Franchise Supplier’s Duty of Care Does Not Extend to Economic Loss

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This article, written by Ben Hanuka, was originally published by The Lawyer’s Daily June 15, 2018. Click here to view the published article.

By Ben Hanuka

In 1688782 Ontario Inc. v. Maple Leaf Foods Inc., a decision released on April 30, 2018, the Court of Appeal for Ontario held that the defendant Maple Leaf Foods, which was the exclusive supplier of core menu items to the Mr. Sub franchise system, was not liable to franchisees in the system for alleged economic loss caused by a food recall.

Key Facts

In 2008, at the time of the listeria outbreak, Maple Leaf was an exclusive supplier for two ready-to-eat meats for the Mr. Sub franchise system.

The franchise agreement between Mr. Sub and its franchisees required the franchisees to purchase the two ready-to-eat meats exclusively from Maple Leaf or its distributors.

Maple Leaf’s contract was with the franchisor, rather than directly with the franchisees.  Maple Leaf contracted with distributors, who in turn delivered the products to the franchisees.

In August 2008, the Canadian Food Inspection Agency informed Maple Leaf that one of its products tested positive for listeria. Within hours of receiving this notice, Maple Leaf released a press release and a recall. A few days later, after further tests revealed a broader problem at the effected plant, Maple Leaf expanded the recall to include the two ready-to-eat meats used by Mr. Sub franchisees.

Media reports regarding the listeria outbreak connected Maple Leaf to Mr. Sub. Maple Leaf communicated with Mr. Sub and set up a hot line for use by franchisees.

Maple Leaf paid distributors to attend the franchisees’ outlets to retrieve affected ready-to-eat meats and claimed that it issued credits to the franchisees. Also, Maple Leaf assisted Mr. Sub to find a new supplier for the two products.

Mr. Sub sued Maple Leaf and reached a settlement for $250,000 and certain contractual advantages.

The franchisees later started the class action in this case against Maple Leaf, alleging that the Mr. Sub franchise system was the only submarine sandwich chain that the media identified as using Maple Leaf ready-to-eat meat, and that it was foreseeable that the recall would result in a loss of sales, profits and goodwill for the franchisees.

The Supreme Court Livent decision

In limiting the scope of Maple Leaf’s duty to the franchisees, the Court of Appeal relied on a recent 2017 Supreme Court decision in Deloitte & Touche v. Livent Inc. (Receiver of), which clarified the Anns/Cooper duty of care legal analysis.  It should be noted that the Livent decision was not available to the motion judge – it was released after arguments before the Court of Appeal, and the parties were invited to make subsequent submissions about the decision.

No recognized duty of care to franchisees

The Court of Appeal distinguished the cases that the motion judge relied on about Maple Leaf’s liability for reputation harm to the franchisees.  It held that in those other cases, the defendants were aware of the potential harm of its products but supplied them anyway.  Here, Maple Leaf promptly issued a recall after learning of the listeria outbreak.

Also in other cases, the defective product resulted in actual damage or injuries to the plaintiff or its customers. Here, the ready-to-eat meats had not sickened any customers of Mr. Sub. The franchisees’ claim was for pure economic loss.

No basis for new duty of care

The Court of Appeal held that economic losses arising from reputational harm did not fall within the scope of any of Maple Leaf’s duties to the franchisees.

Maple Leaf more properly owed a duty of care for human health to the franchisees’ customers, and not to the franchisees themselves.  Expanding this duty to protect franchisees against reputational harm would transform a duty owed to one class (consumers) into a different duty owed to a different class (franchisees).

As the majority of the Supreme Court wrote in Livent, any reliance which falls outside the scope of the defendant’s undertaking falls outside the scope of the proximate relationship and the duty of care.

While it may be reasonably foreseeable that the franchisees would suffer reputational harm, this does not mean that the harm falls within the scope of the proximate relationship.

The Court also noted that there was a strong policy interest to encourage manufacturers to quickly issue recall notices for dangerous or defective products and that these policy considerations were not consistent with imposing liability because of the recall notices.

Reputational damage outside the scope of Maple Leaf’s representation to franchisees

The motion judge found that Maple Leaf made representations to franchisees that its ready-to-eat meats were fit for human consumption.

The Court of Appeal found that the scope of Maple Leaf’s representations to the franchisees did not extend to their economic losses.

Livent instructs courts to consider proximity before foreseeability because what the defendant foresees depends on the purpose of its undertaking to the plaintiff. Here, the purpose of Maple Leaf’s representation was to ensure that customers would not become ill from eating ready-to-eat meats. It was not to protect the franchisees’ reputations. Since the representation was aimed at health and safety interests, the injury to reputational damage was not foreseeable.

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Ben Hanuka, J.D., LL.M., C.S., is a member of the Ontario and British Columbia Bars and practises in the areas of commercial and franchise litigation and arbitration.  He is certified by the Law Society of Ontario as a Specialist in Civil Litigation, and principal of Law Works^‎®P.C. (in Ontario) and Law Works^‎®L.C. (in British Columbia).  The author thanks Anthony Pugh, Student-at-Law at Law Works for his assistance in writing this article.

For more information about Law Works’ expertise and how we may be able to help you, please contact Ben Hanuka at https://www.lawworks.ca/book-a-consultation or by phone in Ontario at (855) 978-5293 and in British Columbia at (604) 262-1711.