization focuses the policy analysis and avoids a case-by-case approach, which risks inconsistent results. Categories will evolve as the jurisprudence evolves: Bruce Feldthusen, Economic Negligence, 6th ed. (Toronto: Carswell, 2012), at pp. 16-17, 22.

[84] Within the five categories, courts have recognized specific duties of care such as an auditor’s duty to a corporation when performing a statutory audit and a solicitor’s duty to a potential beneficiary when preparing a will: Livent, at paras. 58-66; Whittingham v. Crease & Co. (1978), 1978 CanLII 1930 (BC SC), 88 D.L.R. (3d) 353, at p. 373 (B.C.S.C.).

[85] When determining whether a proposed duty of care fits within an existing or analogous duty, a court should avoid construing existing duties of care “in an overly broad manner” and “be attentive to the particular factors which justified recognizing that prior [duty]”: Livent, at para. 28. These factors include (in the case of negligent misrepresentation and negligent provision of services) (a) the defendant’s undertaking to provide a representation or a service and (b) the plaintiff’s reasonable reliance on that undertaking such that the risk of injury was reasonably foreseeable: Livent, at paras. 30-31.

(b) The Duty of Care Analysis Where There is No Established Duty of Care

[86] The Supreme Court has left open the possibility that new categories of recovery for pure economic loss or duties of care might emerge.

[87] Where the case does not fall within an established duty or a duty analogous thereto, the court must (just as in the case of an established duty of care) satisfy itself that (a) there is a proximate relationship and (b) that the risk of injury is foreseeable: Livent, at paras. 29-32. If so, a prima facie duty of care will be established.

[88] To determine whether a close and direct relationship exists, the court must examine all relevant factors arising from the relationship between the plaintiff and defendant. While the factors are diverse and depend on the circumstances of each case, they include factors such as expectations, representations, and the property or other interests involved as well as any statutory obligations. In the case of a duty of care falling within the category of negligent misrepresentation or negligent performance of a service, two factors are determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reasonable reliance: Livent, at paras. 29-30.

[89] Once a prima facie duty of care is established, the court must go on to consider whether there are residual policy reasons that would negate the imposition of a duty of care: Livent, at paras. 37-45; Cooper, at para. 30.

[90] The question is whether, despite the proximate relationship and the reasonable foreseeability of the plaintiff’s injury, the defendant should nonetheless be insulated from liability. This inquiry is concerned with the effect of recognizing a duty of care on other legal obligations, the legal system, and society more generally. The court will consider policy objectives that suggest that this duty of care ought not to be recognized, including the existence of other remedies and concerns about creating unlimited liability to an unlimited class: Livent, at paras. 37-41.

....

[94] The Supreme Court first allowed a claim for pure economic loss for the negligent supply of shoddy goods/structures in Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., 1995 CanLII 146 (SCC), [1995] 1 S.C.R. 85. It approved a subsequent purchaser’s claim against a building contractor for economic loss resulting from the negligent supply of dangerous and shoddy structures. When a portion of the building’s stone cladding fell off, the plaintiff determined that there was a risk that other portions of the cladding could fall off and injure someone. The plaintiff incurred substantial costs to replace the cladding, which the Supreme Court held were, in principle, recoverable if they were the foreseeable result of the defendant’s negligence.

[95] However, Winnipeg Condominium did not address whether pure economic loss arising from the negligent supply of a shoddy good is recoverable absent a dangerous physical defect.

[96] In the later decision of Arora, Hoy A.C.J.O. held, at para. 83, that “the Supreme Court carefully left the issue of whether there should be no recovery for pure economic loss where goods are shoddy, but not dangerous, for another day.” See also Feldthusen, Economic Negligence, at p. 195.

[97] The court in Arora rejected the claim for pure economic loss resulting from the provision of alleged shoddy but non-dangerous washing machines. Hoy A.C.J.O. observed that “the appellants’ economic loss claim is for diminution in value – that is, the difference in value between the product they thought they were getting and the one they actually received”: Arora, at para. 96. She held that the claim had no reasonable prospect of success and dismissed the appeal from the certification judge’s decision to deny certification of the proposed class action on the basis that the pleadings did not disclose a cause of action.

[98] In light of this case law, I agree with the certification judge that this case does not fall within the established category of recovery for pure economic loss for the negligent supply of shoddy goods or any established duty within that category.

....

[102] In Cannon, at paras. 155-60, and 169-77, Strathy J. (as he then was) held that there was a reasonable cause of action against the creators and promoters of a tax avoidance program that the participants alleged was “negligently designed and … did not work” when they were told that it would. In particular, he held, at para. 177, that:
Accepting these allegations as true for the purposes of the s. 5(1)(a) test, Appleby as a creator of the Gift Program arguably owed a duty of care to a prospective donor to ensure that the program would work and that the donor would receive a valid charitable donation receipt in return for his or her gift. I conclude that there is a properly pleaded cause of action against Appleby for negligence.
[103] The claim was allowed to proceed against one of the creators of the scheme even though the creator had no direct contractual relationship with investors: Cannon, at paras. 173-77, 245.

....

(b) Is there a Novel Claim for Breach of the Duty of Care?

[108] In the event I am wrong and this claim for negligent performance of a service does not fall within a recognized duty of care, I will consider whether on the facts pleaded, a novel claim for economic loss resulting from the negligent performance of a service should be allowed to proceed.

[109] Where there is no recognized duty, the first step is to determine whether there is a proximate relationship between the parties resulting from the defendant’s undertaking that invites the plaintiff’s reasonable reliance. If so, the defendant becomes obligated to take reasonable care: Livent, at para. 30. The proximity analysis includes an examination of “‘expectations, representations, reliance, and the property or other interests involved’ as well as any statutory obligations”: Livent, at para. 29 (citations omitted).
. Mandeville v. The Manufacturers Life Insurance Company

In Mandeville v. The Manufacturers Life Insurance Company (Ont CA, 2014) the Court of Appeal expounded on the nature of damages for "pure economic loss":
[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.

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