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The Supreme Court of Canada has ruled that Maple Leaf Foods Inc. cannot be held legally responsible for financial losses suffered by Mr. Sub franchise owners because of tainted meat.

The 5-4 ruling, which relates to a deadly listeria outbreak at a Maple Leaf processing plant in 2008, has broad importance for Canadian manufacturers and franchise owners. The court chose not to expand the potential liability of manufacturers. It said Maple Leaf did not owe a “duty of care” to the sandwich shops that sold their meats, only to the customers who ate them.

The broad principle, then, is that manufacturers cannot be held responsible when their negligence causes “pure economic loss” – lost profits or sales, or reputational harm – to businesses that don’t have a contract with them. The franchisees' contract was with Mr. Submarine Ltd., the chain owner. The ruling came in a class-action lawsuit brought by 425 owners of Mr. Sub franchises, whose contract did not allow them to sue Mr. Submarine Ltd.

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Under that contract, the franchise owners were required to buy 14 core menu items supplied by Maple Leaf Foods. During the listeria outbreak at a processing plant, Maple Leaf recalled certain meats, leaving the franchisees without a supplier for a time. Meanwhile, more than 20 people died, and dozens more became seriously ill (although not connected to Mr. Sub). The Canadian Food Inspection Agency named Mr. Sub in a health warning, and Mr. Sub became publicly associated with Maple Leaf.

All nine judges called the class action a “novel” claim, but the majority said the franchisees accepted the benefits of their relationship with Mr. Submarine Ltd., such as advertising and lower prices, and needed to accept the drawbacks and risks.

“It is this simple: Instead of operating as an independent restaurant, the [franchisees] chose to operate [their] business through a franchise,” Justice Sheilah Martin and Justice Russell Brown wrote. The other three in the majority were Justice Michael Moldaver, Justice Suzanne Côté and Justice Malcolm Rowe.

The class-action had the potential to be a game-changer for manufacturers' liability, said lawyer Andrew Bernstein, who was not involved in the case. It could have been akin to the famous 1932 ″snail in the bottle" case from Britain known as Donoghue v Stevenson, which first allowed consumers to sue manufacturers for negligence over unsafe products, he said. (May Donoghue drank a bottle of ginger beer in a café and found a decomposing snail at the bottom. She fell ill, and sued.) Although the consumer’s “contract” was with the café, the House of Lords ruled the manufacturer had a “duty of care” to Ms. Donoghue, and that negligence was a civil wrong (known as a tort).

The existing state of the law is that manufacturers can be sued for negligence that causes physical or mental harm to persons, or damage to property. (Maple Leaf quickly settled proposed class actions by victims of the tainted meat.) The question in the Maple Leaf case was whether there could be liability for economic losses over a shoddy or unsafe product to non-customers.

The majority ruling stressed that the franchisees' contract was with Mr. Submarine Ltd., not Maple Leaf Foods. The only danger from the meats was to consumers, and the company could not “bootstrap” its legal claim to them. In any event, they said, once Maple Leaf Foods recalled and destroyed the tainted meats, any danger to consumers was gone.

The dissenters said Maple Leaf “knowingly” served as an exclusive supplier of products integral to the Mr. Sub franchisees. Justice Andromache Karakatsanis wrote that it was “just and fair” to hold the company responsible because it "owed the franchisees a duty to take reasonable care not to place unsafe goods into the market that could cause economic loss to the franchisees as a result of reasonable consumer response to the health risk posed by those goods.“ The other dissenters were Chief Justice Richard Wagner, Justice Rosalie Abella and Justice Nicholas Kasirer.

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Elizabeth Bowker, a lawyer for Maple Leaf, said the ruling prevented a “chilling effect” on manufacturers who might, if it had gone the other way, hesitate to recall potentially dangerous products for fear of “indeterminate liability.”

Peter Kryworuk, a lawyer for the franchisees, stressed his clients' vulnerability as small business owners. “The 425 Mr. Sub franchisees who suffered significant losses through no fault of their own as a result of the Maple Leaf listeria outbreak will not be able to obtain compensation for their losses," he said.

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