Par Daria Kapnik (2005)
The Supreme Court of Canada (SCC) in its approach to the recovery for economic loss seems to set up an independent framework for determining liability in cases of negligent misrepresentation; this framework and its position in Canadian law steams out of the old forms of actions, still carrying their heritage.
In order to evaluate the recent evolution in the area of economic loss in Canadian jurisprudence, one has to trace its origins and development throughout history of the common law.
In early 13th century cases that were brought before common law courts were channelled through a strict system of writs. There were initially two courses of action available: one, which dealt with a general wrong such as physical harm, was the action in trespass, and the other was reserved for cases of property entitlement. The latter included entitlement to a certain sum of money and gave rise to an action in debt. At the same time as debt, action of covenant (where covenant meant an agreement) developed out of the general action of trespass, occupying the niche between action of debt and trespass and helping to shape the modern understanding of contract. Insofar as the economic loss in that period is concerned, because the law was primarily focused on recovery for physical injury to person or property, there were only a few isolated instances when it was permitted (in covenant and somewhat in debt). These situations covered enticement or interference with plaintiff’s servants, abduction of feudal wards, interference with father’s right to arrange his daughter’s marriage and hindering a franchise such as right to hold a market at a particular location. These remedies were arguably proprietary in nature and that might have been the reason why compensation for pure economic loss was allowed.
In the 14th century, however, with the narrowing of the scope of the action in covenant by virtue of the creation of the requirement of covenants under seal, and with the procedural tightening that limited actions in debt, these predecessors of the modern law of contract no longer had the capacity to carve out the possibility for recovery for economic loss, which otherwise would effectively become part of the today’s contract law. Actions in debt at that time and later in the 15th century had a requirement of quid pro quo, or what modern law calls consideration. Consideration became an important requirement at common law, and yet again instances where economic loss resulted from negligent misrepresentation were effectively excluded from the law of contracts for the lack of consideration. The development of tort on the other hand, steamed from the idea of loss based on physical harm and damage to property; as such tort law as well did not take in claims in negligent misrepresentation, making them formally compensable only with the existence of a contract.
There was a negligible number of documented occurrences in the area of recovery for economic loss in the subsequent centuries under either contract or tort, and the issue became more important with the industrial changes of the recent centuries; with life becoming more complicated, marked by arrival of public transport, industrial assets and large businesses, the scope of situations where economic loss was experienced as a consequence of wrongdoing increased exponentially. The real change in the area of economic loss occurred with the adoption of generalized duty of care in Donaghue v. Stevenson. This duty, which later on got restated in Anns case (on which in turn the Canadian jurisprudence is still based) does not fit well for cases of economic loss that result from a contract-like situation, where one party voluntarily assumes a responsibility and is negligent, and the other party reasonably relies upon this assumption of responsibility and undergoes an economic loss. The test in Anns simply requires the foreseeability of physical or property damage, and has conceptual troubles extending into the realm of negligent misrepresentation, which historically lies between contract and tort; though the loss experienced in situations of negligent misrepresentations fits more with the idea of a contractual undertaking than with a tortuous claim, economic loss was stuck into the law of negligence.
Hercules Management is a recent SCC case which has followed the landmark British case Hedley Byrne. It sets out the rule that for the pure economic loss resulting from negligent misrepresentation to be recoverable there has to be a ‘special relationship’ between the plaintiff and the defendant. Without going into the details of the test, there has to be an almost contractual setting (but for the absence of consideration) between the plaintiff and the defendant. In this as well as in subsequent cases we see SCC judges trying to come up with general tests, reformulating Anns and trying to bring in policy reasons in assessing the availability of appropriate remedies. However, this approach simply does not work, since justification for remedies assigned in any case should conceptually follow the logic of the notions they are grounded in. And in cases of economic loss, courts have ignored the basic ideas about the importance of property notions. It is fundamental to show damage to person or property in order to be able to recover, as it was shown for actions in debt. Negligent misrepresentation then becomes difficult to justify, as at first sight it seems inconsistent with this property notion. The argument that can be raised linking the damage in these situations to a proprietary origin is that negligent misrepresentation of the defendant has caused the plaintiff loss of freedom. Though this fits into the traditionally protected category of person and property, there is still the problem with the idea of a ‘special’, contract-like relationship for the reasons outlined in the discussion above. The negligent misrepresentation test is reasonably clear, what is unclear is how it fits into the scheme of negligence liability in tort law.
In passing, it would also be worthy of mentioning the use of the traditional notions in the SCC cases dealing with relational loss. In CNR vs. Norsk and (arguably) later in Bow Valley Husky, SCC limits the relational economic loss recovery to cases of joint venture. Once again, this type of recovery is hard to justify using the traditional law of obligations categories for roughly the same reasons as negligent representation (it is the property of another person that is harmed, as well as plaintiff’s contractual right with that person, but not plaintiff’s liberty, person and property). Arguably though, Bow Valley’s restrictive approach to economic loss is merely a redress to its very roots; the recourses under this category are very limited because on its face, plaintiff’s property has not been harmed, but also, they reflect the same relational situations as those addressed by the medieval law, such as recourses for hindering franchise or for interfering with his servants, as they are based roughly on the same proximity of the relationship. Another possible argument in favour of the old forms of action lies with the traditional exemptions from the privity rule in early common law, where with sufficient closeness of the relationship (such as between co-owners or in cases of agency), parties would avoid the scrutiny of the common law. It seems that the same logic is applied for relational loss, as exception to the non-recovery rule is a situation where the proximity between the parties is based on a commercial, contractual ground. Though as final comment, it should be added that the discrepancy in results for Norsk and Bow Valley is based on the economic considerations rather than proximity (i.e. closeness of the relationship). Once again, the SCC in its logic makes an unconscious leap to history of common law, where economic reality (harm to person or property) plays a central role, making recovery for pure economic loss virtually impossible (Bow Valley) where other recognized interests are not at stake, as it is the case with negligent misrepresentation.
Historically ‘unfit’ for tort law because the contractual nature of the damage that it produces, and for contracts law because of the lack of consideration, negligent misrepresentation cases became tangled in the judicial rhetoric of the SCC in the last few decades. However, these cases are a reflection of and a retraction to the old forms of action, grounded in the ideas of proprietary and commercial interests.
