The Supreme Court of Canada released its decision last week in 1688782 Ontario Inc. v. Maple Leaf Foods Inc. The Court was divided on whether Maple Leaf Foods ought to owe a duty of care to Mr. Sub franchisees.
In 2008, several Mr. Sub franchisees were affected by Maple Leaf Foods recall of meat products. The meat products were processed in a Maple Leaf factory in which a listeria outbreak occurred.
After the recall, the franchisees were short on product for six to eight weeks.
Mr. Sub, the franchisor, had an exclusive supply agreement with Maple Leaf. This made Maple Leaf the exclusive supplier of ready to eat meats served in all Mr. Sub restaurants.
The franchise agreements required franchisees to purchase Maple Leaf meats.
Franchisees did not have contracts with Maple Leaf directly. Instead, each had contracts with Mr. Sub.
Franchisees commenced a class action against Maple Leaf. The action was certified. The franchisees claimed for economic losses and reputational injury due to their association with contaminated meat products.
Maple Leaf brought a motion to dismiss the claims.
The motion judge held that Maple Leaf owed the franchisees a duty to supply a product fit for human consumption and that the contaminated products posed a danger. She held that Maple Leaf owed them a duty of care.
The Court of Appeal allowed Maple Leaf’s appeal. It found Maple Leaf owed no duty of care to the franchisees.
The Supreme Court of Canada (5:4) dismissed the appeal.
A duty of care is important because it is a necessary element to proving negligence in tort law.
A tort claim is a claim for a civil wrong.
Without a duty of care, the claim fails.
Notably, the franchisees sued Maple Leaf. They did not sue Mr. Sub, the middle-man whose contract required them to buy products exclusively from Maple Leaf.
Also, although contracts existed, they sued only in tort for economic losses. They did not sue in contract.
The majority held that through the contractual arrangements, the parties had already allocated risk.
According to the majority, courts must ask: is a party using tort law so as to circumvent the strictures of a contractual arrangement? Could the parties have addressed risk through a contractual term? And, did they?
The minority disagreed. They would have decided in favour of the franchisees.
The minority pointed out that no contractual provision addressed compensation for unfit or unsafe shipments. So, the contracts did not allocate this particular risk.
In the majority’s view, courts should take a “realistic approach”.
They felt that courts ought to consider the parties’ actual circumstances, including their commercial sophistication and bargaining power.
According to the minority, courts must ask: was the plaintiff actually able to allocate for this risk?
In their view, the franchisees’ “ability” to allocate risk was illusory.
With no access to direct contracts with Maple Leaf, the franchisees could only contract with their franchisor, Mr. Sub. A franchisee’s relationship with the franchisor is one characterized by a “fundamental power imbalance.”
Franchisees are not generally able to negotiate with the franchisor. Franchise agreements are usually drafted by the stronger franchisor and are presented on a “take it or leave it basis” without negotiation.
The minority considered that franchisees were vulnerable from the beginning. This vulnerability was sustained throughout their relationship with Mr. Sub.
Further, they were particularly vulnerable and dependent on Maple Leaf, due to their franchisor’s exclusive relationship with Maple Leaf. Justice Karakatsanis for the minority stated:
…the fact that this power imbalance and loss of control is widespread in the franchise context does not make it any less acute or justify dismissing it. Nor does it change that the franchisees were, for all intents and purposes, unable to protect themselves from the very loss they allege. …. the franchise agreement was silent on the risk at issue in this case. I therefore cannot interpret the franchise agreement to mean that the franchisees accepted a limit to their rights in tort for the loss at issue in this case.
… In the context of an almost twenty-year relationship, Maple Leaf knowingly operated as an exclusive supplier to a restaurant operating as a franchise — a business arrangement in which the franchisee typically has almost no power to bargain for contractual protection, either
with the supplier or the franchisor. Compounding this vulnerability, the franchisees’ businesses were unusually dependent on Maple Leaf because Mr. Sub is known for selling submarine sandwiches with ready-to-eat meats. …
The majority decision may pose challenges for franchisees in the future.
The minority decision along with other decisions may still provide a basis, in some cases, for franchisees to seek legal redress in certain circumstances for losses they experience.
This is a modified version of a November 15, 2020 article appearing in online publications including the Kelowna Capital News. The content of this article is intended to provide very general thoughts and general information, not to provide legal advice. Advice from an experienced legal professional should be sought about your specific circumstances. We may be reached through our website at inspirelaw.ca.