Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021
Norsk Pacific Steamship Company Limited,
Norsk Pacific Marine Services Ltd.,
The Tug Jervis Crown and
Francis MacDonnell Appellants
v.
Canadian National Railway Company Respondent
Indexed as: Canadian National Railway Co. v. Norsk Pacific Steamship Co.
File No.: 21838.
1991: May 2; 1992: April 30.
Present: La Forest, L'Heureux‑Dubé, Sopinka, Cory, McLachlin, Stevenson and Iacobucci JJ.
on appeal from the federal court of appeal
Torts ‑‑ Negligence ‑‑ Economic loss ‑‑ Railway bridge owned by Crown damaged by barge ‑‑ Bridge used by railways under contract ‑‑ Bridge owner recovering damages from defendants ‑‑ Railways unable to recover economic losses from bridge owner ‑‑ Whether or not defendants liable to railways using bridge for economic loss.
A barge being towed down the Fraser River by a tug owned by Norsk collided in heavy fog with the New Westminster railway bridge and caused extensive damage which closed the bridge for several weeks. Appellants admitted liability for negligence as to the collision. The bridge was owned by Public Works Canada (PWC) and used by four railways, including CN.
The bridge formed part of CN's main line and connected with tracks and land owned by CN on either side of the bridge. The railways' use of the bridge was governed by contract which explicitly reserved full ownership of the bridge to PWC and explicitly rejected any possibility of a leasehold estate or interest in CN. The bridge operated on the principle of full recovery of all operating and maintenance costs but not for profit. CN, in addition, agreed to provide PWC, on a contractual basis, with repair, maintenance, consulting and inspection services as PWC might request. PWC was to authorize all such services and to pay for them as needed. CN also provided some services voluntarily.
PWC paid for the repair to the bridge and recovered all damages resulting from the collision at trial. The licence contracts between PWC and the railways, however, provided for no indemnification in the case of disruption of bridge service. Unable to claim under the contract, CN brought this action in tort against Norsk and the other defendants claiming for the actual costs incurred because of the bridge closure.
Before trial, it was agreed that the entitlement of two of the railways to recover for pure economic loss would stand or fall on the result of the action by CN. The trial judge allowed CN's claim against Norsk and dismissed it as against the other defendants. Norsk's appeal to the Court of Appeal was dismissed.
At issue here is whether or not economic loss, and "contractual relational economic loss" in particular, is recoverable in tort.
Held (La Forest, Sopinka and Iacobucci JJ. dissenting): The appeal should be dismissed.
Per L'Heureux‑Dubé, Cory and McLachlin JJ.: Pure economic loss is prima facie recoverable where, in addition to negligence and foreseeable loss, there is sufficient proximity between the negligent act and the loss. Proximity is the controlling concept, avoiding the spectre of unlimited liability. Proximity may be established by a variety of factors depending on the nature of the case. The categories are not closed and further definition as to what factors give rise to liability for pure economic loss will occur as more cases are decided. In determining whether liability should be extended to a new situation, the courts should consider the factors traditionally relevant to proximity such as the relationship between the parties, physical propinquity, assumed or imposed obligations and close causal connection. Sufficient special factors must exist to avoid the imposition of indeterminate and unreasonable liability. The result would be a principled, yet flexible, approach to tort liability for pure economic loss. Recovery would be allowed where justified, while excluding indeterminate and inappropriate liability, and it will permit the coherent development of the law.
In effect, the absolute exclusionary rule could be seen as an indicator of proximity in accordance with the approach initiated in England by Hedley Byrne & Co. v. Heller & Partners Ltd., and followed in Canada in Rivtow Marine Ltd. v. Washington Iron Works, Kamloops (City of) v. Nielsen and B.D.C. Ltd. v. Hofstrand Farms Ltd. Where there is physical injury or damage, one posits proximity on the ground that if one is close enough to someone or something to do physical damage to it, one is close enough to be held legally responsible for the consequences. It is, however, not the only indicator of proximity. The necessary proximity to found legal liability fairly in tort may arise in circumstances where there is no physical damage.
A more comprehensive and objective consideration of proximity requires that the court review all of the factors connecting the negligent act with the loss; this includes not only the relationship between the parties but all forms of proximity -‑ physical, circumstantial, causal or assumed indicators of closeness. While it is impossible to define comprehensively what will satisfy the requirements of proximity or directness, precision may be found as types of relationships or situations are defined in which the necessary closeness between negligence and loss exists.
Proximity, while critical to establishing the right to recover pure economic loss in tort, does not always indicate liability. The approach adopted in Kamloops (paralleled by the second branch of Anns v. Merton London Borough Council) requires that the court consider the purposes served by permitting recovery as well as any residual policy considerations which call for a limitation on liability. Liability for pure economic loss can therefore be rejected where indicated by policy reasons not taken into account in the proximity analysis.
The approach enunciated in Kamloops does not threaten to open the floodgates of indeterminate liability, lead to undue uncertainty, or cause unfair or inefficient economic allocation of resources. Rather, it is sensitive to these concerns. The legislature, moreover, can impose limits if the courts extend liability too far following this approach. In light of the review of the issues of insurance, loss spreading and contractual allocation of risk raised against liability in this appeal, there is no practical reason for the courts to retreat to the inflexible rule, for example, one that never countenances recovery of economic loss except where the plaintiff has suffered physical damage or injury or has relied on a negligent misrepresentation.
CN suffered economic loss as a result of being deprived of its contractual right to use the bridge damaged by the defendants' negligence. Its right to recover depended on: (1) whether it could establish sufficient proximity or "closeness" and (2) whether extension of recovery to this type of loss was desirable from a practical point of view.
The issue of proximity had to be considered anew here. The case did not fall within any of the categories where proximity and liability had previously been found to exist.
In addition to focusing upon the relationship between Norsk and CN -- a significant indicator of proximity in and of itself -- the trial judge based his conclusion that there was sufficient proximity on a number of factors related to CN's connection with the property damaged, the bridge, including the fact that CN's property was in close proximity to the bridge, that CN'S property could not be enjoyed without the link of the bridge which was an integral part of its railway system, and that CN supplied materials, inspection and consulting services for the bridge, was its preponderant user, and was recognized in the periodic negotiations surrounding the closing of the bridge.
Recovery for purely economic loss has been recognized for a "joint" or "common venture" category. To deny recovery in such circumstances would be to deny it to a person who for practical purposes is in the same position as if he or she owned the property physically damaged. Here, CN's operations were so closely allied to the operations of PWC's damaged bridge that the necessary proximity is established.
From a practical point of view, extension of recovery to this type of loss is desirable. Recovery permits a plaintiff, whose position for practical purposes vis‑à‑vis the tortfeasor is indistinguishable from that of the owner of the damaged property, to recover what the actual owner could have recovered. This is fair and avoids an anomalous result. Recovery of economic loss in this case does not open the floodgates to unlimited liability; the category is a limited one and allows potential tortfeasors to gauge in advance the scope of their liability.
Per Stevenson J.: While in Canada there is no general exclusionary rule precluding recovery of pure economic loss in a negligence action, there are acceptable policy reasons which preclude recovery of certain types of economic losses. For policy reasons and for reasons of fairness to defendants, the law must deny recovery of economic losses which give rise to the possibility of indeterminate liability. Relational losses usually create the possibility of indeterminate liability and their recovery is therefore exceptional. Aside from the danger of indeterminate liability, however, there is no reason in principle that bars recovery of such losses. Relational losses should thus be recoverable wherever the policy concern about indeterminate liability does not apply. There is no danger of indeterminate liability when the defendant actually knows or ought to know of a specific individual or individuals, as opposed to a general or unascertained class of the public, who is or are likely to suffer a foreseeable kind of loss as a result of negligence by that defendant. With a "known plaintiff", the scope of liability cannot become indeterminate. While the "known plaintiff" approach may not be an adequate final limit on recovery of relational economic loss, it provides an appropriate basis for excluding the relational loss exclusionary rule. There may be other exceptions. The concept of proximity is incapable of providing a principled basis for drawing the line on the issue of liability.
On the facts of this case, there is no policy rationale for excluding liability. The appellants do not deny that the respondent's loss was foreseeable or that the other usual elements necessary to found a liability in negligence were present. One navigating near a bridge would ordinarily realize that damage to the bridge structure will cause damage to the users of the bridge. The loss and the victim were identifiable, and the damage almost inevitable. The appellants ought to have known ‑‑ and in fact knew ‑‑ that the respondent would suffer economic loss as a result of their negligence. Liability would in no way be out of proportion with the neglect. There is no danger of indeterminate liability.
Per La Forest, Sopinka and Iacobucci JJ. (dissenting): There are at least three types of economic loss cases in tort. The first involves consequential economic loss. In those cases, the plaintiff claims for economic loss which occurs as a consequence of the plaintiff's being personally injured or incurring property damage. In the second type, which can be termed non-relational economic loss, the plaintiff claims for pure economic loss which is unrelated to any personal injury or property damage suffered by either the plaintiff or any third party. It is doubtful that this group can be analyzed in terms of a single rule. The third type, present here, involves a claim for relational economic loss by the plaintiff as a result of damage caused to someone else's property.
Thus the issue in this case is not whether economic losses are recoverable in tort; they are indeed recoverable in certain cases. The issue, rather, is whether a person (A) who contracts for the use of property belonging to another (B) can sue a person who damages that property for losses resulting from A's inability to use the property during the period of repair. This type of loss can be referred to as contractual relational economic loss.
A distinct approach to contractual relational economic loss cases is justified both on policy grounds and on precedent. In policy terms, contractual economic loss cases have a number of specific characteristics that differentiate them from other pure economic loss cases. First, the property owner's right of action already puts pressure on the defendants to act with care. Imposing further liability cannot reasonably be justified on the grounds of deterrence. Second, a firm exclusionary rule does not necessarily exclude compensation to the plaintiff for his or her loss. Rather, it simply channels to the property owner both potential liability to the plaintiff and the right of recovery against the tortfeasor. Third, perfect compensation in these cases is almost always impossible because of the ripple effects which are of the very essence of contractual relational economic loss. These effects are often absent in other economic loss cases. It is in this sense that the solution to cases of this type is necessarily pragmatic: the whole exercise in this kind of situation involves drawing a line amongst those who are undeniably injured by the tortfeasor who was undeniably at fault. Fourth, contractual relational economic loss cases, typically, involve accidents, an aspect of fundamental importance with respect to tests of liability founded on the foreseeability of an individual plaintiff or an ascertained class of plaintiffs.
As for precedent, the debate over recovery of pure economic loss in tort has been obscured by the existence of two different versions of an exclusionary rule barring recovery for pure economic loss. In its narrow formulation, the rule excludes claims for negligent interference with contractual relations where a third party's property has been damaged and where the damage to the plaintiff's contractual relations is caused as a result of that property damage. The rule was originally developed in these terms in Cattle v. Stockton Waterworks Co., and other early cases as noted in the recent case of Candlewood Navigation Corp. v. Mitsui O.S.K. Lines Ltd. (The Mineral Transporter). Subsequently, the exclusionary rule was broadened and purported to exclude all claims in negligence for pure economic loss. This broad rule was rejected in Hedley Byrne & Co. v. Heller & Partners Ltd., opening up a third phase in the development of law on economic loss. Many recent cases in the area of economic loss have approached the problem at a very high level of generality. They have addressed the question of whether we should abandon the broad rule altogether. The result of this broad approach is that cases on relational economic loss are unhelpfully bound up with other types of economic loss cases that raise different policy concerns. Precedent and policy support a distinct approach to the issue of contractual relational economic loss.
The decisions of this Court relied upon by the respondent are not contractual relational economic loss cases; they involve other types of economic loss claims which raise different policy concerns. Undoubtedly, the decisions of this Court in Rivtow Marine Ltd. v. Washington Iron Works and Kamloops (City of) v. Nielsen, refute the existence of a broad exclusionary rule in Canada and Murphy v. Brentwood District Council does not represent the law in Canada. However, nothing in Rivtow or Kamloops indicates that the Court considered the narrow exclusionary rule to be ill-advised.
While the respondent recognized the existence of the narrow rule in Cattle, it sought first to avoid the application of the rule by contending that its interest was more than a mere contractual interest. Second, they sought to qualify the application of the rule in Cattle by contending that even if CN has only a contractual interest, the existence of other factors is sufficient to constitute a special relationship with the tortfeasor and to ground recovery for its contractual claims. These arguments were dealt with in turn.
CN's arguments that the narrow rule should not apply in this case because it had more than a contractual interest were unpersuasive. First, CN did not suffer a "transferred loss of use" any different in kind from that suffered by the typical contractual claimant. The argument that granting judgment to CN in this case would not extend the liability of the defendants over and above what they would normally incur to the owner of commercial property (since the owner could have collected damages for loss of use) was unconvincing. A similar argument was rejected in Candlewood on stronger facts for the plaintiff. Adoption of a "transferred loss of use" theory in cases of this type would lead to great uncertainties in measuring, tracing and apportioning damages. Second, CN did not come under the common adventure or joint venture exception to the narrow exclusionary rule. CN's preponderant usage of the bridge and its contractual arrangement to supply repair services to PWC where requested and paid for by PWC were not sufficient to constitute a common adventure. Common adventure cases involve a situation where B is bound to contribute to A's loss under general average rules and seeks to recover that amount from the wrongdoer C. They also involve discretionary decisions made in the common interest which impose cost disproportionately amongst those who benefit from the decision. There was no common imminent peril in this case and CN was not required to contribute to PWC's loss. CN's voluntary contributions to bridge maintenance were also insufficient to constitute a common adventure.
Turning to the second branch of CN's argument, it was necessary, before examining the various proposals that have been made to relax the bright line rule which excludes recovery for contractual relational economic loss, to set forth the criteria that a rule in this area should meet. The guideposts set forth by McLachlin J. for establishing a rule in this area were generally agreed with: liability must be limited; the limits must be clearly defined; considerations of policy and fairness must be taken into account. A number of additional aspects are also relevant to the choice of a rule in this area. It is often suggested that indeterminacy is the only problem the rule must confront. This was perhaps natural in light of the importance of potential indeterminate liability in negligent misrepresentation cases and the fact that the breakthrough in allowing recovery for economic loss came in Hedley Byrne. However, the resulting confusion between the indeterminate liability problem and economic loss cases in general tends to obscure the variety of issues raised in different kinds of economic loss cases. Although a rule in the area of contractual relational economic loss certainly must confront the problem of indeterminacy, the rule should serve to do more than just exclude indeterminate liability. A test for recovery in cases of contractual relational economic loss should also reflect the characteristics of this type of litigation. The rule should encourage both parties to act in ways that will minimize overall losses.
The rule must, of course, also confront the problem of indeterminacy. What then does it mean for a particular liability to be determinate? First, in this area, the requisite certainty should exist before the accident occurs. Second, the concern is not simply the risk of a large number of claims since an accident may injure a large number of people or cause extensive property damage. Rather, the concern is that the volume of claims is indeterminate and therefore difficult and expensive to insure against. In physical damage cases, the number of potential first-victim claims is usually foreseeable even when large. Even more importantly, it is rare for multiple physical damage claims to ripple down a chain. In contrast, such ripple effects are the very essence of contractual relational economic loss. A third important consideration is the indeterminacy of each claim. Allowing recovery for contractual expectancies would require analysis of who bore the loss. The problem with this case, from the perspective of indeterminacy, is that it involves a type of accident that will very likely lead to a great number of claims.
The proposed tests that would allow recovery do not meet the criteria that a rule should have in this area. First, the "individual plaintiff" or "ascertained class of plaintiffs" test was rejected in Candlewood. While useful in negligent misrepresentation cases, it has no link with the defendant's degree of fault or with the merit of the plaintiff's claim in the context of an accident. Second, foresight of the specific nature of the plaintiff's loss is not sufficient; in practically all cases of this type, the defendant will be aware that the specific nature of the loss will be loss of use of the damaged property. Third, the "physical effects" test adopted by Jacobs J. in Caltex Oil (Aust.) Pty. Ltd. v. The Dredge "Willemstad", is not satisfied even if it were to be adopted. The other railways suffered identical damages despite not owning any property in physical propinquity to the accident. There is no policy significance in the fact that a particular plaintiff owns property in proximity to an accident. Fourth, the concept of proximity is incapable of providing a principled basis for drawing the line with respect to the issue of liability for the reasons expressed by Stevenson J. It expresses a result, rather than a principle. Fifth, liability in this area should not be established based on the court's perception of the extent of the defendant's moral fault. Liability is very often vicarious in cases of this type. The hallmark of vicarious liability is that it is based neither on any conduct by the defendant nor even on breach of his or her own duty. Furthermore, to the extent that the concern about fault is linked to deterrence, the deterrent effect of tort law is already present due to the tort action of the property owner. Sixth, CN's suggestion that a new bright line be erected excluding all co-contractors of CN does not appear to be a significantly better solution than the traditional rule.
The crucial problem with the various formulations of the proximity test examined so far is that they look at the problem strictly from the perspective of the defendant. Given the eminently pragmatic and policy basis of decisions about liability in this area, the situation of both the defendant and the plaintiff must be examined in cases of this kind. In particular, the plaintiff's ability to foresee and provide for the particular damage in question is a key factor in the proximity analysis.
It is legitimate to consider which party is the better loss bearer in this type of case for three reasons: policy concerns with respect to deterrence and cost internalisation are generally at least substantially met by the tortfeasor's primary liability to the property owner; the approach merely articulates another policy lying behind a well-established rule; in this field the crucial problem remains that of limiting liability and a significantly higher threshold for recovery is entirely justified.
Analysis of loss bearing ability involves asking which party is in a better position to predict the frequency and severity of CN's economic loss when bridges are damaged, and to plan accordingly. CN was undoubtedly in a better position to bear the loss in this case than was Norsk. First, in light of the significant information available regarding bridge failure and CN's long use of the bridge, CN was probably at least equally competent in terms of estimating the potential risks of bridge failure. Second, CN was clearly in a better position than Norsk to estimate the potential costs of bridge failure to CN's operations. Third, CN was better placed to protect itself from the consequences of those losses through first party commercial insurance or self-insurance, or through contract with both the bridge owner and with CN's customers. Even if recovery were allowed in this case, parties such as CN will still need to protect themselves. The critical effect of allowing recovery is that it would also require defendants in Norsk's position to insure for potential contractual relational economic loss.
To justify recovery in cases of this nature, the plaintiff would, at the very least, have to effectively respond not only to the concern about indeterminacy but also show that no adequate alternative means of protection were available. Other concerns may also need to be met. The question of whether recovery should be allowed in the residual cases in which these two barriers are overcome does not require an answer in the context of this case. The exclusionary rule is not in itself attractive. The rule only becomes defensible when it is realized that full recovery is impossible, that recovery is in fact going to be refused to the vast majority of such claims regardless of the rule we adopt, and when the exclusionary rule is compared to the alternatives. It should not be disturbed on the facts of this case.
Cases Cited
By McLachlin J.
Applied: Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189; Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; considered: Anns v. Merton London Borough Council, [1978] A.C. 728; Caltex Oil (Aust.) Pty. Ltd. v. The Dredge "Willemstad" (1976), 11 A.L.R. 227; not followed: Murphy v. Brentwood District Council, [1991] 1 A.C. 398; referred to: Donoghue v. Stevenson, [1932] A.C. 562; Ultramares Corporation v. Touche, 174 N.E. 441 (1931); Cattle v. Stockton Waterworks Co. (1875), L.R. 10 Q.B. 453; Spartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd., [1973] Q.B. 27; Leigh and Sillivan Ltd. v. Aliakmon Shipping Co., [1985] Q.B. 350; Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465; Junior Books Ltd. v. Veitchi Co., [1983] 1 A.C. 520; Morrison Steamship Co. v. Greystoke Castle (Cargo Owners) (The Greystoke Castle), [1947] A.C. 265; Domar Ocean Transportation, Ltd. v. M/V Andrew Martin, 754 F.2d 616 (1985); Amoco Transport Co. v. S/S Mason Lykes, 768 F.2d 659 (1985); Union Oil Co. v. Oppen, 501 F.2d 558 (1974); East River Steamship Corp. v. Delaval Turbine, Inc., 752 F.2d 903 (1985), aff'd 476 U.S. 858 (1986); Cass. civ. 2e, April 28, 1965, D.S. 1965.777 (Marcailloux v. R.A.T.V.M.); Joly v. Ferme Ré‑Mi Inc., [1974] C.A. 523; Regent Taxi v. Congrégation des petits frères de Marie, dits frères maristes, [1929] S.C.R. 650; Hôpital Notre‑Dame v. Laurent, [1978] 1 S.C.R. 605; Agnew‑Surpass Shoe Stores Ltd. v. Cummer‑Yonge Investments Ltd., [1976] 2 S.C.R. 221; B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R. 228; MacMillan Bloedel Ltd. v. Foundation Company of Canada Ltd., [1977] 2 W.W.R. 717; Gypsum Carrier Inc. v. The Queen, [1978] 1 F.C. 147; Star Village Tavern v. Nield (1976), 71 D.L.R. (3d) 439; Sutherland Shire Council v. Heyman (1985), 60 A.L.R. 1.
By Stevenson J.
Approved: Caltex Oil (Aust.) Pty. Ltd. v. The Dredge "Willemstad" (1976), 11 A.L.R. 227; Ross v. Caunters, [1980] Ch. 297; not followed: Murphy v. Brentwood District Council, [1991] 1 A.C. 398; Candlewood Navigation Corp. v. Mitsui O.S.K. Lines Ltd. (The Mineral Transporter), [1986] A.C. 1; Junior Books Ltd. v. Veitchi Co., [1983] 1 A.C. 520; referred to: Agnew‑Surpass Shoe Stores Ltd. v. Cummer‑Yonge Investments Ltd., [1976] 2 S.C.R. 221; B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R. 228; Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; Cattle v. Stockton Waterworks Co. (1875), L.R. 10 Q.B. 453; Simpson & Co. v. Thomson (1877), 3 App. Cas. 279; Donoghue v. Stevenson, [1932] A.C. 562; Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465; Morrison Steamship Co. v. Greystoke Castle (Cargo Owners) (The Greystoke Castle), [1947] A.C. 265; Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189; Anns v. Merton London Borough Council, [1978] A.C. 728; Ultramares Corporation v. Touche, 174 N.E. 441 (1931); Leigh and Sillavan Ltd. v. Aliakmon Shipping Co., [1986] A.C. 785; Société anonyme de remorquage à hélice v. Bennetts, [1911] 1 K.B. 243; Weller & Co. v. Foot & Mouth Disease Research Institute, [1966] 1 Q.B. 569; San Sebastian Pty. Ltd. v. Minister Administering the Environmental Planning and Assessment Act 1979 (1986), 162 C.L.R. 340; Candler v. Crane, Christmas & Co., [1951] 2 K.B. 164; Clarke v. Bruce Lance & Co., [1988] 1 All E.R. 364; Haig v. Bamford, [1977] 1 S.C.R. 466.
By La Forest J. (dissenting)
Gypsum Carrier Inc. v. The Queen, [1978] 1 F.C. 147; Bethlehem Steel Corp. v. St. Lawrence Seaway Authority, [1978] 1 F.C. 464; Star Village Tavern v. Nield (1976), 71 D.L.R. (3d) 439; Weller & Co. v. Foot & Mouth Disease Research Institute, [1966] 1 Q.B. 569; S.C.M. (United Kingdom) Ltd. v. W. J. Whittall and Son Ltd., [1971] 1 Q.B. 337; Spartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd., [1973] Q.B. 27; Rivtow Marine Ltd. v. Washington Iron Works (1972), 26 D.L.R. (3d) 559, rev'd [1974] S.C.R. 1189; Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465; Murphy v. Brentwood District Council, [1991] 1 A.C. 398; State of Louisiana v. M/V Testbank, 752 F.2d 1019 (1985); Cattle v. Stockton Waterworks Co. (1875), L.R. 10 Q.B. 453; Candlewood Navigation Corp. v. Mitsui O.S.K. Lines Ltd. (The Mineral Transporter), [1986] A.C. 1; Simpson & Co. v. Thomson (1877), 3 App. Cas. 279; Caltex Oil (Aust.) Pty. Ltd. v. The Dredge "Willemstad" (1976), 11 A.L.R. 227; Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303 (1927); Abramovic v. Canadian Pacific Ltd. (1989), 69 O.R. (2d) 487; Leigh and Sillavan Ltd. v. Aliakmon Shipping Co., [1986] A.C. 785; Société anonyme de remorquage à hélice v. Bennetts, [1911] 1 K.B. 243; Donoghue v. Stevenson, [1932] A.C. 562; Rothfield v. Manolakos, [1989] 2 S.C.R. 1259; B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R. 228; Haig v. Bamford, [1977] 1 S.C.R. 466; Elliott Steam Tug Co. v. Shipping Controller, [1922] 1 K.B. 127; MacPherson v. Buick Motor Co., 217 N.Y. 382 (1916); Overseas Tankship (U.K.) Ltd. v. Morts Dock & Engineering Co. (The Wagon Mound), [1961] A.C. 388; Cass. civ. 2e, June 25, 1975, Bull. II no. 195, eventually returned to that court, Cass. civ. 2e, February 21, 1979, Bougues‑Montès, J.C.P. 1979, IV, 145; Cour d'appel de Colmar (Ch. détachée à Metz), April 20, 1955, D.1956.723 (Football Club de Metz v. Wiroth); Cass. civ. 2e, November 14, 1958, G.P. 1959.1.31 (Demeyer v. Camerlo); Trib. gr. inst. Nanterre, October 22, 1975, G.P. 1976.1.392 (Brunet v. Rico et Caisse mutuelle d'assurance et de prévoyance); Cass. civ. 2e, April 28, 1965, D.S. 1965.777 (Marcailloux v. R.A.T.V.M.); Morin v. Blais, [1977] 1 S.C.R. 570; J. E. Construction Inc. v. General Motors du Canada Ltée, [1985] C.A. 275; Baumwoll Manufactur von Carl Scheibler v. Furness, [1893] A.C. 8; The "Father Thames", [1979] 2 Lloyd's Rep. 364; Konstantinidis v. World Tankers Corp. (The World Harmony), [1967] P. 341; Venore Transportation Co. v. M/V Struma, 583 F.2d 708 (1978); Morrison Steamship Co. v. Greystoke Castle (Cargo Owners) (The Greystoke Castle), [1947] A.C. 265; Aktieselskabet Cuzco v. The Sucarseco, 294 U.S. 394 (1935); Candler v. Crane, Christmas & Co., [1951] 2 K.B 164; Smith v. Bush, [1990] 1 A.C. 831; Lamb v. Camden London Borough Council, [1981] Q.B. 625; Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827.
Statutes and Regulations Cited
Civil Code of Lower Canada, art. 1053.
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APPEAL from a judgment of the Federal Court of Appeal, [1990] 3 F.C. 114, 104 N.R. 321, 65 D.L.R. (4th) 321, 3 C.C.L.T. (2d) 229, affirming a judgment of the Federal Court, Trial Division (1989), 26 F.T.R. 81, 49 C.C.L.T. 1, allowing respondent's action in damages. Appeal dismissed, La Forest, Sopinka and Iacobucci JJ. dissenting.
P. D. Lowry and M. A. Clemens, for the appellants.
David McEwen, for the respondent.
//La Forest J.//
The reasons of La Forest, Sopinka and Iacobucci JJ. were delivered by
La Forest J. (dissenting) -- This case concerns recovery in tort for economic loss. Though some of the arguments are framed as if the case turned on the broad question whether such damages are generally recoverable, the specific issue is much narrower. It is whether a person (A) who contracts for the use of property belonging to another (B) can sue a person who damages that property for losses resulting from A's inability to use the property during the period of repair. (I call this "contractual relational economic loss", a convenient if somewhat barbarous phrase.)
The issue arises in a context where a barge collided with a bridge while being pulled by the defendants' tug, thereby preventing the plaintiff (CN) from making use of it. Ordinarily, a person whose operations are disrupted by damage to a bridge belonging to another cannot at common law pursue the person who caused the damage. But the plaintiff claims that it may do so by reason of its particular relationship with the owner of the bridge and with the tortfeasor. As in the case of three other railways, it has a contractual right to use the bridge for railway purposes, but the plaintiff relies on additional facts to establish its special relationship. It is by far the major user of the bridge, which is a central link in its operations, so much so that many of those who operated on the river, including the master of the defendants' tug, thought it belonged to the plaintiff. As well, CN's contract requires it to repair and maintain the bridge when necessary at the request of the owner; CN also owns land close to the bridge.
The courts below and my colleagues, Justices McLachlin and Stevenson, are all of the view that CN's claim should be upheld. But this unanimity is more apparent than real, for they do so for different reasons and, indeed, there is significant disagreement on the determining issues. I take the opposite view. For sound policy reasons, the courts have established a clear rule (the "bright line" rule) that persons cannot sue a tortfeasor for suffering losses to their contractual rights with the owner of property by reason of damages caused to that property by the tortfeasor. That rule, I have no doubt, may be subject to exceptions for clear and overriding policy reasons, but as I will indicate, I have been unable to determine any reason for excluding CN from the general rule in the present case.
This, in broad outline, is what this case is about. It is necessary, however, to set forth the facts in some detail.
Facts
The Accident
The New Westminster Railway Bridge, which spans the Fraser River between Surrey and New Westminster, was built in 1904. It carries a single railway track. Its sole purpose is to service railway traffic, both passenger and freight, but it incorporates a swing span to permit marine traffic to navigate the waterway.
On November 28, 1987, the barge Crown Forest No. 4, while being towed downstream by the tug Jervis Crown in heavy fog, collided with the bridge. The Jervis Crown was owned and operated by the Norsk Pacific Steamship Co. and the Norsk Pacific Marine Services Ltd., both hereafter referred to as Norsk. The accident caused extensive damage to the bridge and it was closed for several weeks while repairs were made. The appellants admitted liability for negligence as to the collision itself.
While the bridge was closed, the four railway companies that used the bridge had to reroute traffic over another bridge further upstream. Freight was either delayed or not transported at all. The use of the waterway was also interfered with, and cargo was delayed or transported by land.
This accident gave rise to a number of legal actions which were consolidated in the judgment of Addy J. The Department of Public Works ("PWC"), representing The Queen in right of Canada, claimed damages as owner of the bridge against both Norsk and the owners of the barge Crown Forest No. 4 and the tug Westminster Chinook (another tug which was helping the Jervis Crown at the time of the accident). Only the action against Norsk succeeded. Norsk was held liable to PWC for all damages resulting to PWC from the collision. This decision was not appealed.
In addition to the action by the owner, three of the four railway companies claimed for economic loss against Norsk and the other defendants. The smallest railway user, Canadian Pacific Ltd. ("CP"), did not participate in the litigation. Before trial there was an agreement that the entitlement of the other two railways, the Burlington Northern Railway and the B.C. Hydro and Power Authority Railway, to recover for pure economic loss would stand or fall on the result of the CN claim. It was therefore only the CN claim that was directly in issue. The trial judge allowed CN's claim against Norsk and dismissed its claim against the other defendants. Norsk's appeal was denied in the Court of Appeal. Leave to appeal to this Court was granted to Norsk on November 15, 1990.
Much of the written and oral argument before us was directed to the nature of the relationships between the plaintiff and the property owner on the one hand, and between the plaintiff and the tortfeasor on the other. I have therefore set forth the facts of these relationships in some detail. I also consider two other relationships to be of interest: that between the tortfeasor and the property owner, and that between the plaintiff and other potential plaintiffs or victims of the accident. The latter relationship will be examined in the course of my analysis.
The Relationship Between the Plaintiff and the Bridge Owner
The bridge and the tracks on and adjacent to the bridge are entirely owned by PWC. Four railways were, by contract with PWC, licensed to use the bridge. The tracks owned by PWC connect with tracks owned by three of the railways on the north and south sides of the river. Of the four railways CN was the principal user, accounting for 85 to 86 per cent of the railway cars using the bridge in 1987. On average it sent 32 trains with 1530 cars a day across the bridge.
CN has used the bridge continuously since 1915. It constitutes an integral part of the railway's main line and is in effect the connecting link between the Vancouver terminus and the main line. It is the sole direct link between the CN tracks on the north and south shores of the main arm of the Fraser River. CN owns land and rail track close to the bridge. However, paragraph 13 of its licence to use the bridge clearly retains Canada's full property rights to the bridge. Despite the existence of CN's property on either side of the bridge, Canada has the right to terminate the licence agreement on three years' notice. Paragraph 22 explicitly rejects the idea that the agreement gives any leasehold estate or interest in land to CN. The unit rate charged to the railways for each crossing is set by Canada based upon the principle of "total recovery to Canada of all the costs of operating and maintaining the Bridge".
The licence agreements with the four railways are identical except that CN's agreement has an extra clause, paragraph 10, which reads as follows:
10. The Railway agrees that it will:
(a)in the case of emergency, (as determined by Canada), and upon request of Canada, proceed to make such repairs, changes, or alterations to the Bridge, or maintenance thereof, including without limiting the generality of the foregoing, the approaches thereto, the wooden trestles, steel superstructures, (including the swing span) thereof and the signal system thereof, (including the interlocking plant therefor), as are absolutely necessary, in the opinion of Canada, for the safe and proper operation of the Bridge, (including all approaches thereto), and that Canada shall reimburse the Railway the reasonable cost of making such repairs, changes, alterations, or maintenance in accordance with accounts rendered therefor from time to time to Canada by the Railway; PROVIDED HOWEVER, that no such repairs, changes, alterations or maintenance shall be made or carried out until Canada approves a Memorandum of Understanding to this agreement, setting out the nature of the repairs, changes, alterations or maintenance required to be done, the details of the work to be performed in relation thereto, and the basis of payment therefor; and
(b)upon the written request of Canada from time to time, provide to Canada consulting services or inspections related to the planning, design and construction of the Bridge; PROVIDED HOWEVER that no such services or inspections shall be performed or made until Canada approves a Memorandum of Understanding to this agreement, setting out the nature of the services or inspections to be performed, the details thereof and the basis of payment therefor; and
(c)upon the written request of Canada from time to time, perform such maintenance and repairs to the signal system and interlocking plant of the Bridge as are requested; PROVIDED HOWEVER that no such maintenance or repairs shall be made or carried out until Canada approves a Memorandum of Understanding to this agreement, setting out the nature of the maintenance and repairs required to be done, the details of the work to be performed in relation thereto, and the basis of payment therefor. [Emphasis added.]
CN thus agreed to provide PWC, on a contractual basis, with such services as repairs and maintenance, consulting and inspections as the latter might request. Under the contract, PWC both authorizes all such services in advance and pays for them as needed.
CN also provides some services voluntarily. Consulting services are provided to PWC without charge by a full‑time engineer employed by CN. The engineer's sole duties involve responding to problems at this bridge and two other railway bridges belonging to CN in the vicinity. CN periodically arranges without charge for a complete inspection of the girders, stringers and other metal portions of the bridge. The "Sperry" car used to inspect its own rails on either side of the bridge also inspects the bridge rails as it crosses the bridge. At times, CN provides materials for the bridge. Thus, following the collision, it supplied PWC without charge with a large girder to assist the jacking up of the swing span, thereby saving several days of bridge closure. When the bridge is closed for routine maintenance, the timing and duration are negotiated and arranged between CN and PWC.
The commercial marine traffic transiting the Fraser River through the swing span is substantial, and throughout its history the bridge has on a number of occasions been damaged by ships colliding with it. Apart from the cost of repairing structural damage, the bridge closures resulting from such damage and repairs have caused inconvenience and losses to railway companies, river users and industries relying on it. PWC has maintained a record of such incidents since 1950.
The risk of collisions and their minimization has been the subject of considerable study. In particular the following reports have been made:
(a)Report on the Vulnerability of Bridges in Canadian Waters by the Canadian Coast Guard
(b)Report on the Fraser River Railway Bridge, a Current Review by the Fraser River Bridge Working Committee of the Western Transportation Advisory Council (WESTAC) ‑ 1977
(c)Report on Ship Collision Risk Analysis for the New Westminster Railway Bridge at New Westminster, B.C. Phase 1 and Phase 2 by Crippen Consultants for PWC ‑ 1984
(d)Report on the feasibility study of guide structures for hazard reduction by the Marine Directorate of PWC ‑ 1986.
The second of these studies forms part of the record. The study was prompted by an accident in 1975 in which a log barge was ripped from its mooring by a severe storm and blown into the bridge, causing it to be closed for over four months. The study, in which CN actively participated, was carried out by a working group composed of representatives of all parties interested in the bridge. The Committee examined a wide range of problems and concluded that the only problems of significance were the relatively high risk encountered by deep-sea vessels navigating under the bridge and the very high levels of damage that could ensue from a collision with the bridge supports and structure. Gypsum Carrier Inc. v. The Queen, [1978] 1 F.C. 147, involved yet another ship collision accident in which the same railways as in this case made essentially the same claims for loss caused by the closure of the bridge. Recovery was denied.
In my view, both the surrounding circumstances and the contract itself indicate that the parties either did or ought to have considered the issue of allocating the risk of the bridge's closing as a result of a ship collision. Indeed, the licence agreement between CN and PWC of April 1987, which was in force at the time of the accident, did just that. The agreement provides as follows:
11. Canada may at any time and from time to time, by giving 7 days' notice in writing to the Railway, require the Railway absolutely to stop, delay or suspend its use of the Bridge, as provided for under this license, where, in the opinion of Canada, such stoppage, delay or suspension is necessary; PROVIDED THAT in cases of emergency, as determined by Canada, Canada may require the Railway, without written notice, to so immediately stop, delay or suspend its use of the Bridge, but such stoppage or suspension shall continue only so long as may be absolutely necessary, in the opinion of Canada, and the Railway shall not be entitled to claim any compensation or damages from Canada in respect thereof.
. . .
15. In the event of the complete or partial destruction of the Bridge or any damage thereto, the Minister shall forthwith decide whether or not Canada intends to rebuild, replace or repair such destruction or damage and shall give the Railway notice of such intention within 24 hours of the Minister's decision; PROVIDED HOWEVER that Canada shall be under no obligation to rebuild, replace or repair such destruction or damage and the Railway shall not be entitled to claim any compensation or damages (including, without limiting the generality of the foregoing, any compensation or damages the Railway may be required to pay any customer, passenger or user of the Railway or its services) from Canada in respect thereof. In the event Canada chooses not to rebuild, replace or repair such destruction or damage the Railway shall have the option of terminating this license from the date of such destruction or damage and on such termination all rights and privileges hereunder shall cease forthwith and the Railway shall have no claim whatsoever against Canada; PROVIDED FURTHER that the Railway shall forthwith pay to Canada, up to the date of termination, any sums that have accrued or may have accrued due to Canada, up to the date of such termination. [Emphasis added.]
The Relationship Between the Tortfeasor and the Plaintiff
Prior to the accident, the owners and operators of the bridge, the Jervis Crown, the Crown Forest No. 4 and the Westminster Chinook knew that damage to the bridge would cause delays and rerouting. All the defendants were fully aware of the fact that CN was the primary user. Captain MacDonnell, the master of the Jervis Crown and other masters and seamen operating in the river commonly refer to it as the CN rail bridge. Captain MacDonnell himself had been familiar with the bridge for over 40 years and until sometime after the collision actually believed it belonged to CN.
All the defendants knew that the Port Mann‑Thornton marshalling and switching yard of CN, the main switching yard for the greater Vancouver area, is situated approximately 1½ miles upriver from the bridge on the south bank of the Fraser River. The defendants knew that there was no other rail bridge over the main arm of the river below the Westminster bridge and, because the bridge had been damaged before, they also knew that in the event of closure of the bridge owing to damage, CN would have to detour over the CP bridge upriver between Mission and Matsqui and divert over CP tracks on the north bank of the Fraser River.
The Relationship Between the Property Owner and the Tortfeasor
PWC arranged and paid for the repair of the bridge. As property owner, we saw, it recovered at trial all damages resulting from the collision from the tug Jervis Crown and its owners, and that judgment was not appealed. As earlier noted, the licence contracts between PWC and the railways provided for no indemnification in case of interruption of bridge service. Unable to claim under its contract, CN brought this action in tort against Norsk and the other defendants, claiming for the actual costs incurred by reason of the bridge closure.
The Issues
It is crucial at the outset to set forth precisely what is, and what is not in issue in this appeal. The issue is not whether economic losses are recoverable in tort, as my colleague McLachlin J. seems to frame it in her analysis. For reasons I shall explore later, I would have thought it clear that they are indeed recoverable in certain cases. And, though the parties disagree with respect to the points in issue, they did not frame them in that way in their factums in this Court.
The appellants (defendants) argue that the question in this appeal is whether a duty of care can arise between A (the defendants here) and C (the plaintiff CN here) where A negligently damages the property of B (PWC here) that results in a contractual disruption and consequent economic loss to C. The appellants contend that the nature of CN's relationship with PWC is merely contractual and that this fact is dispositive of the case.
CN concedes that a contractual interest simpliciter does not justify recovery, but it disagrees with the appellants' description of the damage suffered as being merely contractual disruption. Its argument proceeds essentially on two broad fronts which overlap to some degree.
The first front can be termed the alternative interests argument. CN first argues that its interest is more than a mere contractual one. To this end, it put forward essentially two arguments: first that it suffered from a transferred loss of use; and, secondly, that it is involved in a common adventure with PWC. These arguments are centred on the relationship between the plaintiff and the property owner, i.e., between CN and PWC. They represent an attempt to avoid the application of the rule barring recovery for mere contractual interests.
The second broad front on which CN proceeds may be termed the "special relationship" front. Here it argues that, even if the Court rejects its alternative interests argument and finds that its interest is merely contractual, the existence of other factors is sufficient to constitute a special relationship with the tortfeasor and to ground recovery for its contractual claims. In particular, it points to the high degree of subjective and objective foreseeability in this case as sufficient to constitute a special relationship between Norsk and CN, but other factors are invoked as well. These arguments are largely centred on the plaintiff-tortfeasor relationship, i.e., the relationship between CN and Norsk. They represent an attempt to qualify the application of the contractual relational economic loss rule.
CN's two strands of argument overlap, so that the factors that underlie its alternative interests arguments are also at times invoked in support of the existence of a special relationship or, more broadly, of proximity. It thus builds its argument on the allegedly particular characteristics of its relationship with the property owner on the one hand and the tortfeasor on the other. The appellants, on the other hand, consider that the contractual nature of the plaintiff's relationship with the property owner is dispositive of the case.
Part I of the analysis in this judgment examines the appellants' contention and focuses on the narrow problem of contractual relational economic loss. In my view, this question has been unhelpfully bound up with the larger question of pure economic loss. The first part of these reasons retraces these developments and sets forth the rationale for considering this narrow issue as a separate problem.
Part II examines CN's arguments to the effect that it has more than a mere contractual interest. My conclusion is that it does not.
Part III returns to the issue of contractual relational economic loss. It examines the various proposals that have been made to relax the bright line rule excluding recovery for contractual relational economic loss, including those set forth by my colleagues McLachlin and Stevenson JJ.
Part IV examines the rationale for the exclusionary rule. My conclusion is that the bright line rule excluding recovery for economic loss owing to interference with contractual relations that results from damage to a third party's property should not be modified, at least on the facts of this case. I should underline from the outset that this conclusion is not a rejection of recovery for pure economic loss in general terms. It is limited, for reasons that will be set forth, to cases where property damage to a third party has occurred and where the plaintiff's interest is contractual.
Analysis
Part I: The Need to Recentre the Analysis on Contractual Relational Economic Loss
To phrase the key issue in this case as a simple one of "is pure economic loss recoverable in tort?" is misleading. I do not doubt that pure economic loss is recoverable in some cases. It does not follow, however, that all economic loss cases are susceptible to the same analysis, or that cases of one type are necessarily relevant to cases of another. Nor does it follow that the constellation of policy concerns that have grown up around the issue of economic loss can be ignored. The fact is that different types of factual situations may invite different approaches to economic loss, and it seems to me to be at best unwise to lump them all together for purposes of analysis. Professor Feldthusen distinguishes five different categories of economic loss cases which involve different policy considerations: see Feldthusen, "Economic Loss in the Supreme Court of Canada: Yesterday and Tomorrow" (1991), 17 Can. Bus. L.J. 356, at pp. 357-58. They are as follows:
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;
5. Relational Economic Loss.
The present case fits into his fifth category. In my view, both policy and precedent justify narrowing the focus in the present case to loss cases of the kind described in that category.
Professor Feldthusen considers that the cases and strong policy reasons support a general rule precluding recovery of all relational loss, which he frames in the following terms: "The recovery of pure economic loss will be precluded in negligence when it is consequent upon an injury to the person or property of a third party": see Feldthusen, Economic Negligence (2nd ed. 1989), at p. 200. He recognizes, however, that such a rule would be subject to a number of specific exceptions.
In general terms, we are here concerned with relational loss resulting from property damage, and I need not consider relational loss arising out of personal injury. Turning then to an examination of the category of cases in which the initial damage is to property, it is apparent that contract is not the only relation that can lead to losses. If the property is publicly owned, users may not be required to contract for its use. Thus persons who regularly use an ordinary bridge or other publicly maintained facility have no contractual right to do so but may nevertheless suffer damages by having to find alternative routes for themselves or their goods, and their suppliers or customers may also suffer damage. Those suffering such damage will ordinarily not recover: see Bethlehem Steel Corp. v. St. Lawrence Seaway Authority, [1978] 1 F.C. 464, (claims for loss of profits owing to ships being held up after a bridge destroyed and a canal obstructed were refused, as was a claim for extra shipping costs arising out of the same accident); Star Village Tavern v. Nield (1976), 71 D.L.R. (3d) 439 (Man. Q.B.), (recovery by tavern owner suffering losses owing to bridge closure refused). To impose such indeterminate liability on tortfeasors is almost unthinkable as the cases make clear. The courts have similarly refused recovery in other cases of relational economic loss; see, for example, Weller & Co. v. Foot & Mouth Disease Research Institute, [1966] 1 Q.B. 569, as explained by S.C.M. (United Kingdom) Ltd. v. W. J. Whittall and Son Ltd., [1971] 1 Q.B. 337, at p. 342, and Spartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd., [1973] Q.B. 27.
Where the government is able to sue as owner (as in this case and as in most bridge cases), I can see no reason for any difference in treatment depending on whether use is based on contract or not. In my view, contractual relational economic loss cases are perhaps best conceived as a variant of relational loss. At least in terms of result, the different types of relational economic loss cases generally appear to be dealt with in the same way by the courts. As will become evident, many of the underlying policies are, in my view, the same. Nevertheless, most of the reported cases involve claims for contractual relational economic loss, probably because most of the others appear obvious. To avoid possible doctrinal confusion, I propose as much as possible to narrow the focus to contractual relational economic loss only.
Policy
Cases of contractual relational loss have a number of specific characteristics that differentiate them from other economic loss cases, and certainly from other non-relational loss cases. The first is that in such cases, the right of action of the property owner already puts pressure on the defendants to act with care. The deterrent effect of tort law, to the extent that it survives the advent of widespread insurance, is already present. In this case PWC collected substantial damages. Consequently, Norsk was already under a substantial incentive to take care with respect to the bridge since its liability to the bridge owner would and did require the payment of substantial damages. In most cases of this type, imposing further liability cannot reasonably be justified on the grounds of deterrence (unless a policy of full internalization of all losses resulting from accidents to the party who could have avoided the accident is to be pursued at all costs).
This is a critical difference with respect to the other types of economic loss cases. Professor Feldthusen underlines the importance of this first key aspect of contractual relational economic loss cases, in the following passage dealing with relational loss generally ((1991), 17 Can. Bus. L.J. 356, at p. 377):
. . . in each of [the first four] categories [identified above], the issue is whether the law of negligence applies at all to sanction the defendant's careless conduct. Relational loss cases are different because the defendant will be held liable to the victim of physical damage. The issue is whether additional liability to third parties is warranted. The better analogy is not to how the claim in Hedley Byrne or Rivtow Marine was resolved, but to how an additional claim brought by the best customer of the plaintiffs in each of those cases would have fared. [Emphasis added.]
I come now to a second distinction. A firm exclusionary rule in this area does not have the effect of necessarily excluding compensation to the plaintiff for his or her loss. Rather, it simply channels to the property owner both potential liability to the plaintiff and the right of recovery against the tortfeasor. The property owner is both entitled to recover from the tortfeasor and potentially liable under contract to the plaintiff. Here, the licence agreement explicitly rejected any liability, so the plaintiff cannot recover under it against PWC. In contracts between sophisticated parties such as those in the case at bar, who are well advised by counsel, such exclusions of liability often result from determinations regarding who is in the best position to insure the risk at the lowest cost.
A third distinction is that perfect compensation of all contractual relational economic loss is almost always impossible because of the ripple effects which are of the very essence of contractual relational economic loss. This aspect has been recognized as critical from the very beginning. It is in this sense that the solution to cases of this type is necessarily pragmatic and involves drawing a line that will exclude at least some people who have been undeniably injured owing to the tortfeasor's admitted failure to meet the requisite standard of care.
In other types of economic loss cases, ripple effects may not be of concern. Thus cases like the present are significantly different from the situation in Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189, in which Rivtow was the sole victim of the type of damage for which it claimed. Full compensation of all those to whom a private law duty is owed is also realistically possible in the situation dealt with in Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2. In cases like the present, claims that the denial of recovery in the type of case here would be "unjust" must take into account that other "just" claims are inevitably denied in this type of case.
Finally, contractual relational economic loss cases typically involve accidents. This distinguishes them from both products liability economic loss cases like Rivtow, in which by definition there is no accident, and negligent misrepresentation cases like Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465. This aspect is of fundamental importance with respect to tests of liability founded on the foreseeability of an individual plaintiff or an ascertained class of plaintiffs, which I shall discuss in Part III.
In light of these substantial differences between contractual relational economic loss cases and other pure economic loss cases, I agree with Professor Feldthusen, that "it assists little, if at all, to generalize on the basis of proximity from other types of economic loss cases to the relational loss cases" ((1991), 17 Can. Bus. L.J. 356, at p. 376). For the purposes of the present case, it is not necessary to proceed to an exhaustive categorization of economic loss cases. There is, in my view, at the very least a clear difference between economic loss in three types of cases.
In the first type, which involves what has been termed consequential economic loss, the plaintiff claims for economic loss in addition to his claims for property damage or personal injury. Focusing on the issue of remoteness of damage, the courts have established guidelines regarding the availability of damages for economic loss in these cases.
In the second type, which can be termed non-relational economic loss, the plaintiff claims for pure economic loss unrelated to any personal injury or property damage suffered by either the plaintiff or any third party. The law in this area is developing. In view of my analysis of the issues in this case, it is not necessary for me to say much about these cases. I doubt, however, that this group can be analyzed in terms of a single rule. The extract from Professor Feldthusen above contends that this group can be further broken down into four distinct categories. It is sufficient to say that I fully support this Court's rejection of the broad bar on recovery of pure economic loss in Rivtow and Kamloops. I would stress again the need to take into account the specific characteristics of each case. I agree with McLachlin J. that Murphy v. Brentwood District Council, [1991] A.C. 398, does not represent the law in Canada.
The present case, however, is of a third type. It involves a claim for contractual relational economic loss by the plaintiff as a result of damage caused to someone else's property.
Precedent
The English Background
It is helpful to retrace the development of the so-called rule against recovery of pure economic loss in order to place the argument in this case in context. The debate has often been obscured because of the existence of at least two different versions of the rule, one narrow and one broad. American cases have occasionally addressed specifically the issues in this case in terms of the breadth or narrowness of the economic loss rule. Particularly instructive in this regard is the recent case of State of Louisiana v. M/V Testbank, 752 F.2d 1019 (1985).
The original formulation of the rule of the categorical exclusion of economic loss in cases such as Cattle v. Stockton Waterworks Co. (1875), L.R. 10 Q.B. 453, was narrow. In its narrow formulation, the rule excludes claims for negligent interference with contractual relations where a third party's property has been damaged and where the damage to the plaintiff's contractual relations is caused as a result of that property damage. The rule thus applies to exclude recovery for a plaintiff's pure economic loss flowing from the property owner's property damage, damage which I have termed contractual relational economic loss.
The development of the original narrow rule is well set out in Candlewood Navigation Corp. v. Mitsui O.S.K. Lines Ltd. (The Mineral Transporter), [1986] A.C. 1, at pp. 15-17, a case that dealt with a time charterer's claim for economic loss. Because of the importance of clearly understanding this development, I reproduce Lord Fraser of Tullybelton's account in that case in extenso:
This issue is one of fundamental importance in maritime law and in the law of negligence generally. There is a long line of authority in the United Kingdom for the proposition that a time charterer is not entitled to recover for pecuniary loss caused by damage by a third party to the chartered vessel. The reason is that a time charterer has no proprietary or possessory right in the chartered vessel; his only right in relation to the vessel is contractual: see Scrutton on Charterparties and Bills of Lading, 19th ed. (1984), p. 47. The proposition in relation to a time charterer is thus only one example of the more general principle stated by Scrutton L.J. in Elliott Steam Tug Co. Ltd. v. Shipping Controller [1922] 1 K.B. 127, 139-140:
"At common law there is no doubt about the position. In case of a wrong done to a chattel the common law does not recognize a person whose only rights are a contractual right to have the use or services of the chattel for purposes of making profits or gains without possession of or property in the chattel. Such a person cannot claim for injury done to his contractual right: see on this point the judgment of Blackburn J. in Cattle v. Stockton Waterworks Co. (1875) L.R. 10 Q.B. 453, where a contractor making a tunnel on K.'s land claimed against a wrongdoer to K.'s land, whose wrong made his contract less profitable, and was held not entitled to recover. It is for this reason that underwriters cannot sue directly a wrongdoer against property they have insured, but must proceed in the name of the assured, as explained by Lord Penzance in Simpson v. Thomson (1877) 3 App. Cas. 279, 289. It is for this reason also that charterers under a charter not amounting to a demise do not and cannot sue in the Admiralty Court a wrongdoer who has sunk by collision their chartered ship. The same principle was applied by Hamilton J. in Remorquage à Hélice (Société Anonyme) v. Bennetts [1911] 1 K.B. 243, to prevent the owner of a tug suing the wrongdoer who had sunk his tow, whereby he had lost the benefit of his contract of towage."
The general principle was stated in Cattle v. Stockton Waterworks Co., L.R. 10 Q.B. 453, a case which had nothing to do with ships or maritime law. The facts have been summarised sufficiently for the present purpose in the passage just cited from Scrutton L.J.'s judgment in Elliott's case. The reason for the decision appears from the following passage from the judgment of the Court of Queen's Bench which was delivered by Blackburn J., at pp. 457-458, where, after stating that the court would have been glad to avoid giving effect to the rule against permitting the contractor to sue, he went on to say:
"But if we did so, we should establish an authority for saying that, in such a case as that of Fletcher v. Rylands (1866) L.R. 1 Ex. 265, the defendant would be liable, not only to an action by the owner of the drowned mine, and by such of his workmen as had their tools or clothes destroyed, but also to an action by every workman and person employed in the mine, who in consequence of its stoppage made less wages than he would otherwise have done. And many similar cases to which this would apply might be suggested. It may be said that it is just that all such persons should have compensation for such a loss, and that, if the law does not give them redress, it is imperfect. Perhaps it may be so. But, as was pointed out by Coleridge, J., in Lumley v. Gye (1853) 2 E. & B. 216, 252, courts of justice should not `allow themselves, in the pursuit of perfectly complete remedies for all wrongful acts, to transgress the bounds, which our law, in a wise consciousness as I conceive of its limited powers, has imposed on itself, of redressing only the proximate and direct consequences of wrongful acts.' In this we quite agree. No authority in favour of the plaintiff's right to sue was cited, and, as far as our knowledge goes, there was none that could have been cited."
It is apparent from that citation that the court in Cattle's case regarded the rule as a pragmatic one dictated by necessity.
The same appears even more clearly from the other foundation case in this branch of the law, Simpson & Co. v. Thomson (1877) 3 App. Cas. 279 which was a Scottish appeal arising out of a collision between two ships belonging to the same owner. The House of Lords held that the underwriters, who had paid the insurance due on one of the ships which was lost and which was not to any extent to blame for the accident, had no right of action against the owner of the other ship which was solely to blame, because they (the underwriters) had no independent right of action but only such right as they might have derived from the owner of the lost ship in whose place they stood. He had no right of action, as owner of the innocent ship, against himself as owner of the negligent ship. Lord Penzance gave a rather fuller statement of the reasons behind the rule against allowing the underwriters to sue, at pp. 289-290:
"But in the argument at your Lordships' Bar the learned counsel for the respondents took their stand upon a much broader ground. They contended that the underwriters, by virtue of the policy which they entered into in respect of this ship, had an interest of their own in her welfare and protection, inasmuch as any injury or loss sustained by her would indirectly fall upon them as a consequence of their contract; and that this interest was such as would support an action by them in their own names and behalf against a wrongdoer. This proposition virtually affirms a principle which I think your Lordships will do well to consider with some care, as it will be found to have a much wider application and signification than any which may be involved in the incidents of a contract of insurance.
"The principle involved seems to me to be this ‑‑ that where damage is done by a wrongdoer to a chattel not only the owner of that chattel, but all those who by contract with the owner have bound themselves to obligations which are rendered more onerous, or have secured to themselves advantages which are rendered less beneficial by the damage done to the chattel, have a right of action against the wrongdoer although they have no immediate or reversionary property in the chattel, and no possessory right by reason of any contract attaching to the chattel itself, such as by lien or hypothecation.
"This, I say, is the principle involved in the respondents' contention. If it be a sound one, it would seem to follow that if, by the negligence of a wrongdoer, goods are destroyed which the owner of them had bound himself by contract to supply to a third person, this person as well as the owner has a right of action for any loss inflicted on him by their destruction.
"But if this be true as to injuries done to chattels, it would seem to be equally so as to injuries to the person. An individual injured by a negligently driven carriage has an action against the owner of it. Would a doctor, it may be asked, who had contracted to attend him and provide medicines for a fixed sum by the year, also have a right of action in respect of the additional cost of attendance and medicine cast upon him by that accident? And yet it cannot be denied that the doctor had an interest in his patient's safety. In like manner an actor or singer bound for a term to a manager of a theatre is disabled by the wrongful act of a third person to the serious loss of the manager. Can the manager recover damages for that loss from the wrongdoer? Such instances might be indefinitely multiplied, giving rise to rights of action which in modern communities, where every complexity of mutual relation is daily created by contract, might be both numerous and novel."
These two cases of Cattle, L.R. 10 Q.B. 453, and Simpson, 3 App.Cas. 279, have stood for over a hundred years and have frequently been cited with approval in later cases, both in the United Kingdom and elsewhere. They show, in their Lordships' opinion, that the justification for denying a right of action to a person who has suffered economic damage through injury to the property of another is that for reasons of practical policy it is considered to be inexpedient to admit his claim. [Emphasis added.]
Lord Fraser felt it was unnecessary to refer to all the many cases in which either or both of the cases of Cattle and Simpson & Co. v. Thomson (1877), 3 App. Cas. 279, have been cited but he did go on to note the favourable treatment given to the narrow rule in Scotland, Canada and the United States.
Subsequently, in the second stage of the development of the rule, it was greatly broadened. The remarks of Mason J. in Caltex Oil (Aust.) Pty. Ltd. v. The Dredge "Willemstad" (1976), 11 A.L.R. 227 (H.C.), are illuminating, in that they illustrate the passage from the narrow rule discussed in the above passage to a broader rule (at p. 269):
None the less before Hedley Byrne the influence of the early cases was strong and it seems to have been generally considered that financial loss not consequential upon property damage could not be recovered. For the most part the cases concerned a claim by a plaintiff that he suffered a loss or lost a profit under a contract because the defendant's negligent conduct damaged or destroyed property of the other contracting party thereby putting an end to the contract or rendering it unprofitable. Yet the cases were thought to establish a general principle relating to the recovery of pure economic damage. [Emphasis added.]
As Mason J. notes, in its broad formulation, the rule was said to exclude all claims in negligence for pure economic loss, i.e., economic loss in the absence of property loss or personal injury loss, to the plaintiff in question. The crucial factor of property damage to a third party that existed in the early cases fell completely out of the picture. Interestingly, the same evolution appears to have occurred with respect to the holding in Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303 (1927), in the United States, which I shall more fully discuss later. The result was that until 1963, it was generally felt that no recovery would lie for pure economic loss.
A new stage in the development of the law on economic loss opened with the great case of Hedley Byrne v. Heller, supra. The speeches of the Law Lords were principally concerned with the problem of liability for negligent words, rather than with the issue of economic loss itself. As Atiyah notes, the problems of liability for negligent misstatements and the problem of economic loss had become entangled before Hedley Byrne and with both problems arising again in that case, it is perhaps not surprising that in subsequent cases, the two issues have not always been completely distinguished: see Atiyah, "Negligence and Economic Loss" (1967), 83 L.Q. Rev. 248; see also the discussion of Hedley Byrne in Stapleton, "Duty of Care and Economic Loss: A Wider Agenda" (1991), 107 L.Q. Rev. 249, at pp. 259-61.
Only two of the Lords in Hedley Byrne, Lord Hodson and Lord Devlin, dealt specifically with the issue of economic loss. Both rejected the broad exclusionary rule. It was clear that henceforth economic loss was recoverable at least in some circumstances. With Hedley Byrne to guide the way, the broad rule came increasingly under attack in a variety of situations during this third phase.
Many recent cases on economic loss have approached the problem at a very high level of generality. They have addressed the question of whether we should abandon the broad rule altogether. Many examples of the broad interpretation of Cattle and the other early cases can be pointed to: see, for example, Abramovic v. Canadian Pacific Ltd. (1989), 69 O.R. (2d) 487, at p. 492; Kamloops (City of) v. Nielsen, supra, at p. 28. My colleague, McLachlin J., I may say, interprets Cattle broadly in this manner, although she recognizes that the case dealt with relational losses.
The result of this broad approach is that cases on relational economic loss are bound up with other types of economic loss cases which raise different policy concerns. This leads to all types of economic loss cases being canvassed in order to resolve the case at hand. The judgment of the Court of Appeal in this case has been criticized for its undifferentiated approach to the issue of pure economic loss. Professor Feldthusen (1991), 17 Can. Bus. L.J. 356, writes, at p. 375:
The main effect of this scatter-gun approach is to obscure the state of the authorities on relational loss, and to present instead the accurate, but largely irrelevant, impression that recovery of economic loss is often allowed in negligence.
In the second phase, cases decided on the narrow facts of contractual relational economic loss had been interpreted very broadly to exclude liability for all pure economic loss. Now, it was argued, the rejection of the broad rule in cases like Hedley Byrne and Rivtow should eliminate the specificities of economic loss in all cases. Today CN urges us to extend this approach to include contractual relational economic loss cases.
In my view, the precedents support a distinct approach to the issue of contractual relational economic loss. The original exclusionary rule developed in such cases and was expressed in narrow terms. In addition, the recognition that Cattle stands for a narrow rule has never completely disappeared. Recent cases have referred to Cattle and the early cases as establishing the narrow rule: see the extracts from Candlewood, supra; Leigh and Sillavan Ltd. v. Aliakmon Shipping Co., [1986] A.C. 785, at p. 809; Murphy v. Brentwood District Council, supra, at p. 485. Cases that frame and treat the question in terms of the narrow rule have generally upheld it. The major exception is Caltex, which I will discuss at length later.
The Decisions in this Court
The respondent, the courts below and McLachlin J. rely heavily on the decisions of this Court in the cases of Rivtow and Kamloops. The respondent argues that these cases refute the existence of a broad exclusionary rule. I agree but, in my view, both these cases belong to the second group of economic loss cases mentioned above in which the plaintiff claims for pure economic loss where the defendant has not caused damage to a third party's property. They are not directly relevant to contractual relational economic loss. There is nothing in those cases indicating that this Court considered that the narrow exclusionary rule was ill-advised. However, I find those cases particularly significant in the context of this case for the way in which the specific policy concerns raised in the particular case were addressed.
An examination of Rivtow reveals that the concern over indeterminate liability is only one among several policy issues that arise in economic loss cases. What is particularly instructive about Rivtow, rather than any wide dicta about proximity in economic loss cases, is the manner in which both judgments analyzed the policy considerations underlying the exclusionary rule. Of these, indeterminate liability was only of secondary importance. The broad rule was qualified and recovery for economic loss upheld only after a searching examination of the functions the rule served in the type of case there in question.
In Rivtow, the plaintiff (appellant) chartered by demise a log barge, the Rivtow Carrier, fitted with two cranes designed and manufactured by the first defendant and for which the second defendant was the sole representative and distributor in British Columbia. Neither defendant was in a contractual relationship with Rivtow: see the facts as stated in the court below (1972), 26 D.L.R. (3d) 559 (B.C.C.A.), at p. 560. The manufacturer and distributor had become aware of structural defects in this type of crane as early as 1963, and certainly by late 1965 they were aware of many cracks in the legs of the cranes. They also knew that the plaintiff was using the cranes for the logging work but did not warn it of the potential danger.
On September 16, 1966, the aft crane of the Straits Logger, another barge fitted with the same type of crane, collapsed owing to a failure in the rear legs. It tore itself free of the front legs, fell to the deck and bounced into the ocean, killing the crane operator. The same day, the Rivtow Carrier was about to begin loading logs at Kitimat. Word was received of the Straits Logger accident, and the Rivtow Carrier was ordered to return empty to Vancouver. As a result, the barge had to be taken out of service for repairs in the busiest part of the logging season.
Rivtow sued for loss of the use of the barge during the repair period and for the cost of repairs to the cranes. Ritchie J., for the seven judges in the majority, held that the lower courts were right in disallowing the claim for repairs and for such economic loss as it would in any event have sustained even if proper warning had been given. The full Court concurred with the part of Ritchie J.'s judgment that recognized a manufacturer's duty to warn of known dangerous defects and held the manufacturer liable for loss of extra profit caused by the failure to warn promptly in a slack period.
Two judges, dissenting in part, would have included in the allowable loss the cost of repair of the cranes on the ground that threatened physical harm should be treated in the same way as actual physical harm. Laskin J. (Hall J. concurring) specifically excluded general contractual relational loss. He stated, at pp. 1218‑19:
. . . the doctrine of Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., which has been considered in this Court and has been applied in other Courts in Canada, shows that economic or pecuniary loss is not outside the scope of liability for negligence.
The present case is not of the Hedley Byrne type, as the reasons of my brother Ritchie show, but recovery for economic loss alone is none the less supported under negligence doctrine. It seems to me that the rationale of manufacturers' liability for negligence should equally support such recovery in the case where, as here, there is a threat of physical harm and the plaintiff is in the class of those who are foreseeably so threatened: see Fleming, Law of Torts, 4th ed., 1971, pp. 164-5, 444-5.
Support for such recovery in the present case will not lead to "liability in an indeterminate amount for an indeterminate time to an indeterminate class", to borrow an often-quoted statement of the late Judge Cardozo in Ultramares Corp. v. Touche [255 N.Y. 170 (1931)], at p. 179. The pragmatic considerations which underlay Cattle v. Stockton Waterworks Co. will not be eroded by the imposition of liability upon Washington as a negligent designer and manufacturer: cf. Fleming James, "Limitations on Liability for Economic Loss Caused by Negligence: A Pragmatic Appraisal", (1972), 12 Jo.S.P.T.L. 105. Liability here will not mean that it must also be imposed in the case of any negligent conduct where there is foreseeable economic loss; a typical instance would be claims by employees for lost wages where their employer's factory has been damaged and is shut down by reason of another's negligence. The present case is concerned with direct economic loss by a person whose use of the defendant Washington's product was a contemplated one, and not with indirect economic loss by third parties, for example, persons whose logs could not be loaded on the appellant's barge because of the withdrawal of the defective crane from service to undergo repairs. It is concerned (and here I repeat myself) with economic loss resulting directly from avoidance of threatened physical harm to property of the appellant if not also personal injury to persons in its employ. [Emphasis added.]
As this passage makes clear, the Rivtow case involves significant policy considerations. The incursion into the broad rule is carefully justified on policy grounds. As Laskin J. notes, at p. 1222, "[t]he case is not one where a manufactured product proves to be merely defective (in short, where it has not met promised expectations) but rather one where by reason of the defect there is a foreseeable risk of physical harm from its use and where the alert avoidance of such harm gives rise to economic loss". In Laskin J.'s view, the courts must be careful to avoid giving redress in tort for "safe but shoddy" products. Where the products are unsafe, however, tort may have a role: prevention of threatened harm resulting directly in economic loss should not be treated differently from post-injury treatment. The narrow rule barring contractual relational economic loss is explicitly left intact.
The majority's examination of the policy issues lead to a lesser incursion on the broad exclusionary rule. Ritchie J. wrote, at p. 1207:
Mr. Justice Tysoe's conclusion [in the B.C. Court of Appeal in the same case] was based in large measure on a series of American cases, and particularly Trans World Airlines Inc. v. Curtiss‑Wright Corp. [148 N.Y.S. 2d 284 (1955)], where it is pointed out that the liability for the cost of repairing damage to the defective article itself and for the economic loss flowing directly from the negligence, is akin to liability under the terms of an express or implied warranty of fitness and as it is contractual in origin cannot be enforced against the manufacturer by a stranger to the contract. It was, I think, on this basis that the learned trial judge disallowed the appellant's claim for repairs and for such economic loss as it would, in any event, have sustained even if the proper warning had been given. I agree with this conclusion for the same reasons; but while this finding excludes recovery for damage to the article and economic loss directly flowing from Washington's negligence and faulty design, it does not exclude the additional damage occasioned by breach of the duty to warn of the danger.
Ritchie J., at pp. 1213‑14, expressly considered whether the tort duty he imposed would have the effect of disrupting contractual relations:
In the present case there is no suggestion that liability should be based on negligent misrepresentation and to this extent the Hedley Byrne case is of no relevance. I refer to it for the sole purpose of indicating the view of the House of Lords that where liability is based on negligence the recovery is not limited to physical damage but extends also to economic loss. The case was recently distinguished in this Court in J. Nunes Diamonds Ltd. v. Dominion Electric Protection Co. [[1972] S.C.R. 769], where Pigeon J., speaking for the majority of the Court, said at p. 777:
Furthermore, the basis of tort liability considered in Hedley Byrne is inapplicable to any case where the relationship between the parties is governed by a contract, unless the negligence relied on can properly be considered as "an independent tort" unconnected with the performance of that contract . . . This is specially important in the present case on account of the provisions of the contract with respect to the nature of the obligations assumed and the practical exclusion of responsibility for failure to perform them.
In the present case, however, I am of opinion that the failure to warn was "an independent tort" unconnected with the performance of any contract either express or implied.
However, because in Ritchie J.'s view the failure to warn was an independent tort, he considered that the plaintiffs should recover for the economic loss resulting from the inactivity of the barge for the period after the respondent became seized with the defects.
The respondent CN submitted that, in Ritchie J.'s judgment in Rivtow, proximity was based on the defendants' knowledge of the use of the cranes by Rivtow and on their potential danger, and that similar knowledge by Norsk should also give rise to proximity here. This argument fails to recognize that the defendants' knowledge in Rivtow was pertinent with respect to a particular duty: the duty to warn. Because they knew about Rivtow as a specific user, they could have warned Rivtow. In the case at bar, Norsk had no opportunity to warn CN in any meaningful sense.
In neither judgment in Rivtow does the plaintiff recover solely because the indeterminacy problem is solved. Rather, criteria are put forward which either logically impose particular duties on defendants (a duty to warn) or specify a particular type of damage to plaintiffs which raises specific concerns (a threat of physical damage raising safety concerns). The "threatened physical harm" criteria employed by Laskin J. serves to distinguish among plaintiffs those who were in a particular position with respect to a particular risk. The recent decision in Murphy, supra, appears to contest this distinction as too arbitrary. However, I think Laskin J.'s concern with safety and the prevention of further damage is justified. The duty to warn imposed by the majority serves to distinguish among defendants who could and should have warned, and those who could not. Furthermore, both judgments explicitly consider another policy issue: the impact of the imposition of tort liability on contractual relations. In addition, the criteria meet the test of indeterminate liability, but that stage of the analysis constitutes in some sense a second step, after the imposition of liability has been justified on grounds that legitimately distinguish particular groups of plaintiffs or particular groups of defendants.
The criteria put forward by CN in the present case respond only to the concern about indeterminate liability. The respondent has put forward 14 factors that create a "special relationship" making this case "unique". This surely provides the court with plenty of flexibility to distinguish future cases from this one. But no argument is presented as to why the uniqueness is relevant in terms of either deterring specific behaviour by the defendants or protecting a specific interest of the plaintiff different in nature from that of the typical contractual claimant.
CN argued that the passage in Ritchie J.'s judgment, at pp. 1211-12, called for a general revision of approach in contractual relational economic loss cases in terms of proximity. In my view, Ritchie J.'s suggestion is best interpreted as a call for a more differentiated analysis of economic loss cases such as the approach I am suggesting. He rightly questioned the broad interpretations given to Cattle and Société anonyme de remorquage à hélice v. Bennetts, [1911] 1 K.B. 243. On the facts before him he found, at p. 1212, that the broad rule has "no relevance in a case where liability flows from the manufacturer acquiescing in the continued use of an article which he knows to have become dangerous when used for the purpose for which it was intended, without giving warning to a known user of the article who is a stranger to the contract of sale". He suggests that the notions of proximity and remoteness at the time Cattle and Société anonyme de remorquage à hélice v. Bennetts were decided need reassessment in light of Donoghue v. Stevenson, [1932] A.C. 562 (H.L.), but he does not suggest that those cases were wrongly decided. His call is best interpreted as an invitation to reconsider the broad rule in the variety of situations in which it has been applied after careful consideration of the policy issues raised in each type of case.
MacGuigan J.A. in the court below ([1990] 3 F.C. 114) considered that Ritchie J.'s judgment, despite denying recovery, was very broad in opening up recovery for economic loss. He wrote as follows, at p. 151:
Despite the wider recovery he would have allowed, Laskin J. is much closer to the exclusionary rule than the majority because of his retention of the physical harm concept. For the majority, it seems that any economic loss which occurs apart from a relationship between the plaintiff and the tortfeasor is recoverable if there is a sufficient "proximity of relationship" between the two parties. In fact, the principle adopted by the majority is the corollary to that adopted by the majority in Nunes Diamonds (J.) Ltd. v. Dominion Electric Protection Co., [1972] S.C.R. 769. Ritchie J. quotes Pigeon J. in that case (at page 777) to the effect that "the basis of tort liability considered in Hedley Byrne is inapplicable to any case where the relationship between the parties is governed by a contract".
I am not certain what MacGuigan J.A. meant by the phrase "any economic loss which occurs apart from a [contractual] relationship between the plaintiff and the tortfeasor is recoverable if there is a sufficient `proximity of relationship' between the two parties". If he meant that an undifferentiated Hedley Byrne type approach should govern all cases of economic loss other than those that arise between contracting parties, I respectfully disagree with his interpretation of Ritchie J.'s judgment. To say that Hedley Byrne does not apply to cases between contracting parties is not the same thing as saying the Hedley Byrne test applies to all cases other than cases between contracting parties.
I turn now to Kamloops, supra. The issue there was whether a municipality can be held liable for negligence in failing to prevent the construction of a house with defective foundations by a purchaser who took without notice either of the state of the foundations or of the inadequacy of the municipal surveillance. Recovery was ultimately allowed on a statutory basis. The judgment of MacGuigan J.A. recognized that neither the result nor the reasons are therefore directly relevant to the case at bar. Nevertheless, it seemed to him that both the thrust and the tone of what the Court did militated against an absolute exclusionary rule. If he was referring to a broad absolute exclusionary rule, I agree. I cannot agree, however, that the judgment of Wilson J. can be interpreted as contesting the existence of the narrow exclusionary rule.
Wilson J. for the majority extensively surveyed the cases on recovery for pure economic loss since the municipality argued that the economic loss in the case was analogous to the cost of repairs to the crane which was expressly disallowed by the majority in Rivtow. Wilson J. acknowledged, at p. 33, that "the majority judgment of this Court in Rivtow stands until such time as it may be reconsidered by a full panel of the Court".
She distinguished Rivtow on at least two grounds: (1) Rivtow was a lawsuit between private litigants as compared with a claim against a public authority for breach of a private‑law duty of care arising under a statute; (2) "there are no contractual overtones to this case as there were in Rivtow" (at p. 34).
Wilson J. recognized the key role of concerns about the interaction of tort and contract. At page 34, she states:
I tend to think that the problem of concurrent liability in contract and tort played a major role in the restrictive approach taken by the majority in Rivtow and that, as in the case of Hedley Byrne, we will have to await the outcome of a developing jurisprudence around that decision also. . . .
It is notable that both of the distinguishing factors in Rivtow are present in the case at bar.
Wilson J.'s judgment is also finely attuned to the specific policy issues raised by public authority liability cases which are very different from those raised in the present case. A number of key factors must exist before liability is found: the statute has to create a private law duty to the plaintiff alongside the public law duty; the loss must not result from a policy decision made by the public authority in the bona fide exercise of its discretion. She specifically emphasizes that economic loss will only be recoverable if as a matter of statutory interpretation it is a type of loss the statute intended to guard against. She also recognized the policy reasons for recognizing liability in the following passage, at p. 35:
It seems to me that recovery for economic loss on the foregoing basis accomplishes a number of worthy objectives. It avoids undue interference by the courts in the affairs of public authorities. It gives a remedy where the legislature has impliedly sanctioned it and justice clearly requires it. It imposes enough of a burden on public authorities to act as a check on the arbitrary and negligent discharge of statutory duties. For these reasons I would permit recovery of the economic loss in this case. [Emphasis added.]
Recognizing a duty in statutory authorities has the salutary effect of placing some incentive on public authorities to discharge their statutory duties properly; see also Rothfield v. Manolakos, [1989] 2 S.C.R. 1259. No similar effect results from imposing a duty in this case.
CN asserts that in B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R. 228, Haig v. Bamford, [1977] 1 S.C.R. 466, and Kamloops, all of which involved economic loss, the ascertained or limited class test was used. It is true that in addition to the just mentioned factors which serve to control liability, Wilson J. established a limited class of plaintiffs test in Kamloops. At page 35, she stated: "The plaintiff has to belong to the limited class of owners or occupiers of the property at the time the damage manifests itself." The class of plaintiffs test is not defined here in terms of foreseeability of a limited class or of a particular plaintiff. Rather, the test is framed to allow protection of certain interests and not others. Specifically, it excludes contractual relational claimants. Recovery for economic loss is explicitly limited to owners and occupiers. Whether the limited class test makes sense in policy terms in cases of contractual relational economic loss will be addressed below. It is surely relevant that the only economic loss case in this Court that involved an accident established a "limited class" test that unequivocally excluded all contractual claimants.
My understanding of the foregoing cases is also supported by the majority judgment of Estey J. in Hofstrand Farms, supra. In that case a courier company had contracted with the province of British Columbia to deliver an envelope which, unknown to the courier, contained a Crown grant which it was imperative that the proposed recipient register by a particular date. Through the carelessness of the courier in not delivering the envelope in a timely way, it was not received by that date, and Hofstrand Farms Ltd. sued the courier. The trial judge found the courier had no duty to the recipient but the British Columbia Court of Appeal held it was liable. In its view, the recipient belonged to a "known limited class", likely to be affected by the courier's carelessness. This Court unanimously reversed the decision. In the course of his reasons, Estey J. clearly underlined the different policy concerns that underpinned cases like Rivtow (which he categorized as a products liability case) and Hedley Byrne and Kamloops (which he viewed as cases involving reasonable reliance respecting the provision of services) from the case before him. He understood the desirability of affording redress where reasonable and workable limits to liability could be found in the types of cases mentioned, and I have no doubt there are others. At the same time, he underlined the need of clearly defined limits for limiting indeterminate liability. But except for cases that could be confined within workable limits, he underlined the need for a clear pragmatic rule against indeterminate liability. He stated, at p. 243:
No doubt the courts of this country will continue to search for reasonable and workable limits to the liability of a negligent supplier of manufactured products or services, to the liability of a negligent contractor for contractual undertakings owed to others, and to the liability of persons who negligently make misrepresentations. In this search courts will be vigilant to protect the community from damages suffered by a breach of the "neighbourhood" duty. At the same time, however, the realities of modern life must be reflected by the enunciation of a defined limit on liability capable of practical application, so that social and commercial life can go on unimpeded by a burden outweighing the benefit to the community of the neighbourhood historic principle. [Emphasis added.]
In sum, I consider that precedent and policy justify an approach that focuses on the specific question of contractual relational economic loss. In addition, recourse to comparative law reveals that other legal systems have also isolated these cases as presenting specific problems.
The United States Experience
In the United States, contractual relational economic loss cases are dealt with under the rubric of negligent interference with contractual relations, a less barbarous but perhaps less accurate name; see Feldthusen, Economic Negligence, supra, at p. 201.
The leading United States case in this area is Robins Dry Dock, supra. There the time charterer of a steamship sued for profits lost when the defendant dry dock negligently damaged the vessel's propeller. The propeller had to be replaced, thus extending by two weeks the time the vessel was laid up in dry dock. The charterer sued for the loss of use of the vessel for that period. The Supreme Court denied recovery to the charterer. Holmes J. wrote as follows, at p. 309:
. . . no authority need be cited to show that, as a general rule, at least, a tort to the person or property of one man does not make the tortfeasor liable to another merely because the injured person was under a contract with that other, unknown to the doer of the wrong. . . . The law does not spread its protection so far.
Holmes J. relied notably on the earlier English case of Elliott Steam Tug Co. v. Shipping Controller, [1922] 1 K.B. 127, referred to in the extract from Candlewood reproduced above. I should also note here that the fact that the tortfeasor is unaware of the contract is not of central importance: as noted in the Restatement of the Law, Second, Torts 2d, section 766C, it is more likely the character of the contract itself that has led the courts to refuse to give it protection against negligent interference.
Holmes J.'s opinion broke no new ground; it applied a principle then settled in both the United States and England, that refused recovery for negligent interference with contractual rights. In a remarkable parallel development to that experienced by Anglo-Canadian law, the Robins decision, which barred recovery in a contractual relational economic loss case, was extended to a broad holding precluding recovery of economic loss in the absence of physical damage to the plaintiff. There was a lively movement in the United States in the 1920s and 1930s, mostly among commentators, to expand recovery for indirect economic loss in a way that would bring it more closely into line with the law governing physical injury; see James, "Limitations of Liability for Economic Loss Caused by Negligence: A Pragmatic Appraisal" (1972), 12 J.S.P.T.L. 105. The failure of this movement to gain momentum takes on added significance when it is placed in the context of the vast extension in the law of negligence that has occurred in the United States. The decision in Robins Dry Dock itself took place 11 years after Cardozo J.'s opinion in MacPherson v. Buick Motor Co., 217 N.Y. 382 (1916), had shattered the doctrine of privity.
A searching re-examination of the scope and rationale of Robins took place in the recent case of State of Louisiana v. M/V Testbank, supra. The court there referred to the earlier doctrinal debate and noted, at p. 1023, that "[t]he push to delete the restrictions on recovery for economic loss lost its support and by the early 1940's had failed". In Testbank, two vessels collided in the Mississippi River Gulf Outlet. A large quantity of toxic chemicals was lost overboard one of the ships and, fearing great contamination, the authorities closed the outlet to navigation for about 20 days. Fishing, the catching of shrimp and other related activities were also suspended for a short while in a surrounding area of about 400 square miles. Forty-one lawsuits were filed and eventually consolidated. The plaintiffs came under a number of fairly distinct categories, namely: commercial fishermen, recreational fishermen, operators of marinas, bait and tackle shops, cargo terminal operators, restaurants, etc. The trial court dismissed all the claims except those of the commercial fishermen. A panel of the Court of Appeals affirmed but, in light of the importance of the issue, the case was reheard by the entire 15-judge Fifth Circuit.
The opinions thoroughly canvassed the relevant American law. What is most striking about them is that both the majority and minority agreed that Robins made eminent sense in its own particular fact situation. Where they differed was in the breadth they considered the Robins rule to have. As colourfully put, at p. 1021: "The meaning of Robins Dry Dock v. Flint . . . (Holmes, J.) is the flag all litigants here seek to capture." The majority concluded that the Robins rule should be upheld in its broad rule version to exclude all claims for economic loss in the absence of physical injury to the plaintiff. At page 1021, it stated:
After extensive additional briefs and oral argument, we are unpersuaded that we ought to drop physical damage to a proprietary interest as a prerequisite to recovery for economic loss. To the contrary, our reexamination of the history and central purpose of this pragmatic restriction on the doctrine of foreseeability heightens our commitment to it. Ultimately we conclude that without this limitation foreseeability loses much of its ability to function as a rule of law.
In a judgment concurring with the majority, Garwood J., at p. 1035, underlined the insufficiency of the proximate cause, foreseeability and remoteness formulations to "alone provide an adequate guide for distinguishing, on a normative, pre-event basis, between the classes of cases in which recovery will be allowed and those in which it will not" (emphasis added).
The minority disagreed as to the scope of the Robins rule and consequently as to its application to the facts of the case. In essence, it considered that Robins excluded only contractual relational economic loss. The minority recognized the "sound reasons" underlying the narrow formulation of the Robins rule and did not contest its applicability where the claim is derived solely through contract with an injured party (at p. 1039):
Courts recognize that once they permit recovery for economic loss to parties linked in a serial chain of contracts, defining a stopping point becomes nearly impossible.
Recognizing that perfect compensation is not possible since losses are widely disseminated, the minority accepted that the bright line test of Robins made good sense. It is notable that both the majority and the minority opinions in Testbank recognized the existence and rationale of the exclusionary rule with respect to contractual relational economic loss. Where the minority disagreed with the majority was in the extension of Robins to exclude non-contractual claimants.
As noted, the Restatement of the Law, Second, Torts 2d, devotes section 766C to the narrow question of negligent interference with contract or prospective contractual relations. The comment notes that although a number of cases scattered through the years have allowed recovery, no general recognition of liability exists for negligent interference with an existing contract or with a prospective contractual relation. The Restatement rule unconditionally excludes recovery for pure economic loss that results from negligent interference with a third person's performance of his or her contract with the plaintiff, with the plaintiff's performance of his or her own contract or with the plaintiff's acquisition of prospective contractual relations.
Civil Law Systems
Since my colleagues have also supported their conclusions by forays into comparative law, and notably their understanding of the civil law experience, I find it necessary to enter into some discussion of that experience. I say at the outset that it does not seem to me to provide as much comfort for my colleagues' views as they seem to derive from it.
It is undeniable that not all legal systems have isolated cases like the present as presenting specific problems. Some civil law systems do not apply any particular rules either to pure economic loss cases or to contractual relational economic loss cases. The opinions of my colleagues in this case particularly rely on the law of France and Quebec. The argument from French and Quebec law is really about the floodgates argument. Since those systems allow recovery for pure economic loss without breaking down, the argument goes, we should not be deterred by floodgates arguments: see Jutras, "Civil Law and Pure Economic Loss: What Are We Missing?" (1986-87), 12 Can. Bus. L.J. 295, at p. 310. In my opinion the relevant comparative reference is to contractual relational economic loss, not to the broad question of pure economic loss. To consider comparative law at the level of generality of "economic loss" is not, in my view, helpful. I have already explained why I think the cases grouped under the rubric of economic loss deserve a more refined analysis. The same narrowing of the question should be employed in the recourse to comparative law. The legal system of every society faces essentially the same problems and solves these problems by quite different means, though often with similar results: see Zweigert and Kötz, Introduction to Comparative Law, Volume I -- The Framework (2nd ed. 1987), at p. 31. While some of these systems have not retained the concept of "economic loss" as a limiting factor, they have generally not recognized claims of the type put forward here.
Second, the French and Quebec approach involves applying the same criteria to a case of this type as to any other tort claim. Although some scholars argue that the common law should change its focus entirely to a concern with causation as the limiting factor (see Tetley, "Damages and Economic Loss in Marine Collision: Controlling the Floodgates" (1991), 22 J. Mar. Law & Com. 539, at p. 584), this does not appear to me to be an advisable option. Our current causality test of foreseeability is clearly insufficient to control liability. The directness criterion was rejected in Overseas Tankship (U.K.) Ltd. v. Morts Dock & Engineering Co. (The Wagon Mound), [1961] A.C. 388, for determinations as to remoteness and does not seem to me to provide much predictive value: see S.C.M. (United Kingdom) Ltd. v. W. J. Whittall and Son Ltd., supra, at p. 343.
A close examination of French law in this area reveals that the floodgates problem is resolved by the use of a number of control devices such that liability is very rare. French delict doctrine treats the question of dommage par ricochet in relation first to the requirement that the injury suffered must have a "personal character"; see Viney, "Les obligations: La responsabilité: conditions" (1982), in Ghestin, Traité de droit civil, nos. 288 et seq. Undoubtedly, in general terms, French law allows generous recovery for dommage par ricochet: see Viney, at no. 309. However, with respect to persons who were contractually linked to the initial victim, Viney writes as follows, at no. 312:
[translation] The courts have from time to time had before them claims made by some customer, supplier or creditor, or by a partner, employee or employer, of the initial victim when the latter's death endangers their interests. In general, the courts have so far been very hesitant to allow such claims, especially those made by a creditor, employer or partner; but at the same time a more liberal solution may well be envisaged in the case of employees who are thrown out of work by the employer's death.
The position in French law is no more harsh in this respect than that of foreign systems of law, which generally refuse to take into consideration this type of repercussive damage. [Emphasis added.]
The distinction of the case of the employee is not specifically justified, but the most obvious rationale for distinguishing that particular case is surely that the employee is least able to protect himself or herself from the consequences of the accident. As for mere créanciers of the primary victim like CN, recovery is generally denied. The 1975 Cour de cassation case which left open the issue of recovery for a creditor whose debtor died as result of the defendant's fault, Cass. civ. 2e, June 25, 1975, Bull. II no. 195, eventually returned to that court in 1979: see Cass. civ. 2e, February 21, 1979, Bougues-Montès, J.C.P. 1979, IV, 145. The finding that the damages were indirect and hence unrecoverable was, as noted by Durry, partly justified by the fact that the lender should have protected himself by contract by requiring his debtor to contract life insurance; see "Obligations et contrats spéciaux" (1979), 77 Rev. trim. dr. civ. 610. Larroumet speaks of recovery in such cases (other than in cases of contracts concluded intuitus personae) as a "hypothèse d'école" and notes that "on a bien du mal à en trouver dans la jurisprudence": see Bordeaux, May 17, 1977, D.1978, I.R. 34, note Larroumet.
Cases in which contractual relational economic loss have been awarded as a result of property damage to a third party are even more rare. These cases are admittedly also subject to the same basic framework of analysis. However, the Cour de cassation exercises its control over the lower courts determinations of causality; see Starck, Droit civil: Obligations: 1. Responsabilité délictuelle (3rd ed. 1988), by Roland and Boyer, at no. 851. Recovery is rarely allowed. Durry describes the state of the law in this area as follows, "Obligations et contrats spéciaux" (1976), 74 Rev. trim. dr. civ. 132, at p. 134:
[translation] Physical repercussive damage to one who is neither parent, relative, fiancé or mistress of the immediate victim responds to a well‑known dialectic: though in principle compensation may be obtained it in fact rarely is.
Markesinis' comparative examination of English and French law in this area (Markesinis, "La politique jurisprudentielle et la réparation du préjudice économique en Angleterre: une approche comparative", [1983] Rev. int. dr. comp. 31, at pp. 44-45), also points out the remarkable similarity of result despite the different analytical approaches:
[translation] The first point to note is that French judges are fully aware of these dangers. Some fifty years ago the Tribunal civil of Bordeaux indicated it had no doubts on the matter when it said "that extending entitlement to damages to everyone who might in some way suffer tangible or intangible injury from a quasi‑delict would amount to creating a kind of social disorder which can never be the purpose of the law" . . . Accordingly, what is special about this judgment is that it openly expresses the philosophy of many judgments which have followed and which, though in theory they admit the possibility of compensation, have in many if not all cases proceeded to a denial of the right of action in practice. Consequently, what is interesting in these cases is to examine the method used to arrive at the result which English law obtains in a generally and rigidly applicable manner.
A variety of "causal" dispositions, which sometimes seemed to involve duplication, have been skilfully (and at times arbitrarily) used to attain this result. In some cases, it is said that the victim assumed the risk; in other cases, that the injury suffered is only indirect; and in still others, that it is only hypothetical and not certain; but in all cases, the possibility of compensation is recognized in theory. [Emphasis added.]
Recovery has been allowed in a few contractual relational economic loss cases. The first is where the contract that is disturbed is intuitus personae, i.e., a personal service contract where the particular individual cannot be replaced. In one case, a soccer club recovered for damages incurred as a result of the death of a star player: see Cour d'appel de Colmar (Ch. détachée à Metz), April 20, 1955, D.1956.723 (Football Club de Metz c. Wiroth). Even here, however, the law is not certain: recovery was denied to an opera director for the loss caused by an injury to the leading tenor: see Cass. civ. 2e, November 14, 1958, G.P. 1959.1.31 (Demeyer c. Camerlo). In a preliminary procedure at first instance, recovery was allowed to employees whose unemployment was caused by the tortfeasor who damaged their hair salon: see Trib. gr. inst. Nanterre, October 22, 1975, G.P. 1976.1.392 (Brunet c. Rico et Caisse mutuelle d'assurance et de prévoyance).
Marcailloux v. R.A.T.V.M., Cass. civ. 2e, April 28, 1965, D.S. 1965.777, cited by McLachlin J., involved a traffic accident that led to a traffic jam. The person who caused the accident was held liable for damages of 39 francs to the local transport authority for the loss of receipts caused by the resulting delay to the circulation of its vehicles. It is unclear what distinguishes this claim from other potential traffic jam claims. The note by Professor Esmein in the Marcailloux case observes that the characterization of a particular damage as direct or indirect, far from being a factual inquiry, is simply the statement of a conclusion as to recovery; in this regard, it plays a similar function to the concept of proximity in our law. See Note under Cass. civ. 2e, April 28, 1965, D.S.1965.777.
In Quebec, the expansive interpretation of "another" in art. 1053 of the Civil Code of Lower Canada referred to by McLachlin J. has served to shift the analysis to the terrain of causality: see Baudouin, La responsabilité civile délictuelle (3rd ed. 1990), at no. 177. Baudouin recognizes the difficulty of generalizing with respect to determinations of directness but he considers that a trend toward an exclusion of liability is discernable, supra, at no. 354:
[translation] The problem of determining what is "direct" damage is complex and here again any attempt at generalization would be presumptuous. However, one trend seems to be clear. The courts will not recognize loss the immediate source of which is not the fault itself but some other injury already caused by the fault. In other words, damage resulting from damage, repercussive damage, "second degree" damage, is indirect.
However, as the author recognizes, this is at most a trend. He further notes that Quebec courts have tended to consider causality as a question of fact: supra, at no. 349. This would constitute a significant difference with the French regime. However, the author notes that the decision of this Court in Morin v. Blais, [1977] 1 S.C.R. 570, considered the question of causality to constitute a question of law. Recovery of contractual relational economic loss has been allowed in a few cases in Quebec. Employers have been allowed to recover for the loss of the services of their employees.
In my view, the French and Quebec experience remains inconclusive. Although the cases are theoretically not subject to any special requirements for recovery, cases of recovery of contractual relational economic loss are few. The rarity of the cases has resulted in little doctrinal discussion of the issues raised and the brevity of the reasons makes the grounds for determination difficult to analyze. While French law does not establish an absolute bar, it is very close to establishing a de facto bar through the use of the dual requirements of directness and proof of causality. The number of cases in which recovery has been allowed is very few when one considers that relational losses occur as a result of practically every accident causing property damage in the commercial area.
Furthermore, one is at pains to establish the grounds for distinguishing successful claims from other relational claims. What little doctrinal discussion there is appears to be both keenly aware of the potential for open-ended liability and conscious that recovery is generally denied. Such analysis also points to factors entering into the directness and causality analysis that would exclude CN's claim, factors such as the intuitus personae nature of the contractual relationship and the inability of the plaintiff to protect itself through contract or otherwise. I shall have occasion to consider such factors later.
In addition, civil law scholars have remarked on the lack of emphasis in French and Quebec law on the problems raised by the nature of particular protected interests; see Jutras, supra, at pp. 295-96 and 310-11. In civil law systems such as the German system which, unlike the French system, have focused significant attention on the problems posed by the nature of different protected interests, (see Limpens, Kruithof and Meinertzhagen-Limpens, "Liability for One's Own Act", in International Encyclopedia of Comparative Law, vol. XI, ch. 2, IV.), recovery is denied for contractual relational claims based on the type of damage; see Markesinis, A Comparative Introduction to the German Law of Torts (2nd ed. 1990), at pp. 39 et seq. Other civil law systems have strict exclusionary rules. Switzerland apparently excludes le dommage par ricochet, allowing only recovery for wrongful death; see Herbots, "Le "Duty of Care" et le dommage purement financier en droit comparé" [1985], Rev. dr. int. et dr. comp. 7, at p. 32.
What conclusions can be drawn from the civil law? First, I think there is general agreement that economic loss cases cannot simply be subjected to the same analysis as cases involving other types of damage: see Atiyah, supra, at p. 270. No one is suggesting, after all, that we modify the rules adopted in Hedley Byrne for an undifferentiated Donoghue test in economic loss cases.
There remains the argument that French and Quebec experience puts the lie to the floodgates problem in this area. In my view, this is simply not borne out. First of all, as Markesinis points out, French judges are acutely aware of the potential for unlimited liability. They use different analytical tools to reach much the same result.
One can of course attempt to meet the floodgates argument by contending that recovery for contractual relational economic loss will remain exceptional even if the exclusionary rule is relaxed. This is perhaps the most that can be drawn from the civil law experience: the replacement of an exclusionary rule with what amounts to very close to a de facto bar will not lead to many cases being brought forward. Unlike the civil law rules in these areas, however, the traditional control devices in our tort law have been elaborated to deal with damages that are generally by their nature limited.
I am principally concerned about the relative advisability of attempting to draw a line within the group of contractual claimants as opposed to distinguishing based on the nature of the interest at stake. Specifically, I am concerned about the nature and the workability of the criteria used to distinguish valid claims. In my view, any incursions into the exclusionary rule should be carefully justified on policy grounds. With respect to this question, I do not find any theory put forward in either France or Quebec that would aid in making distinctions amongst contractual claimants on valid policy grounds; see the discussion by Mayrand J.A. of the difficulties in making the directness determination with respect to "victims by ricochet" in J.E. Construction Inc. v. General Motors of Canada Ltd., [1985] C.A. 275, at pp. 278-79.
To the extent that recovery has been allowed, the inability of doctrine to elucidate the characteristics leading to recovery or to a finding of directness gives the lie to the idea that allowing recovery in a few cases of this nature will provide material for an ex post rationalisation that the court is incapable of formulating beforehand. I do not share McLachlin J.'s confidence that turning this issue over to the common law to decide cases on the basis of proximity will lead to the gradual formation of categories of recovery that make sense in policy terms, and nothing in the civil law experience with findings of directness leads me to greater confidence in this regard: see Herbots, supra, at p. 21.
The narrow exclusionary rule distinguishes between property claims and contract claims and excludes the latter in cases of property damage. This bright line test has been in the past extended to the wider field of pure economic loss; in this wider field, it is in retreat in a number of areas. In my view, this case presents the court with the following problem: should the court eliminate the bright line test in the narrow area of contractual relational economic loss in favour of a test that will discriminate differently, this time amongst the class of contractual claimants, those who merit recovery and those who do not? If yes, what criteria should govern recovery?
Before dealing further with the question of contractual relational economic loss, however, it is necessary to consider a different set of arguments advanced by the respondent.
Part II: Alternative Interest Theories
Introductory
CN argues that its case does not rest on a mere contractual interest. It seeks to avoid the application of the narrow exclusionary rule by arguing that it has alternative interests at stake that differentiate it from the ordinary contractual claimant. It does not seek to place itself under a long-standing exception to the exclusionary rule enunciated in Simpson & Co. v. Thomson, supra, at p. 290, which involves cases allowing recovery to a plaintiff with a proprietary or possessory interest. If CN could argue that its interest in the bridge was analogous to the interest of a demise charterer in the chartered ship, it would be able to recover since it would be, vis-à-vis third parties, the temporary owner of the bridge; see Scrutton on Charterparties and Bills of Lading (19th ed. 1984), at pp. 47-52; Baumwoll Manufactur von Carl Scheibler v. Furness, [1893] A.C. 8 (H.L.); The "Father Thames", [1979] 2 Lloyd's Rep. 364. A demise charterer's interest typically entirely supplants the interest of the owner of the ship, even in the repair of physical damage: see Candlewood, supra, at p. 18. For example, in Rivtow, the plaintiff was a demise charterer. No argument was directed to contesting Rivtow's interest.
CN's licence agreement gives it no proprietary or possessory interest. This state of affairs was surely not entirely fortuitous in light of the fact that the existence of such an interest was a central consideration in the Gypsum Carrier case. CN's contract with PWC establishes no proprietary or possessory interest in the bridge, and it did not attempt to argue that its contract resembled that of a demise charterer.
Unable to contend for the existence of a possessory right to the bridge, CN, we saw, put forward essentially two arguments to the effect that its interest is more than that of a mere contractor. First, it says, it suffered from a transferred loss of use. Secondly, it maintains, it is involved in a common adventure with PWC. These arguments are centred on the relationship between the plaintiff and the property owner, i.e., between CN and PWC.
Transferred Loss Theories
CN frames its argument with respect to transferred loss in two different ways. First, it submits that "P.W.C. initially suffered the physical loss for the damage to the bridge, but pursuant to their contracts with the railways all costs are ultimately borne by the railways, substantially by the C.N.R.". Along a similar line, it contends that PWC "acted like a trustee" in providing the bridge to the railways and particularly CN. The second manner in which it frames its argument on transferred loss involves arguing that granting judgment to CN in this case would not impose additional liability on the defendants over and above what they would normally be incurred by the owner of commercial property. I will deal with these in turn.
The respondent's first argument, as I understand it, is that the contract provides for a particularly mechanical passing through of the costs of the accident to the eventual users. CN's claim is thus different from the typical contractual relational claim.
I find this unconvincing. The rates are not set after all the costs are established. Canada unilaterally sets the rate for each three-year period of the licence after the initial three-year period, in light of the principle set out in the preamble of "total recovery to Canada of all the costs of operating and maintaining the Bridge" (see Recital E of the Preamble of the License Agreement). After each renewal of the contract the railway has a guaranteed unit rate for three years. CN is less exposed to costs incurred by the property owner than the typical consumer, for whom the costs incurred today are often passed through almost immediately. Before any such costs are passed through to CN, the current unit rate must expire and CN must decide that it wishes to renew the contract for another three-year period.
Second, it must be noted that PWC recovered damages as property owner in this case. Since PWC was fully compensated, none of the costs of property damage in this case will be passed through, even in the future. The only transferred loss in this case concerned a loss of use.
Third, the real reason all the loss of use costs appear to be passed through in this case has nothing to do with any special characteristics of CN or of the licence agreement. Rather, it results from the fact that PWC runs the bridge on a non-profit basis. PWC did suffer a loss of use of its fee-earning capacity; its pricing policy is such that the economic value of its loss of use is zero. In most cases, the owner of a profit-making chattel damaged by the tortfeasor will suffer a loss of use in the form of reduced payments by users. Here, the loss of use appears to be transferred in toto only because PWC does not use the bridge to earn a profit so it incurs no financial loss owing to interruption of transit fees. PWC's pricing policy, which happens to be particularly advantageous to CN and the other users at the expense of the taxpayers of Canada, does not mean that any more transferred loss of use occurred in this case than in the typical case.
Fourth, the toll structure does not support the "unique relationship" theory since all railways were equally situated with respect to this factor. The loss of use in this case was initially spread over the four railways. A wide range of people and companies were undoubtedly affected by the unavailability of the bridge. People who contracted for carriage of their goods by the railways, for example, may well have had shipment of the goods delayed in transit. The eventual bearer of this loss would be determined by the terms of the contract of carriage.
As the appellants rightly suggest, the contract CN had for the shared use of the bridge puts it in no better position to recover its loss than a time charterer who contracts for the sole use of a vessel. Recovery has been regularly denied in the time charterer cases: see Konstantinidis v. World Tankers Corp. (The World Harmony), [1967] P. 341, at p. 362.
The unique features of the toll structure are not such as to found an alternative legally protected interest over and above the contractual interest of the plaintiff. A fortiori, they also are not such as to justify a characterization of PWC as a trustee.
The second manner in which the respondent frames its loss of use argument involves arguing that granting judgment to CN in this case would not be extending the liability of the defendants over and above what they would normally incur to the owner of commercial property. Here, the respondent essentially argues that the defendants' liability should not be reduced merely because it was fortunate enough to strike a bridge being used by railways. Had PWC, i.e., the owner, been using the bridge, it could have recovered loss of use profits as consequential economic loss.
A variant of the respondent's transferred loss argument was rejected in the Candlewood case, supra, on stronger facts for the plaintiff than in this case. There, the ship Ibaraki Maru was damaged in a collision with the Mineral Transporter owned by the defendant. The negligence of the Mineral Transporter was established. Repairs to the Ibaraki Maru were delayed for several weeks owing to labour unrest.
The plaintiff time charterer ("time charterer") was also the owner of the Ibaraki Maru. As owner, it had let the ship on a bareboat charter to the second plaintiff ("bareboat charterer") and by a time charter of the same date, the bareboat charterer had let it back to the owner on a time charter. The bareboat charterer had a proprietary or possessory interest and could bring an action for damage to property and for consequential economic loss. Under the terms of the bareboat charter, the bareboat charterer was liable as against the owners to bear the cost of repairs resulting from the collision. It paid this amount to the owner and collected damages for this amount from the tortfeasor. Under the terms of the time charter, the daily hire payable during the time charter was reduced while the ship was undergoing repairs to about one quarter of the normal daily rate. The bareboat charterer also recovered the amounts necessary to make up the reduced payments. These findings were not challenged before the Privy Council where the case centred on the rights of recovery of the time charterer.
The time charterer claimed for the amount of hire it paid while the vessel was not operational and the profits it lost during that period. Its first argument was that its reversionary interest as owner was sufficient to ground recovery. Their Lordships rejected this contention on the ground that the claim was made in respect of losses it suffered as time charterer (at p. 18). The time charterer's second argument was that, if it had incurred the loss of use in its capacity as owner, it would have been entitled to recover the whole cost of repairing the collision damage, and also its whole loss of profits while the ship was out of service. Because the ship was subject to the bareboat charter and the time charter, the loss was divided between the bareboat charterers (as disponent owners) and the time charterers, but the loss was the same and should be recoverable by the party on whom it happened to fall. The court apparently pushed the first plaintiffs to take their argument to its logical conclusion: if there had been a chain of sub-charterers and sub-sub-charterers, each party in the chain would have been entitled to recover his particular loss. Lord Fraser of Tullybelton rejected the argument on the following grounds, at p. 19:
It may be asked, and Mr. Gleeson did ask rhetorically, why the wrongdoer should escape paying for part of the loss for which he is responsible merely because the loss is divided between two victims. One answer was given by Holmes J. in Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303, where he said, at p. 309:
"justice does not permit that the petitioner [wrongdoer] be charged with the full value of the loss of use unless there is some one who has a claim to it as against the petitioner" (emphasis added).
If the bareboat charter and the time charter are accepted as valid and effective contracts, it cannot be right to disregard them or to treat claims from parties to them as if the contracts did not exist. Another, and perhaps less technical, answer is that the argument, if accepted, would have far-reaching consequences, which would run counter to the accepted policy of the law. If this exception to the rule against allowing recovery by persons who are in merely contractual relationship with the injured party were admitted, there appears to be no reason why contracts under time charters should be treated differently in this regard from other contracts between the owner or disponent owner of a ship and other parties. In the, not uncommon, case where the damaged vessel is the subject of a chain of sub-charters and sub-sub-charters, made at different dates, some of the charters may be profitable to the charterer though the respective rates of profit may be different, and some charters may result in a loss to the charterer. Is a sub-charterer who is wholly or partly released from a loss-making charter to be expected to contribute to the damages fund, in order to relieve the wrongdoer pro tanto? That would be surprising, yet it seems to be the logical consequence of treating the damages as a fund which is divisible among those who have suffered loss in proportion to their loss. And if claims for economic loss by sub-charterers are to be admitted, why not also claims by any person with a contractual interest in any goods being carried in the damaged vessel, and by any passenger in her, who suffers economic loss by reason of the delay attributable to the collision? An exceedingly wide new range of liability would be opened up. Their Lordships accordingly reject this submission.
Lord Fraser's speech also noted that the appeal of the argument was strong in that case because the whole loss of use fell on only two parties. In the case at bar, the loss of use fell initially on only the four railways. However, if the theory of recovery is based on a transferred loss of use rationale, there is no reason to limit recovery to such cases. Obviously, all users of a damaged bridge suffer a loss of use of the bridge and damage to bridges, unlike damage to a single ship, is very likely to cause loss to a wide group of people. Difficulties of measuring, tracing, and apportioning damages would bring excessive uncertainties and complexity into damage actions, and thereby overburden the courts. There would be a significant risk of duplicate recovery. Setting up a fund to compensate all such losses in every case of transferred loss would be impractical.
The facts in Candlewood, as I noted, were more favourable to the plaintiff than those in this case. The time charterer was also the actual owner. It suffered exactly the same kind of damage as the owner would suffer. It constituted a single user whereas CN is merely one of four users of the bridge. The respondent attempted to distinguish Candlewood on a number of grounds. They first argued that the time charterer had mere contractual rights. If a time charterer who suffers the entire loss of use has mere contractual rights, I am unable to see how a company like CN, which merely suffers a partial loss of use, has anything more. Second, it asserts that the time charterer was attempting to recover loss of profit whereas it is trying to recoup losses. This contention involves a misreading of the case: the time charterer was claiming both for the amount of hire paid whilst the vessel was not operational and for loss of profits. Its claim to recoup losses was rejected as was its claim for lost profits.
CN also attempted to distinguish the case on the ground that the defendants had no knowledge of the identity of the charterer or even that the vessel was chartered at all and that the plaintiff owned no adjacent property that was interfered with because of the negligent act; in sum, there was no special relationship. I shall deal with these arguments in Part III devoted to the special relationship question.
A time charterer typically suffers exactly the same type of damages the owner would have suffered. This gives particular force to the transferred loss argument in that context. The use value of the ship is limited to chartering fees and transport profits. The defendant would not be exposed to a different liability from that which he would ordinarily expect; see Feldthusen, Economic Negligence, supra, at p. 234. It is this similarity which explains why in certain cases in the United States, the rule against recovery by a time charterer has occasionally been relaxed. In Venore Transportation Co. v. M/V Struma, 583 F.2d 708 (1978), the time charterer had to continue paying charter hire during repairs. The court found that the time charterer could recover his lost charter hire but not lost profits, at pp. 710-11:
. . . payment for loss of use of the damaged vessel is a conventional item of recovery, and the fact that the charter party has transferred the risk of loss of use from the owner to the time charterer should not extinguish the right to a recovery of a traditional item of damages. [Emphasis added.]
I am uncertain whether it is advisable to so extend recovery to a type of damages that would normally be recovered by an owner. I am certain, however, that to extend recovery to everything that could be recovered by an owner would be impractical.
To accept wide recovery for transferred loss as proposed by the plaintiff here would have the effect of entitling the plaintiff to compensation in all cases dealing with contracts for the use of another's property. If loss of use is extended to include the costs of finding alternate sources for the same benefits, it goes considerably beyond what is normally payable to the owner in commercial cases, although admittedly it could be payable to the owner.
True transferred loss cases involve a claim which is in essence a claim for property damage which the owner himself would have recovered, had the loss not fallen on the plaintiff because of their contract. A true transferred loss case requires that the risk of property damage have passed, as in the case of goods damaged in transit after the risk (but not the property) has passed to the buyer. In such a case, unless the buyer is given a right of action, the carrier will be liable to neither party: not to the seller because he has suffered no loss, nor to the buyer who has no protected interest; see Fleming, The Law of Torts (7th ed. 1987), at pp. 164-65.
Even in that type of case, recovery was denied in the recent House of Lords decision in Leigh and Sillavan Ltd. v. Aliakmon Shipping Co., supra, essentially on the ground that contract law provided a sufficient protection in the circumstances of that case. It was only the particular variation of the contract to which the buyers agreed that deprived them of their usual right of action.
The present is not a true transferred loss case. PWC has collected for the property damage it has sustained. The transferred loss claimed in this case is thus not with respect to the property damage claim. Rather, it is a claim for the transferred loss of use, or transferred economic loss.
In these circumstances, I fail to see how the respondent suffered a transferred loss such as to create an alternative protected interest to its contractual interest.
Common Adventure or Joint Venture
MacGuigan J.A. refers, at p. 167, to the finding of the trial judge that recovery is supported by "the CNR's role in supplying materials and inspection and consulting services for the bridge, and CNR's preponderant usage of the bridge, recognized even in the periodic negotiations for routine maintenance closings". CN argues that these findings bring into play the "common adventure" cases: see Morrison Steamship Co. v. Greystoke Castle (Cargo Owners) (The Greystoke Castle), [1947] A.C. 265; Aktieselskabet Cuzco v. The Sucarseco, 294 U.S. 394 (1935).
I disagree. In my view, the appellants are correct in arguing that there was no common adventure in this case. The parties agreed that the bridge was owned, operated and maintained by the PWC. PWC was, by contract with the railways, obligated to operate and maintain the bridge.
CN's preponderant usage of the bridge and participation in negotiations over bridge closure do not justify a finding of common adventure. I can see no reason to allow recovery based simply on the plaintiff's status as a principal client. Undoubtedly, many suppliers of services consult with their principal clients with respect to planning necessary interruptions of supply so as to minimize disruption. While this is certainly good business practice, it does not establish a finding of common adventure.
CN also argues that paragraph 10 of its licence agreement (cited supra), together with its provision of materials for repairs, is sufficient to constitute a "common adventure" between itself and PWC. In my view, that provision is far from sufficient to create an alternative interest. While it does provide that CN will make emergency repairs, it provides both for prior approval and reasonable reimbursement by Canada. The consulting services, inspections, maintenance and repairs are subject to a similar regime. These provisions merely provide for the establishment of further contractual relations between CN and PWC. CN is both a supplier to PWC and a contractor for services from PWC. None of the clauses provides for any joint responsibility for property losses. It would be curious if a bridge user could found a contractual loss claim on the fortuitous circumstance that it also was the company hired to fix the bridge on occasion.
There is no case for a common adventure that equates to the relationship between ship and cargo in a general average case. In cases of common adventure, A, the ship, has suffered damage which is recoverable against the wrongdoer C. B is bound to contribute to A's loss and seeks to recover the amount of its contribution from the wrongdoer: see The Greystoke Castle, supra, at p. 304, per Lord Simonds (dissenting). In The Sucarseco, supra, the United States Supreme Court considered a claim by owners of undamaged cargo against the non-carrying ship arising out of a collision. The cargo owners claimed for damages in the amount of their contributions to the general average. In allowing the claim, Hughes C.J. carefully distinguished the case before him from a general contractual claim (at pp. 404-405):
This is not a case of an attempt, by reason of "a tort to the person or property of one man," to make the tort-feasor liable to another "merely because the injured person was under a contract with that other, unknown to the doer of the wrong." See Robins Dry Dock & Repair Co. v. Flint, 275 U.S. 303, 309; Elliott Steam Tug Co. v. Shipping Controller [1922] 1 K. B. 127, 139, 142; The Federal No. 2, 21 F. (2d) 313. Here, cargo as well as ship was placed in jeopardy. That jeopardy was due in part to the negligence of the vessel against which the claim is made. The fact that the vessel and the cargo under the "Jason clause" bear their proportionate shares of the expenses gives Sucarseco no ground for a contention that the expenses themselves, or the share that cargo bears, were not occasioned directly by the tort. In the light of the nature of the general average contributions, and of the event which made them necessary, the fact that they were made under the stipulation in the "Jason clause" is no more a defense to Sucarseco than is the fact that the cargo was placed on board under a contract to carry it. [Emphasis added.]
Earlier in his reasons, the Chief Justice had underlined that the Jason clause "in no way changes the essential features of general average contributions" (at p. 402). In addition to the other distinctions with respect to the case at bar, the contractual clause in these cases largely serves to reaffirm the application of a special legal regime.
The Greystoke Castle, supra, is very similar to The Sucarseco and the House of Lords in fact relied on the American case. It involves the law of general average and is easily distinguishable from this case. I would confine Lord Roche's dictum, at p. 280, to cases of general average and common adventure narrowly defined: see Murphy v. Brentwood District Council, supra, at p. 460, per Lord Keith. At the very least, a requirement exists that the expenses be incurred in avoiding or mitigating personal or property damage threatened by the defendant's negligence: see Fleming, supra, at p. 164.
These cases involve discretionary decisions made in the common interest that impose cost disproportionately amongst those who benefit from the decision. In the words of Hughes C.J. in The Sucarseco, supra, at pp. 402-403: "It must still appear that voluntary and successful sacrifices have been made or extraordinary expenses incurred on behalf of those interested in the adventure in order to avert a common imminent peril, with resulting benefit to the adventure upon which the burden of such sacrifices and expenses appropriately rests." In my view, these general average cases are not applicable to the facts of this case. There was no common imminent peril. CN was not required to contribute to PWC's loss. The loss fell exactly where the contract between CN and PWC attributed it. It cannot suffice that losses were incurred by both parties, for that is always the case in this type of situation.
With respect to CN's voluntary contributions to bridge maintenance, which constitute the principal extra-contractual aspect of the relationship between the plaintiff and the property owner in this case, it should be remembered that CN and the other railways were paying a low price under the contract, merely sufficient to cover PWC's costs. In return, PWC's repair obligations under the contract were not particularly strict. In the event of the complete or partial destruction of the bridge or any damage thereto, the decision to replace or repair was entirely at Canada's discretion. Canada was under no obligation to rebuild, replace or repair such destruction or damage and the railway was not entitled to claim any compensation or damages. No time limits for repairs were provided for. It thus made perfect commercial sense for CN to voluntarily inspect and repair the bridge on occasion in its own interest, especially since it must, in any event, maintain the necessary manpower and equipment to repair its own bridges in the area. CN may have provided some maintenance services when it suited its purposes, but it cannot be said that CN operates and maintains the bridge. The railway had no obligation to provide any service without being paid. It also had no obligation to contribute financially in any manner to compensate any losses incurred by PWC. CN's voluntary contributions are not such as to constitute a joint venture.
It remains unclear to me how the Court is to proceed to establish the existence of a joint venture other than by looking at the contractual relationship between the plaintiff and the property owner. McLachlin J. considers that the evidence in this case is sufficient to establish the existence of a joint venture. With respect, I am unable to agree. None of the traditional indicia of a joint venture is present either through contract or extra-contractually. There was no legal entity in the nature of the partnership. There was no joint undertaking of any commercial enterprise. There was no duty to share both profits and losses. In my view, where the contractual or extra-contractual relationship between the parties excludes any form of possible joint lability or contribution in cases of loss of this type, a finding of the existence of a joint venture in this context is excluded.
In conclusion, I do not find the respondent's arguments to the effect that it had more than a mere contractual interest convincing. CN's entitlement to use the bridge finds its sole source in the contract. The contract sets out the full extent of CN's rights: without the contract, CN would be trespassing. It has wisely not argued the existence of any possessory interest. Its transferred loss is merely the transfer of a loss of use and is a less compelling case for recovery than the loss incurred by a time charterer. This case does not involve a common adventure such as exists in the cases dealing with general average contributions. As a result, I cannot accept the rationale for recovery set forth by McLachlin J. to the effect that the purpose of allowing recovery in this case is to permit "a plaintiff whose position for practical purposes, vis-à-vis the tortfeasor, is indistinguishable from that of the owner of the damaged property, to recover what the actual owner could have recovered".
CN's recovery in the courts below, however, was not founded on a different interest than the typical contractual claimant; rather, it was founded on greater proximity with respect to the same interest. As a result, I propose to return to the issue of contractual relational economic loss. I will first examine the various proposals to relax the bright line rule. Then I will consider the rationale behind that rule in light of the proposals.
Part III: The Proposed Tests
CN argues that even if we reject its "alternative interests" argument and find its interest merely contractual, the existence of other factors is sufficient to constitute a special relationship with the tortfeasor and to ground recovery for its contractual claims in this case. In particular, it points to the high degree of subjective and objective foreseeability in this case as sufficient to constitute a special relationship between Norsk and CN, but other factors are invoked as well. The respondent does not deny the existence of the rule in Cattle. It contends, however, that the rationale for Cattle is simply that the mere disruption of contractual rights without more is insufficient to ground recovery. These arguments represent an attempt to qualify the application of the contractual relational economic loss exclusionary rule.
My colleague McLachlin J. has set forth guideposts for the search for the answer to the issue in the case at bar. In brief, she underlines the need for limits to liability, the need for the limits to be reasonably clear and the need for the rule to respond to considerations of policy and fairness. She also recognizes that a single rule for all economic loss cases is probably unattainable. I am in substantial agreement with her on these points but I consider that a number of additional aspects are relevant to the choice of a rule in this area.
First, with respect to the need for limits to liability, it is important to underline that perfect justice is not possible in this area; it is impossible to compensate everybody who suffers loss owing to their contractual relationships with the property owner. Some losses, which were undoubtedly incurred as a result of a defendant's negligence, are going to remain uncompensated. The challenge, then, is to come up with a rule that divides the winners and the losers in the best possible manner.
A good test should distinguish on a rational basis between potential plaintiffs, all of whom were injured by the defendants' negligence. The plaintiff's proposed rule should offer a convincing and practical rationale for distinguishing its claim from those other claims, contractual or otherwise, which are to be rejected. Victims whose claims are to be denied must perceive a minimum of justice in the result. In my view, none of the theories that involve the acceptance of CN's claim but which would lead to the rejection of the claims of the other railways can be accepted as just from this perspective.
A test for recovery in cases of economic loss to contractual entitlements caused by property damage to another party should reflect the characteristics of this type of litigation, described in Feldthusen, Economic Negligence, supra, at pp. 207-8:
The defendants in this type of case are not typically heinous wrongdoers, but rather individuals and enterprises engaged in common and useful social activity. The same is true of the plaintiffs who are inadvertently harmed by some unfortunate and often inevitable consequence of modern life. Few important moral, social or symbolic issues are involved. Here, if anywhere, the economists' suggestion that the law should devise rules which permit the occasionally incompatible activities of plaintiffs and defendants to continue at the lowest possible total social cost should be taken seriously. This includes rules which encourage both parties to take cost-efficient accident prevention measures. And in respect of the unavoidable accidents which remain, it suggests that the loss should be borne by the party who can insure against it at the lowest cost.
This description is pertinent in the present case. A good rule should thus place some incentive on both parties to act in an economically rational manner to reduce total accident costs.
The rule must, of course, also confront the problem of indeterminacy. It is often suggested that this is the only problem the rule must confront. This was perhaps natural in light of the importance of potential indeterminate liability in negligent misrepresentation cases and the fact that the breakthrough in allowing recovery for economic loss came in Hedley Byrne. However, this confusion between the two issues tended to obscure the variety of issues raised in different kinds of economic loss cases. If the principal reason lying behind the broad exclusionary rule for pure economic loss is the concern over indeterminate liability, then the exclusionary rule can be easily discarded in favour of a more direct test of whether liability would be indeterminate. The plaintiff's case here is essentially built on this proposition and they offer this Court a wide variety of factual distinctions which they contend respond to the concern about indeterminate liability. As the above discussion indicates, I do not agree with that approach; a rule in this area should serve to do more than simply exclude indeterminate liability. However, in contractual economic loss cases, the proposed rule must certainly confront this issue.
What then does it mean for a particular liability to be determinate? The first critical question is whether the liability needs to be determinate before or after the accident. It is important to underline that since most claims of this nature occur in the commercial area, the requisite certainty should exist before the accident occurs. A company like CN should be able to consult legal counsel and receive reasonably clear advice with respect to potential recovery in the case of an accident that is as common as a ship hitting a bridge. So should a company like Burlington Northern Railway. Even more importantly, when the shoe is on the other foot, CN should also be able to get some reasonably clear guidance from counsel with respect to its potential liabilities in a case where a train derails and damages a factory. Estimating such liability is, of course, a key aspect to the pricing of insurance for potential tortfeasors. Under the exclusionary rule, liability is determinate before the accident; unless the contract is such as to create a joint venture or a possessory interest, all parties are aware that no recovery will lie for damage to those contractual interests.
The second important point is that the objection is not simply to a large number of claims since an accident may injure a large number of people or cause extensive property damage. But in physical damage cases, the number of potential first-victim claims is usually foreseeable even when large. Even more importantly, it is rare for multiple physical damage claims to ripple down a chain; physical injury to one person rarely gives rise to physical injury to others down a chain: see Stapleton, supra, at p. 255. Such ripple effects are on the contrary the very essence of contractual relational economic loss. The concern is that the volume of claims is indeterminate and therefore difficult and expensive to insure against.
A third important consideration is the indeterminacy of each claim. Recovery for contractual expectancies requires analysis of who bore the loss. What would happen if CN effectively passed on any increased costs incurred owing to the unavailability of the bridge to its customers? Refusing to address this question could result in a very expensive tort case leading to compensation for a party who suffered no loss. In a multi-stage chain of contracts, it becomes very difficult to analyze the economic effects of an accident on a particular link in the chain. A related concern is with false or inflated claims: see Spartan Steel, supra.
The problem with this case from the perspective of indeterminacy is that it involves a type of accident that will very likely lead to a great number of claims. It so happens that on the facts of this case, the number of injured parties is small. The fact that Norsk was fortunate enough to hit a bridge with few users does not make its potential liability for contractual relational economic loss any less indeterminate. Its liability after the accident is, of course, determinate; but beforehand, when potential tortfeasors are looking for insurance, they and their insurance company do not know which bridge will be hit. It seems odd to establish one set of rules for negligent tortfeasors who hit busy bridges ‑‑ liability for economic loss is excused because of indeterminacy ‑‑ and a different set for those who hit bridges used by few users.
I turn to an examination of the proposed tests. The principal authority in the Commonwealth allowing recovery for contractual relational economic loss is Caltex, supra. Caltex involved an oil refinery and pipeline owned by the Australian Oil Refinery ("AOR") that carried oil to a terminal owned by the plaintiff Caltex. While oil was moving through the pipeline between the refinery and the Caltex terminal a dredge negligently damaged the pipeline. AOR was compensated for its loss as property owner.
Under the terms of the Caltex-AOR contract, the oil in the pipeline was owned by Caltex but was at the risk of AOR. Caltex claimed against the dredge and its owners for its economic loss resulting from the damage, specifically the expense to which it was put in arranging for continued supply of its terminal either by ship or road. One of the questions before the court was whether the plaintiff could recover damages for economic loss sustained as a result of damage negligently caused to the property of a third party. Although all five judges held that the right to economic loss must rest on something more than mere foreseeability they all agreed that the plaintiff must succeed. Each, however, suggested different approaches for the appropriate test to be applied. I shall examine the various proposed rules under the headings set out below.
Foreseeability of the Individual Plaintiff or of an Ascertained Class of Plaintiffs
CN heavily stressed the defendants' undoubtedly high level of subjective and objective knowledge that CN as a particular company would suffer loss. My colleague Stevenson J. relies on this factor as his principal ground for finding liability in this case. There is no question that Norsk knew and ought to have known that CN would suffer loss. Indeed, the facts reveal that the tug captain thought CN would suffer even more than it did, since he erroneously thought the bridge belonged to it. I am unable to see the importance of this "excess of foresight" in policy terms, however.
First, the subjective view of the defendants with respect to the ownership of the bridge is obviously not sufficient to ground a claim. Such an error does not, of course, negate the defendants' duty with respect to the actual owner of the property. Why should it have the effect of creating new duties in the absence of a protected interest? It remains true, however, that Norsk could reasonably foresee that a specific plaintiff, CN, would suffer loss as a contractual claimant. Should this factor distinguish CN from other contractual claimants?
Two judges in Caltex suggested versions of an individual plaintiff test, at least one that would allow recovery in this case. At the level of a general test for all cases of pure economic loss, Mason J. adopted what can be termed the specific individual test. "A defendant", he held at p. 274, "will then be liable for economic damage due to his negligent conduct when he can reasonably foresee that a specific individual, as distinct from a general class of persons, will suffer financial loss as a consequence of his conduct". Gibbs J. also incorporated the known plaintiff test into his analysis as a necessary but not sufficient condition for liability (at p. 245). As he saw it, the existence of a common adventure or physical propinquity may have supporting roles, but are neither necessary nor sufficient. The ascertained class test would allow recovery where the defendant knows or has the means of knowing that the persons likely to be affected by his or her negligence consist of a definite number of persons.
In Candlewood, supra, at p. 24, the House of Lords rejected the individual plaintiff test and the ascertained class of plaintiffs test in the following terms:
Their Lordships have carefully considered these reasons for the decision in the Caltex case, 136 C.L.R. 529. With regard to the reasons given by Gibbs and Mason JJ., their Lordships have difficulty in seeing how to distinguish between a plaintiff as an individual and a plaintiff as a member of an unascertained class. The test can hardly be whether the plaintiff is known by name to the wrongdoer. Nor does it seem logical for the test to depend upon the plaintiff being a single individual. Further, why should there be a distinction for this purpose between a case where the wrongdoer knows (or has the means of knowing) that the persons likely to be affected by his negligence consist of a definite number of persons whom he can identify either by name or in some other way (for example as being the owners of particular factories or hotels) and who may therefore be regarded as an ascertained class, and a case where the wrongdoer knows only that there are several persons, the exact number being to him unknown, and some or all of whom he could not identify by name or otherwise, and who may therefore be regarded as an unascertained class? Moreover much of the argument in favour of an ascertained class seems to depend upon the view that the class would normally consist of only a few individuals. But would it be different if the class, though ascertained, was large? Suppose for instance that the class consisted of all the pupils in a particular school. If it was a kindergarten school with only six pupils they might be regarded as constituting an ascertained class, even if their names were unknown to the wrongdoer. If the school was a large one with over a thousand pupils it might be suggested that they were not an ascertained class. But it is not easy to see a distinction in principle merely because the number of possible claimants is larger in one case than in the other. Apart from cases of negligent misstatement, with which their Lordships are not here concerned, they do not consider that it is practicable by reference to an ascertained class to find a satisfactory control mechanism which could be applied in such a way as to give reasonable certainty in its results.
In Kamloops, supra, Wilson J. also questioned the advisability of the individual plaintiff test. At pages 30-31, she stated:
It is quite apparent that Gibbs and Jacobs JJ., and possibly Stephen J. also, were seeking some means of permitting recovery for pure economic loss while avoiding the undesirable consequences of applying the reasonable foreseeability rule, namely indeterminate liability to an indeterminate class. They saw the solution in limiting foreseeability to specific individuals rather than members of a class. I am not sure, however, that their exception solves the problem. It may make the class determinate but it gives no guarantee that it will be small.
Both Lord Fraser of Tullybelton's unanimous opinion and Wilson J.'s majority opinion stressed the practical difficulties in applying such a test. I agree that the practical difficulties of applying such a test are considerable to say the least.
In my view, problems also exist at the level of principle. In the absence of any malicious intent on the part of the defendant, of what significance is the fact that the defendant knew that the individual plaintiff would suffer? In my view, its only role is to limit liability. The individual plaintiff or class of plaintiff or special relationship test serves a very different and more focused policy function in the context of the negligent misrepresentation cases where it has been employed: see Hedley Byrne, supra; Candler v. Crane, Christmas & Co., [1951] 2 K.B. 164. Professor Feldthusen remarks as follows on its function in those cases ((1991), 17 Can. Bus. L.J. 356, at pp. 376-77):
. . . the duty of care is derived from a business relationship between the parties which antedates, and is independent from, the negligent act. The assumption of responsibility or special relationship duty tests and the known limited class remoteness test were developed to deal with transaction-specific negligence. The defendant makes a reflective transactional undertaking to a third party which affects (and is probably intended to affect) the plaintiff. The defendant is actually contemplating advice or service and its consequences in the transaction. It makes some sense to speak of parties known to be at risk from the contemplated transaction. The entire thrust of misrepresentation and services law is to limit liability to contemplated transaction-specific situations. One may describe this in proximity language, but it is a different use of the proximity principle than in a relational case. [Emphasis added.]
Those cases involve the defendant's making a representation voluntarily. It makes sense to impose upon the defendant a requirement that he or she put his or her mind to the question of who might be affected, since the defendant has the opportunity to reflect on this issue before making the representation: see Haig v. Bamford, supra.
Here we are dealing with an accident. There is no intention to affect the plaintiff; rather the effect on the plaintiff is merely a result of the accident. Norsk cannot be said to contemplate a particular act of negligence, a particular plaintiff or a particular loss in the same sense as a bank manager who provides financial information. Knowledge of the individual plaintiff serves solely to eliminate "indeterminate liability": it operates arbitrarily both in terms of singling out defendants and in terms of singling out plaintiffs.
In the context of an accident, this criterion* has thus no link with fault or with a lack of care; surely no one is suggesting tort law should strive to protect bridges with high profile users more than bridges used by anonymous users, or that defendants who damage bridges with high profile users are more guilty than others. Its sole function is to distinguish one plaintiff from another and thus "solve" the indeterminacy problem, a function that could be as effectively performed by a rule based on the colour of CN's trains.
Allowing CN's claim to be distinct from the other contractual victims by virtue of its particular foreseeability as an individual victim would in my view give rise to an unjust rule owing to its sheer arbitrariness. It serves neither to distinguish particularly meritorious victims, nor to single out particularly careless tortfeasors. Its sole function is to reduce the class of claimants to a small group, a function that could be equally well performed by any other factual distinction. Further, the test would have the effect of singling out the wrong parties for relief. It would offer a premium to notoriety, a premium for which I can find no legal or social justification, particularly since such persons are most likely to advert to the matter and to contract out or insure against the harm.
The Defendant's Foresight with Respect to the Specific Nature of the Loss Incurred by the Plaintiff
The second factor put forward as founding proximity is that Norsk foresaw the specific nature of the loss incurred by CN. The argument based on the foreseeability of the specific nature of the loss would presumably found recovery for all three railroads, so it sits rather awkwardly with CN's unique relationship claim. It is also clearly insufficient to function on its own as a limit on indeterminate damages, since even if there were thousands of users of the bridge, the specific nature of the losses incurred would be foreseeable for all users. In practically all cases of this type, the defendant will be aware that the "specific nature of the loss" will be the loss of use of the property he or she has damaged.
Additionally, the tortfeasor does not actually know the specific nature of the loss, since the allocation of the loss will depend primarily on the terms of the contract between the plaintiff and the property owner as well as on other contracts between the plaintiff and the other parties. It is certain that Norsk knew that CN's use of the bridge would be interrupted. What is less clear and in fact quite doubtful is whether Norsk knew about the allocation of risk of bridge failure in the contract between CN and PWC.
It is thus incorrect to say that, because Norsk knew that CN's use of the bridge would be interrupted, it knew the "precise nature of the loss" CN would incur. The precise nature of the loss, and in fact whether any loss is incurred at all, would be a result of the contractual allocation of risk, of which Norsk would normally be unaware. In many cases of contractual relational loss, the variety of contractual entitlements will be much greater and more complex.
Physical Propinquity
The third factor that is said to found proximity is the physical proximity of CN's property to the accident. CN's property is closely joined to the bridge on both sides of the river and the bridge forms an integral part of its railway network. CN relies here primarily on the judgment of Jacobs J. in Caltex. Jacobs J. there recognized that where the plaintiff's loss arises solely from a contractual relationship with a third party, recovery will be denied (at p. 279). However, he held, at p. 279, that if the damage arose owing to "physical effect on the person or property of the plaintiff, it will not be irrecoverable simply because it is economic loss". The judge, at p. 278, defined physical effect short of physical injury as an act or omission that prevents physical movement of a person or physical movement or operation of property. In that case, the physical effect was the immobilization or the flow of crude oil through the pipeline.
CN does not, in my view, meet this physical effect test, even if such a test were adopted. Its trains have certainly not been immobilized. Its land has not been damaged and it makes no sense to speak of its being immobilized. In the absence of such a "physical effect", physical propinquity of property cannot constitute an alternative potential interest. As the appellants rightly point out, the other railways suffered identical damages despite not owning any property in physical propinquity to the accident.
The application of this test would also lead to minimal damages even if it were met. Jacobs J. describes the damages that flow from his test as being limited to those resulting from the physical effect. In the Caltex case, the quantification of the damage was conceded. No inquiry was required as to whether all the crude oil for which alternative arrangement had to be made was "at the time of the incident already in physical propinquity to the place of the incident". In the case at bar, however, damages under this test would presumably be recoverable only as regards those trains that were in "physical propinquity" to the bridge when the barge hit the bridge. How close they would have to be is a matter for speculation.
My colleague McLachlin J. has adopted a geographic proximity factor as one element of her proximity analysis. With respect, I am unable to discern any policy significance in the fact that a particular plaintiff owns property in proximity to an accident.
Proximity
The fourth approach taken by the respondent is more general and involves deciding economic loss cases on the basis of proximity. To this end it puts forward not only the three above mentioned factors regarding its relationship with Norsk but also the aspects of its relationship with PWC which I examined, i.e., the alleged common adventure and the transferred loss. In fact, it provides the Court with a lengthy list of factors which, it alleges, create the necessary proximity in this case.
Stephen J. in Caltex adopted this approach. My colleague McLachlin J. also relies on this approach. I agree with Stevenson J. that the concept of proximity is incapable of providing a principled basis for drawing the line on the issue of liability for the reasons expressed by him (at p. 17). As he notes, it expresses a result, rather than a principle.
The Argument from Morality
Stephen J.'s opinion in Caltex, at p. 255, rejects the exclusionary rule since it possesses the "unattractive quality of being quite unresponsive to the grossness of the wrongdoer's want of care in its exclusion of non-consequential economic loss". In a similar vein, McLachlin J. at p. 000 criticizes the contractual allocation of risk argument on the ground that it "overlooks the historical centrality of personal fault to our concept of negligence or `delict' and the role this may have in curbing negligent conduct and thus limiting the harm done to innocent parties, not all of whom are large enterprises capable of maximizing their economic situation". With respect, liability in this particular area should not be established based on the court's perception of the extent of the defendant's moral fault.
Liability is very often vicarious in cases like the present one. Vicarious liability is not based on the breach of any personal duty owed by the employer, but on his or her employee's tort being imputed to him or her: see Fleming, supra, at p. 341. As Fleming notes, "[t]he hallmark of vicarious liability . . . is that it is based neither on any conduct by the defendant himself nor even on breach of his own duty". This makes it unrealistic in this context to calibrate liability on the degree of fault of the tortfeasor.
Second, to the extent that the concern about fault is linked to deterrence, the deterrent effect of tort law is already present owing to the tort action of the property owner. In my view, cases like the present do not fall to be decided on the grounds of personal fault. Rather they concern the effort to deter accidents and to allocate losses in a reasonable and efficient manner.
CN's Argument
CN, of course, concedes that a line must be drawn and that not all losses can be compensated. It suggests, however, that the line be situated somewhere on the other side of its recovery. It suggests that although its own and at least some other contractually based claims should be allowed, the Court should re-erect a bright line barrier excluding all plaintiffs who are not contractually linked with the property owner victim. In particular, co-contractors of CN, whatever the circumstances with respect to foreseeability and other traditional tort doctrines, "clearly cannot recover" owing to the lack of a direct contractual relationship with PWC. It is unclear to me why drawing a new bright line around potential claimants in this manner is a significantly better solution.
Part IV: A Refined Proximity Analysis in Contractual Relational Economic Loss Cases
The crucial problem with the various formulations of the proximity test examined so far is that they look at the problem strictly from the perspective of the defendant. The defendant's negligence places it in a position of liability vis-à-vis the entire world. However, if it can show that its liability would be indeterminate, it can be excused. In my opinion, given the eminently pragmatic and policy basis of decisions about liability in this area, the situation of both the defendant and the plaintiff needs to be examined in cases of this kind. In particular, the plaintiff's ability to foresee and provide for the particular damage in question is a key factor in the proximity analysis.
The Legitimacy of this Type of Consideration
In my view, it is legitimate to consider which party is the better loss bearer in this type of case. This term requires definition. Determining which party is best able to bear the loss essentially involves asking which party is in a better position to predict the frequency and severity of CN's economic loss when bridges are damaged, and to plan accordingly. Analysis of loss bearing ability emphasizes how the parties deal with accidents that tort law has not succeeded in preventing, rather than with preventing accidents.
The question of which party is best able to bear the loss should be distinguished from the question of which party is best able to avoid the accident's occurring. Analysis of the issues pertaining to deterrence, or accident avoidance, involves the question of the relative ability of parties to act in a way that will reduce the risk of occurrence of the type of accident in question and is widely recognized as relevant in tort law. In my view, analysis of loss bearing ability is particularly relevant in determining whether proximity exists in the context of contractual relational economic loss cases.
Tort law has not generally given much consideration to analysis of loss bearing ability. This type of approach is obviously ill-suited to personal injury cases. In property damage cases involving the primary liability of the tortfeasor, the courts have often rightly been more concerned to ensure deterrence by placing liability on the party best able to avoid the accident's occurring. Under modern conditions, deterrence may, of course, be difficult to effect through tort law; nonetheless, placing liability on the injurer serves to internalize the costs of accidents legitimately to the accident-causing activity. In many cases, loss shifting to the better loss bearer runs squarely into the powerful objection that it is not also the better risk avoider. When the case involves the question whether that party will be held liable at all, the concern for deterrence overrides the concern about loss-bearing ability. Thus, in cases involving primary liability for accidents, tort law has given priority to preventing accidents by requiring those who cause accidents to pay for their damage or more likely to pay for insurance.
Consideration of loss bearing ability is by no means entirely absent from the cases, however, and it has been increasingly recognized in recent cases. In Leigh and Sillavan Ltd. v. Aliakmon Shipping Co., supra, at p. 819, Lord Brandon relied on the fact that the plaintiff had open to it an adequate avenue of protection in contract in refusing liability. A recent article by Stapleton, supra, at pp. 270-71, has suggested a formulation that seems to me to encapsulate this aspect of that case and may well be of more general application, as the author suggests, in cases of economic loss. She writes:
The power of this neglected argument [that the plaintiff had available to it an adequate avenue of protection] is that it does not depend on a circular proposition about where "principle" or precedent has in the past drawn the tort boundary. It is an argument explaining where that boundary should, on clear and stated principle, be placed. In our agenda of considerations, then, about where a tort duty in respect of economic loss should be recognised, we could place alongside the necessary (but not sufficient) condition of the absence or controllability of floodgates problems, a second requirement: the necessary but not sufficient condition that the plaintiff did not have, nor could reasonably be expected to have acquired, protection against the risk of economic loss.
In Smith v. Bush, [1990] 1 A.C. 831 (H.L.), the House of Lords, in allowing recovery in a case where a purchaser acquired defective property in reliance on the competence of a professional adviser, considered whether the plaintiff could have protected herself by contract. Prompted by the Unfair Contract Terms Act 1977, 1977 (U.K.), c. 50, the House expressly acknowledged the difficulty purchasers of small houses have in affording a second survey. The issue of indeterminacy became by the same token of lesser concern, since the ambit of liability was confined to a relevant vulnerable sub-set of property acquirers ‑‑ those buying modest dwellings; see Stapleton, supra, at pp. 278-79. Moreover, as I noted in reference to comparative law, in those systems that in theory allow recovery for relational economic loss, recovery has apparently been denied in some cases where the plaintiff had adequate means of protecting itself.
Increasingly, our courts have openly addressed the issue of insurance as one of these policy concerns. In Lamb v. Camden London Borough Council, [1981] Q.B. 625 (C.A.), at pp. 637-38, Lord Denning M.R. wrote as follows:
On broader grounds of policy, I would add this: the criminal acts here ‑‑ malicious damage and theft ‑‑ are usually covered by insurance. By this means the risk of loss is spread throughout the community. It does not fall too heavily on one pair of shoulders alone. The insurers take the premium to cover just this sort of risk and should not be allowed, by subrogation, to pass it on to others . . . . It is commonplace nowadays for the courts, when considering policy, to take insurance into account. It played a prominent part in Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827. The House of Lords clearly thought that the risk of fire should be borne by the fire insurers who had received the full premium for fire risk ‑‑ and not by Securicor's insurers, who had only received a tiny premium. That, too, was a policy decision. . . .
So here, it seems to me that if Mrs. Lamb was insured against damage to the house and theft, the insurers should pay the loss. If she was not insured, that is her misfortune.
See also Fleming, supra, at p. 202 and p. 224.
The judges in Caltex implicitly or explicitly deny the importance of insurance considerations in resolving the pragmatic question of where to draw the line in this type of case. Four of the five judgments did not consider insurance issues at all. Stephen J. explicitly denies the court any role in this regard. In his view, the task of the courts remains that of fixing loss rather than spreading loss, and if this is to be altered it is a matter for direct legislative action rather than for the courts (at p. 265).
With respect, I do not agree with Stephen J. that the consideration of insurance changes the task of the courts from loss fixing to loss spreading. Insurance considerations are merely one element in an analysis of where it is appropriate to fix the loss, in a case where a solution is necessarily pragmatic. Many of the extensions of tort liability that have occurred over the last 50 years would have been inconceivable in the absence of insurance. Many cases have referred to insurance considerations to justify extending liability: see, for example, Laskin J. in Rivtow, supra, at p. 1221. To reject, as does Stephen J., the open consideration of insurance as "covert judicial action" is paradoxical, since what is proposed is to bring insurance considerations into the open rather than merely expressing conclusions in terms of proximity. Fleming notes that Stephen J.'s concern that the new policy dimension may appear more germane to the legislative than to the judicial function, but responds, in my view accurately, that "the change in perspective is dictated by inescapable external developments, to ignore which would be deliberately short-sighted and self-defeating": see Fleming, supra, at p. 11. I agree with my colleagues McLachlin J. and Stevenson J. that insurance deserves to be considered in cases of this kind; however, I disagree with them as to its relevance.
In the context of contractual relational economic loss, policy concerns with respect to which party can best bear the loss are particularly important for three reasons. First, policy concerns with respect to deterrence and cost internalisation are generally at least substantially met by the tortfeasor's primary liability to the property owner. In cases where the property damage is inconsequential, it might make sense to impose additional liability on deterrence grounds; that is not the case here, however, and I expressly reserve that question.
Second, they can be raised since current law denies recovery; rather than pose the risk of a revolutionary result, the approach merely articulates another policy lying behind a well-established rule. In some areas of the law, an examination of relative loss bearing ability might lead to arguments for fundamental changes in the law, changes best left to Parliament. Here, however, such considerations simply serve to establish a new rationale, or perhaps more accurately, to articulate explicitly an underlying rationale for a long-standing rule in an area of the law where the importance of policy considerations is now clearly recognized. As the law of torts has evolved, the courts have not been averse to modifying their mode of analysis of cases and have not waited for the legislature to do so. One imagines with difficulty a statute henceforth requiring the courts to take such considerations into account.
Finally, in this field the crucial problem remains that of limiting liability. All recognize that recovery of this type of claim must remain exceptional, if only because the potential number of claims of this type is practically unlimited. In these circumstances, a significantly higher threshold for recovery is, in my view, entirely justified. In other areas of tort law, where the trend has been towards extending liability, placing an onus on the plaintiff is inconceivable. In this area, however, there is an overriding need for strict controls on potential liability.
In my view, it is legitimate for these reasons to consider explicitly the ability of the plaintiff to bear the risk of loss in this type of case.
Turning then to an application of these criteria to this case, a determination of which party is the better loss bearer is relatively straightforward. CN is undoubtedly in a better position to bear the loss than Norsk. First, in light of the significant information available regarding bridge failure and CN's long use of the bridge, CN was probably at least equally competent in terms of estimating the potential risks of bridge failure. This aspect seems to me to be clear in light of the facts.
Second, CN would clearly be in a better position than PWC to estimate the potential costs of bridge failure to CN's operations. CN knows exactly how much use it gets out of the various bridges crossed by its trains. It also knows what the alternatives are in cases of bridge failure. Norsk, of course, is very poorly placed to estimate the value of the use that various people and companies get out of the bridges that cross the rivers its tugs sail on. It is also poorly placed to estimate the potential costs to those users of an interruption in bridge service. Unlike the first factor, which depends to a large degree on the facts of each case, this factor tends to weigh heavily in favour of the defendant in almost every case of this type.
Third, CN was better placed to protect itself from the consequences of those losses. This point requires further discussion. It is hard to imagine a more sophisticated group of plaintiffs than the users of railway bridges. These parties have access to the full range of protective options: first party commercial insurance or self-insurance, contracts both with the bridge owner and with the railway's customers.
Insurance
My colleague McLachlin J. rejects the idea that insurance considerations justify a denial of liability and relies on an article by Bishop: see Bishop, "Economic Loss in Tort" (1982), 2 Oxf. J. Legal Studies 1. Bishop argues that the insurance argument must overcome two difficulties in the context of economic loss. First, he states that to eliminate recovery for economic loss would reduce the incentive to take care. With respect, I do not find this argument persuasive in the context of relational economic loss cases, since the primary liability of the tortfeasor to the owner of the bridge is largely sufficient to create incentives to take care. This, as I noted earlier, is one of the key distinguishing features that justifies separate treatment of relational economic loss cases.
Bishop's second argument is that insurance is unavailable at reasonable cost. He argues in particular that insurance for loss of profits is not available. Insurance companies understandably refuse to insure profitability. However, that is not the issue here. CN is not claiming for loss of profit, but rather for the costs occasioned by the interruption of its access to the bridge. That risk is analogous to a business interruption. Many businesses have interruption insurance covering interruption caused by factors others than breach of contract: see Waddams, The Law of Damages (2nd ed. 1991), at {SS} 14.330. Even if insurance is not available in the commercial market, CN is ideally situated to self-insure.
Undoubtedly in certain cases, an affected business will not have purchased insurance. However, as James has noted, if the business community accepts a rule of non-liability for indirect economic losses without securing insurance protection against them by a relatively inexpensive method, then this fact at least suggests that these losses do not present a social problem serious enough to justify the cost to society in providing for their compensation by the most expensive method in its arsenal ‑‑ liability based on fault: see James, supra, at p. 114. In other words, if the business community is insured, then there is no point in shifting the loss from one insurance company to another at high cost. If the business community is not insured, then that reveals that other ways of defraying such losses are perceived as superior to insurance and the problem is not that serious.
Conclusions about the insurance market are of course somewhat tentative and it would behoove lawyers, as Atiyah notes, to inform themselves about fundamental matters of insurability in new tort cases and to see to it that courts are also informed: see Atiyah, "Note: Economic Loss in the United States" (1985), 5 Oxf. J. Legal Studies 485. However, the weight of opinion is certainly to the effect that first-party insurance is a cheaper and more effective method of protecting against loss than liability insurance, particularly where the liability is of uncertain amount; see Photo Production Ltd. v. Securicor Transport Ltd., [1980] A.C. 827, at p. 851; Smillie, "Negligence and Economic Loss" (1982), 32 U.T.L.J. 231, at pp. 240-42; James, supra, at pp. 113-16. In my opinion, the burden of showing otherwise must rest on those who would have the court overturn a long-standing rule excluding recovery.
Contract
I agree with McLachlin J. that in many cases the contractual allocation of risk does not supply a rationale for refusing recovery. Inequality of bargaining power is in fact only one of a number of reasons why contract may not be a real alternative in a given case. In many cases, protecting oneself from economic losses through contract is not possible. In the cases involving interruptions in services provided by utilities, the service is often supplied by a monopoly supplier on standard form contracts. Any shifting of the risk from consumer to utility company may even be statutorily excluded. Such cases involve contracts in name only. Or again, the risk which materializes may be so unusual that the parties never contemplated it. Though there may be other reasons for denying liability, in all of these cases the argument from the contractual allocation of risk is not convincing.
In this case, however, it is. The facts in this case establish that all parties were well aware of the risk of bridge failure. CN knew what it was doing. The very bridge at issue here had been damaged on a number of previous occasions, and various studies of the problem had been carried out. CN participated actively in at least one of these studies. CN was even aware of the traditional legal rule; as I noted, it brought a very similar claim for bridge failure in similar circumstances in 1973 for which recovery was denied.
The risk of bridge failure could have been borne by PWC, which also has a right of action in tort. The economic losses of contractual users of the bridge would then likely have been made good under the contract. The property owner is able to collect these losses from the tortfeasor subject to the limiting principles of tort damages. If PWC contracted to provide bridge services and is unable to do so because of the negligence of the tug and has to pay damages as a result, it can collect for those damages from the tug owner: see Fleming, supra, at p. 226. Liability in the contractual relational economic loss case is channelled rather than denied.
In many cases, contracting parties are not willing to insure performance; the contractual allocation of risk in this case is probably typical in that risk is allocated to the potential victim of interrupted service, who benefits from a lower price and who is best placed to take other measures to deal with accidental interruption of contractual benefits. That such an arrangement is so frequent despite the fact that under current law it precludes recovery by the contracting party is significant. That such an arrangement existed in this case despite the fact that CN's identical claim had been refused in 1973 is doubly significant.
CN's ability to protect itself through contract is not limited to its contract with the property owner. CN can also protect itself to some degree through its contractual arrangements with its clients, suppliers and others. It can plan ahead for the case of unavailability of the property in question. Denying recovery will provide incentives to all parties to act in ways that will combine to minimize the impact of losses once they occur, while still providing the critical incentive to the tug to avoid causing accidents in the first place.
In my view, a denial of recovery in this case is justified in light of CN's overwhelmingly superior risk bearing capacity on the facts of this case.
Before leaving the issue of CN's ability to protect itself, it should be noted that the rule proposed by my colleagues will still require parties such as CN to protect themselves since they will never know before the particular accident whether they will be part of the determinate class. It is to say the least difficult to predict whether a particular railway bridge will be knocked out by someone who knows you by name. Alternatively, it is difficult to know whether of the many possible bridges that will be damaged, the one that will be damaged is the one next to which you own property. As a result, the only solution for the prudent railway will be to purchase insurance. Presumably, the cost of this insurance will reflect the value the insurance company places on the possibility of its recovering from the tortfeasor.
The critical effect of allowing recovery is that it would also require defendants in Norsk's position to insure for potential contractual relational economic loss as well, since they will obviously never know beforehand whether the bridges damaged by its tugs will be used by plaintiffs whose name it knows or who have property nearby. The principal beneficiaries of the rule proposed by my colleagues would be insurance companies, who would benefit from the existence of a new and highly uncertain risk against which companies likely to inflict property damage would need to insure.
The rules suggested by my colleagues thus will require that both parties insure at considerable additional social cost. The only gain will be a slight reduction in the plaintiff's first party insurance costs to take into account the possibility that the insurance company will recover from a tortfeasor under the new doctrine.
A further practical difficulty should be noted. In cases where the tortfeasor is either not insured or insufficiently insured with respect to the initial property damage or personal injury claim or the relational claim or both, serious problems will arise with respect to the primacy of one type of claim over another. For example, if the tortfeasor is liable for both a $500,000 personal injury claim and $500,000 in relational claims but his total assets and insurance only cover half of that amount, the actual compensation of the personal injury claim will presumably be halved in order to allow recovery for a relational claim which as noted will often involve recovery for a subrogated insurance company: see Feldthusen, Economic Negligence, supra, at p. 207.
Conclusion
It is unclear to me why the current state of the law on contractual relational economic loss, which channels claims to the property owner, is unsatisfactory at least in the commercial area involving sophisticated parties. It is also unclear whether significant amounts of court time should be expended in distinguishing between contractual relational economic loss sufferers those who are proximate to the tortfeasor and those who are not.
There is no question that the outcome of cases of this nature under the exclusionary rule depends upon the terms of the contract. This operates in two ways: the contract may create a possessory interest or a joint venture or it may provide for an indemnity from the property owner. The question to be resolved is whether allowing the contract to determine whether the plaintiff has the requisite interest and where the loss falls is more arbitrary, unfair or unworkable than the various tests referred to above.
The arguments against recovery in this case can be summed up as follows. First, the arguments for recovery are weak. It is not necessary to impose liability to ensure that tortfeasors like Norsk are dissuaded from damaging bridges. The increase in deterrence that would result from imposing the additional liability called for in this case would not likely have much impact on the behaviour of potential tortfeasors. The only purpose served by recovery in this case to which the judgment of McLachlin J. refers, at p. 000, is "the purpose of permitting a plaintiff whose position for practical purposes, vis-à-vis the tortfeasor, is indistinguishable from that of the owner of the damaged property, to recover what the actual owner could have recovered". In my view, the argument that CN is indistinguishable from the owner founders on the fact that CN does not qualify under the well-established cases in which the law provides for recovery by the contracting party where it in fact has a proprietary or possessory interest. CN's interest is merely contractual.
CN argues that restricting recovery to the owner or person in possession is based on pragmatism not logic, and therefore to require logical support for an exception to a pragmatic rule which in a particular case results in an injustice, is in itself illogical. In my view, cases such as Rivtow and Kamloops which have allowed recovery for pure economic loss have established criteria that do provide logical support for an exception to a pragmatic rule.
The argument that Norsk was at fault and CN was innocent and that fault should justify recovery is also unconvincing here. Fault alone cannot justify recovery in this area since some admittedly injured claimants will have their claims denied. Since the whole exercise in this kind of situation involves drawing a line amongst those who are undeniably injured by the tortfeasor who was undeniably at fault, appeals to fault beg the question. The defendants were equally at fault with respect to other claims that will be denied. CN is unable to show any special damage different in kind from that suffered by the other potential contractual claimants. None of the factual distinctions the company puts forward has any relevance with respect to the defendants' fault.
The second group of reasons focus on the weaknesses of the proposed rules that would allow recovery. The tests that would allow recovery do not meet the criteria that a rule should have in this area. The concept of a "special relationship" is not applicable to cases involving accidents. None of the facts put forward by CN as indicative of its special relationship has any other policy significance than to attempt to meet, after the fact, the problem of indeterminate liability. The individual plaintiff test would presumably preclude recovery by the other railways that suffered losses identical in nature to those suffered by CN. If the test were extended to cover a foreseeable class of plaintiffs such as users of the railway bridge, it would simply restate the general requirement that the plaintiff be foreseeable and recovery would be allowed whether the users of the bridge were four or four thousand. The proximity test has practically no predictive value; it remains impossible to say whether that test would lead to recovery for the other railways in this case, let alone its application in other cases.
Finally, there are the reasons supporting the exclusionary rule. These are, of course, essentially pragmatic, as has been recognized in cases of this type from the very beginning. First, denial of recovery places incentives on all parties to act in ways that will minimize overall losses, a legitimate and desirable goal for tort law in this area. Second, denial of recovery allows for only one party carrying insurance rather than both parties. Third, it will result in a great saving of judicial resources for cases in which more pressing concerns are put forward. The difficult job of drawing the line is at least done quickly without a great deal of factual investigation into the various factors that found proximity. The right to recover can be most often determined from the face of the contract. Fourth, it also eliminates difficult problems of sharing an impecunious defendant's limited resources between relational claims and direct claims. Fifth, the traditional rule is certain, and although like any pragmatic solution, borderline cases may cause problems, the exceptions to the rule in cases of joint ventures, general average contributions, and possessory and proprietorial interests are reasonably well defined and circumscribed. This case, in my view, does not even constitute a borderline case in this respect, since CN has no property interest of any kind. The consequence of that certainty is that contracting parties can be certain of where the loss with respect to the unavailability of property will lie in the absence of any contractual arrangement.
I add one final consideration. This case is one of maritime law, which in large measure encompasses a global system. The bright line exclusionary rule against recovery has for nearly a century been in effect in that system, and continues to be followed by the major trading nations, in particular Great Britain and the United States. In making arrangements for allocating risks in essentially maritime matters, those engaged in navigating and shipping should, as much as possible, be governed by a uniform rule, so that they can plan their affairs ahead of time, whether by contract or insurance against possible contingencies.
In my view, to justify recovery in cases of this nature, the plaintiff would, at the very least, have to respond effectively not only to the concern about indeterminacy but also show that no adequate alternative means of protection was available. Other concerns may also need to be met. At the very least, the requirement that the plaintiff not have had any commercially reasonable method of protecting itself is an important addition to what remains a conceptually difficult ex post facto inquiry into the "determinate nature" of the particular victim and damage from the perspective of the defendant.
The question of whether recovery should be allowed in the residual cases in which these two barriers are overcome does not require an answer in the context of this case. Individuals and small businesses may be incapable of effectively protecting themselves in any meaningful fashion. In some cases, of course, contractual relational economic loss may occur in a different form such as loss of salary and the failure to protect against it by first-party insurance cannot be said to lead to an inference of social unimportance. In such cases, however, the indeterminacy problem is often very acute. If the number of potential individual plaintiffs is great, recovery will be denied on the grounds of "indeterminacy", even though the plaintiffs may not have had any real ability to protect themselves. Where the plaintiff passes the indeterminacy tests, it will often be sophisticated. The argument that recovery should be denied to those who could have protected themselves does not support a bright line in and of itself. Rather, it complements the indeterminacy analysis. It suggests that those who are most likely to emerge from the indeterminacy analysis are those with the ability to protect themselves and questions the advisability of a rule with the effect of allowing recovery to only that group of contractual claimants, rather than denying recovery to all.
The exclusionary rule is not in itself attractive. It excludes recovery by people who have undeniably suffered losses as a result of an accident. It also leads to some arbitrary but generally predictable results in cases at the margin. The results with respect to time charters may be "capricious", but time charterers know their rights and obligations from the start and can act accordingly. The rule only becomes defensible when it is realized that full recovery is impossible, that recovery is in fact going to be refused in the vast majority of such claims regardless of the rule we adopt, and when the exclusionary rule is compared to the alternatives. In my view, it should not be disturbed on the facts of this case.
I should add a few words about McLachlin J.'s suggestion that the essential difference between her approach and mine lies in the flexibility allowed by her approach. She characterizes my approach as providing for recovery depending exclusively on the terms of the formal contract between the plaintiff and the property owner. She considers an approach based on the terms of the contract involves a "rigid categorization which denies the possibility of recovery in new cases which may not meet the categorical test" (at p. 000), a problem that is avoided under the proximity test she sets forth.
I do not see the essential difference between our two approaches as that between certainty and flexibility. In my view, the key difference is between a principled flexibility, which adheres to a general rule in the absence of policy reasons for excluding its application, and arbitrariness. Among the policy factors considered in the course of this opinion that might justify relaxing the rule are the ability of the plaintiff to protect itself and the quantum of property damage caused by the tortfeasor with its attendant impact on the issue of deterrence. I have not found it necessary to consider the precise role of these factors in this case since CN was clearly able to protect itself and the property damage sustained was sufficient to afford deterrence. Whether such factors would in fact provide workable criteria sufficient to provide for recovery despite the strong arguments in favour of the long standing exclusionary rule, based on certainty and other factors, is an open question. What I have decided is that in the absence of all of these factors, there is no reason to disturb the rule.
Thus I do not say that the right to recovery in all cases of contractual relational economic loss depends exclusively on the terms of the contract. Rather, I note that such is the tenor of the exclusionary rule and that departures from that rule should be justified on defensible policy grounds. The Court should do more than simply establish a rule that allows judges to resolve cases as they see fit. That, as I see it, is the effect of the approach proposed by my colleague.
Disposition
I would allow the appeal and dismiss the claim for damages.
//McLachlin J.//
The judgment of L'Heureux-Dubé, Cory and McLachlin JJ. was delivered by
McLachlin J. -- The issue in this case is whether a person who contracts for the use of the property of another can sue a person who damages that property for losses resulting from his or her inability to use the property during the period of repair. Can purely economic losses such as this be recovered? Or is the right to recover in tort confined to cases where the plaintiff can show that his or her property or person was injured?
The Facts
The accident which gives rise to these proceedings occurred near the mouth of the Fraser River in British Columbia. A tug owned and operated by the Norsk Pacific Steamship Co. and Norsk Pacific Marine Services Ltd., negligently struck a railway bridge owned by Public Works Canada ("PWC"). A number of railway companies, including the Canadian National Railway ("CN"), held contracts with PWC for the use of the bridge. CN was the primary user of the bridge (86 percent of the total use), which was known locally as "the CNR bridge". The bridge connects the Vancouver terminus to the main line and is the sole direct link between CN rails on the north and south shores of the Fraser.
CN has property (land and rails) close to the bridge. When the bridge is closed for maintenance, the timing and duration are negotiated between PWC and CN. The appellants knew that the bridge was essential to CN's operations since there was no other rail bridge in the area. In fact, the bridge had to be closed once due to an accident and, as a result, the appellants were aware of the consequences of such closing for CN.
After the accident involving Norsk's tug, it took several weeks to repair the bridge. CN and the other railways had to reroute their traffic. This raised the cost of their operations and may have diminished the amount of freight hauled.
The railways sued the tug owners and operators for the additional cost incurred as a result of the closure of the bridge.
Judgments Below
The trial judge, Addy J. (1989), 26 F.T.R. 81, held that the plaintiffs could recover. He concluded that while the rule which had once excluded recovery of such loss no longer existed in Canada, not all economic loss is recoverable in tort. He declined to enunciate a rule for when pure economic loss is recoverable, but suggested three factors upon which recovery of such loss might be conditioned:
(1) knowledge of the specific person who is likely to suffer damage (as opposed to a class of persons);
(2) foreseeability of the precise nature of the loss; and
(3) sufficient proximity between the act and the injury to permit objectively the conclusion that the tortfeasor is "morally bound" to compensate the victim.
Addy J. found these requirements to be met. CN was the known user of the bridge and the precise nature of the loss was foreseeable, as it had occurred before. Moreover, the railway's relationship was sufficiently closely connected with the bridge, both physically and in terms of use, to establish proximity.
The Federal Court of Appeal, [1990] 3 F.C. 114, upheld the finding that the loss was recoverable. The old exclusionary rule no longer prevailed. According to MacGuigan J.A. (Heald J.A. concurring) as well as Stone J.A., the only prerequisites to recovery are sufficient proximity and reasonable foreseeability.
Analysis
This case requires the Court to confront squarely the vexed question of the extent to which damages for pure economic loss may be recovered in tort at common law. I propose to consider in turn: (1) the nature of the problem; (2) how different jurisdictions have dealt with the problem; (3) the approach which should be adopted in the common law provinces of Canada; (4) application of the indicated approach to the facts of this case.
1. The Nature of the Problem
A fundamental proposition underlies the law of tort: that a person who by his or her fault causes damage to another may be held responsible. Where the fault is negligence, the duty extends to all those to whom the tortfeasor may foreseeably cause harm: Donoghue v. Stevenson, [1932] A.C. 562 (H.L.). This is a proposition of great breadth. It was soon realized that it would be necessary to limit recovery for practical, policy reasons. As Cardozo J. put it in Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931), at p. 444, limits were needed to prevent "liability in an indeterminate amount for an indeterminate time to an indeterminate class".
The search for a principled mechanism of limitation has proved elusive. The law began by limiting recovery to cases where the tortfeasor had caused physical loss or injury to the plaintiff: Cattle v. Stockton Waterworks Co. (1875), L.R. 10 Q.B. 453. That case denied recovery of "relational losses" consequent upon the negligent infliction of damage to the property of another person. Only a person whose person or property is damaged can recover in tort. This rule was followed for decades in England and elsewhere in the Commonwealth.
While the criterion of physical damage successfully avoided the spectre of unlimited damages, it suffered from the defect that it arbitrarily, and in some cases, arguably unjustly, deprived deserving plaintiffs of recovery. Why, it was asked, should the right to recover economic loss be dependant on whether physical damage, however minuscule, had been inflicted on the plaintiff's property? Why should a plaintiff who waits for a defective machine to break and cause physical injury or damage be able to recover, while one who prudently repairs the machine before the physical damage or injury occurs be left without remedy? Is there really a generic distinction between the loss resulting from repair of physical damage and loss resulting from loss of use in a commercial situation where the only real loss is one of profit? While it may be argued that physical injury is inherently more deserving than economic loss, particularly where the economic loss is not associated with physical damage (see Feldthusen, Economic Negligence (2nd ed. 1989), at pp. 8‑14), that does not explain why the law should not permit recovery for economic loss where justice so requires nor how damage to property and economic losses can be distinguished in many situations. Someone who invests in a bridge in order to use it cannot be distinguished from someone who leases a bridge in order to use it. If the bridge is lost they have both lost something of value: the use of the bridge.
Not surprisingly, the courts began to allow recovery of pure economic loss where they thought it was just. However, apart from reliance damages for negligent misrepresentation, the course of the law has been neither uniform nor uncontroversial. This appeal raises anew the issue in the Canadian context.
The answers to the question of recovery economic loss in negligence are not easy, as the uncertain history of the cases attests. On the one hand, the jurisprudence of the past three decades discloses a resurgent feeling on the part of judges that in some cases beyond physical damage and reliance, economic loss should be recoverable in negligence. On the other hand lies the fear of indiscriminately opening the floodgates of liability.
It is worth stating at the outset certain general propositions which have been often put and may serve as guideposts in our search for the answer to the difficult issue we face.
First, some limits on the potentially unlimited liability which can theoretically flow from negligence are necessary; potential defendants must be able to gauge the extent of the risk they incur and frivolous litigation should be discouraged. The need for a limiting device is recognized in Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189, and acknowledged in Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2.
Second, the limits should be relatively clear. Commentators have adverted to the need for certainty such that commercial enterprises have some appreciation of what risk is to be borne by whom. See, for example, Smith, Liability in Negligence (1984), at p. 166, Winfield and Jolowicz on Tort (13th ed. 1989), at p. 86, and Fleming, The Law of Torts (7th ed. 1987) at pp. 162 et seq.
Third, as Lord Denning observed in Spartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd., [1973] Q.B. 27 (C.A.), (at p. 36), "At bottom ... the question of recovering economic loss is one of policy." The question is not only one of legal doctrine, but of where, from the point of view of individual fairness and economic policy, the loss should ultimately fall.
Finally, a single, simple criterion for recovery in all the disparate circumstances where economic loss is foreseeable and ought to be recoverable is, given the record to date, probably unattainable: see Oliver L.J. in Leigh and Sillivan Ltd. v. Aliakmon Shipping Co., [1985] Q.B. 350, and Wilson J. in Kamloops (City of) v. Nielsen, supra.
From this general statement of the problem, I turn to a more detailed analysis of the search for a limiting principle on the right to recover damages for economic loss in tort or delict in different jurisdictions.
2. Limiting Recovery for Economic Loss -‑ A Comparative View
A summary of how different courts in different jurisdictions have dealt with this problem affords us perspective both on the nature of the problem and the possible solutions.
(a) United Kingdom
The traditional exclusionary rule of Cattle v. Stockton Waterworks Co. restricted recovery of economic loss to cases where the plaintiff had suffered physical damage. This rule was lifted to allow recovery for pure economic loss in an action for negligent misstatement in Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.). The exception was pinned on the concept of reliance. Where the defendant negligently made a misstatement which the defendant should have foreseen others would rely on, and where the plaintiff relied on it and suffered financial loss, the plaintiff was entitled to recover that loss, notwithstanding the absence of any physical harm to the plaintiff. This exception is now firmly fixed in the law of tort.
Various courts in the following two decades attempted to widen the exceptions to the exclusionary rule. For example, it was extended to products liability cases in Junior Books Ltd. v. Veitchi Co., [1983] 1 A.C. 520 (H.L.). And it was allowed in maritime law where the plaintiff could be said by reason of its contract to be in a "joint venture" with the owner of damaged property: Morrison Steamship Co. v. Greystoke Castle (Cargo Owners) (The Greystoke Castle), [1947] A.C. 265. These cases culminated in the dictum of Lord Wilberforce in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.), which suggested that recovery should not depend on the category of case, but should lie wherever two general conditions were found: (1) foreseeability and sufficient proximity between the negligent act and the loss; and (2) the absence of considerations which call for a limitation on liability.
The House of Lords recently resiled from Anns and returned to the old proposition that economic loss could be recovered in negligence only where the plaintiff had suffered physical damage or in the reliance situation of Hedley Byrne: Murphy v. Brentwood District Council, [1991] 1 A.C. 398. The reasons cited in Murphy, at p. 472, for the return to the narrow rule focus on the absence of any "coherent and logically based doctrine" or device for avoiding the spectre of unlimited liability, an absence, in the view of Lord Keith, calculated "to put the law of negligence into a state of confusion defying rational analysis". The only way to avoid this result, in the view of their Lordships, was to return the law to its former narrow, if arbitrary state.
(b) Australia
In Australia recovery in negligence is not confined to the established cases of physical damage to the plaintiff's property or person or reliance. In Caltex Oil (Aust.) Pty. Ltd. v. The Dredge "Willemstad" (1976), 11 A.L.R. 227, the Australian High Court awarded economic loss caused by negligence in the absence of physical damage to the plaintiff. While Gibbs J. based his decision on the special circumstances of the case, Stephen, Mason, Jacobs and Murphy JJ. held that in Australia it is possible to recover economic loss unrelated to reliance without physical damage.
(c) United States
The prevailing approach in the United States has been characterized as "pragmatic": see Tetley, "Damages and Economic Loss in Marine Collision: Controlling the Floodgates" (1991), 22 J. Mar. Law & Com. 539, at p. 575. The jurisprudence continues to be dominated by Cardozo J.'s fear of opening the floodgates and remains reluctant to award damages for pure economic loss. Such damages have sometimes been awarded, however in three classes of cases:
(1) in cases where the economic loss is closely related to physical damage, e.g., Domar Ocean Transportation, Ltd. v. M/V Andrew Martin, 754 F.2d 616 (5th Cir. 1985) where a tug was held to be an integrated unit of a barge which was physically damaged permitting recovery of economic loss for loss of use of the tug; and the Amoco Transport Co. v. S/S Mason Lykes, 768 F.2d 659 (5th Cir. 1985) where a cargo holder recovered non‑physical damage due to collateral physical damage to a vessel). This may be regarded as the equivalent of the U.K. "joint venture" exception;
(2) pollution cases such as Union Oil Co. v. Oppen, 501 F.2d 558 (9th Cir. 1974), where, on grounds of public policy, economic loss has been awarded to commercial fishermen and others who suffer as a result of pollution;
(3) certain products liability cases, at least where the defective product creates an unreasonable risk of harm to persons or property and such harm materializes: see East River Steamship Corp. v. Delaval Turbine, Inc., 752 F.2d 903 (3d Cir. 1985), aff'd 476 U.S. 858 (1986).
(d) Civil Law Jurisdictions
The civil law jurisdictions of France and Quebec make no distinction between physical and economic damage. Nor do they base liability on concepts of reliance. Loss of any type is recoverable wherever fault, damage and a direct and immediate causal connection between the two are established. Thus pure economic loss is recoverable. For example, it has been held in France that a bus company can recover losses of revenue from the person at fault in a car accident which congested traffic: Cass. civ. 2e, April 28, 1965, D.S. 1965.777 (Marcailloux v. R.A.T.V.M.); and in Quebec, that a chicken farmer can recover profits lost as a result of negligence which caused a power pole to fall which in turn caused a power failure: Joly v. Ferme Ré‑Mi Inc., [1974] C.A. 523.
In Quebec, art. 1053 C.C.L.C. states: "Every person capable of discerning right from wrong is responsible for the damage caused by his fault to another, whether by positive act, imprudence, neglect or want of skill." Parties able to recover in delict have not been restricted by this Court; "another" has been found to include all persons suffering a loss, including economic loss, as a direct result of the defendant's fault: Regent Taxi v. Congrégation des petits frères de Marie, dits frères maristes, [1929] S.C.R. 650, and Hôpital Notre‑Dame v. Laurent, [1978] 1 S.C.R. 605.
This is not to say that the civil law does not impose limits on the recovery of economic loss. The control mechanism against unlimited loss in the civil law lies not in the type of loss but in the factual determination of whether the loss is a direct, certain and immediate result of the negligence. It appears to have worked well in avoiding frivolous claims and the threat of unlimited liability. Thus Tetley, supra, concludes at p. 584:
The vigorous application of this solid theoretical framework to the analysis of damage claims of all types in the civil law appears to result in `economic loss' (to use the common law term) being compensated in approximately the same types of cases as in common law jurisdictions, without the `indeterminate' liability so much dreaded in those latter jurisdictions actually ensuing in practice.
(e) Canada ‑‑ Common Law Jurisdictions
Canadian judges early on evinced skepticism about the possibility of limiting damages for negligence to cases of physical injury to the plaintiff or reliance. In 1974, four years before the landmark English case in Anns v. Merton London Borough Council, supra, this Court allowed recovery of pure economic loss in Rivtow Marine Ltd. v. Washington Iron Works, supra. There was no actual physical damage. The majority, per Ritchie J., allowed damages for the loss of use of a defective crane during its repair period on the basis that the loss was the "proximate" result of the duty to warn. Laskin J., dissenting in part, would have additionally allowed recovery for the cost of repair of the crane because the repair was necessary to prevent foreseeable damage resulting from the collapse of the crane, even though no physical damage had yet occurred.
In subsequent years this Court repeatedly held that economic loss can be recovered in tort in the absence of injury to the plaintiff's person or property in appropriate cases: Agnew‑Surpass Shoe Stores Ltd. v. Cummer‑Yonge Investments Ltd., [1976] 2 S.C.R. 221, at p. 252, Kamloops (City of) v. Nielsen, supra, and B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R. 228, at p. 239. It has, moreover, repeatedly affirmed the test for tort liability adopted in Anns v. Merton London Borough Council, supra.
This Court in Kamloops (City of) v. Nielsen, supra, held that the purchaser of a house which the defendant municipality had negligently caused to be constructed could recover his financial loss in the absence of physical damage, affirming the non‑exclusionary test of Anns v. Merton London Borough Council. It confirmed that claims for economic loss in negligence are not confined to cases where the plaintiff has suffered physical damage or where there has been reliance. Determination of when such liability arises is not a matter so much of finding a single universal formula, as of identifying criteria associated with valid claims. The Court, faced with the same issue which confronts us in this case ‑‑ whether recovery for economic loss should be allowed in a new category of case ‑‑ adopted an approach at once doctrinal and pragmatic, asking: (1) is there a duty relationship sufficient to support recovery? and, (2) is the extension desirable from a practical point of view, i.e., does it serve useful purposes or, on the other hand, open the floodgates to unlimited liability?
The departure from the narrow exclusionary rule in Canada has not opened the floodgates to claims for pure economic loss. While acknowledging that pure economic loss could be recovered, many cases in the years that followed failed for want of satisfactory proof: see MacMillan Bloedel Ltd. v. Foundation Company of Canada Ltd., [1977] 2 W.W.R. 717 (B.C.S.C.); Gypsum Carrier Inc. v. The Queen, [1978] 1 F.C. 147; Star Village Tavern v. Nield (1976), 71 D.L.R. (3d) 439 (Man. Q.B.); B.D.C. Ltd. v. Hofstrand Farms Ltd., supra.
(f) Implications of the Comparative Review
The foregoing comparative review suggests that in some cases damages for economic loss should be available where the plaintiff has neither suffered physical damage nor relied in the sense of Hedley Byrne. Civil law jurisdictions, far from precluding such recovery, require it where it is direct and certain. The common law jurisdictions started from a narrow rule excluding most pure economic loss, but found themselves in a situation where judges on a case‑by‑case basis persisted in awarding damages for economic loss outside the categories. Even in the United States, where fear of the floodgates of unlimited liability has held the strongest sway, courts have been forced to make exceptions in the interests of justice. The fact is that situations arise, other than those falling within the old exclusionary rule, where it is manifestly fair and just that recovery of economic loss be permitted. Faced with these situations, courts will strain to allow recovery, provided they are satisfied that the case will not open the door to a plethora of undeserving claims. They will refuse to accept injustice merely for the sake of the doctrinal tidiness which is the motivating spirit of Murphy. This is in the best tradition of the law of negligence, the history of which exhibits a sturdy refusal to be confined by arbitrary forms and rules where justice indicates otherwise. It is the tradition to which this Court has adhered in suggesting in Kamloops that the search should not be for a universal rule but for the elaboration of categories where recovery of economic loss is justifiable on a case‑by‑case basis.
If a comparative review suggests that economic loss should be recoverable in circumstances not covered by the traditional exclusionary rule, it also suggests that the need for some limit on such recovery is universally recognized. To permit all economic loss related to a negligent act to be recovered would be to subject potential defendants to liability which is not only unfair, but which may cripple their ability to do business.
The search then must be for a legal formulation which will permit recovery of economic loss in appropriate cases, while excluding frivolous and remote claims. The comparative jurisprudence indicates that this may be accomplished in different ways. In the civil law, a direct connection test appears to provide appropriate limits. At common law, two approaches present themselves: the "exhaustive rule" solution typified by Murphy and the incremental approach adopted in Kamloops. I turn next to a consideration of which of these two approaches should prevail.
3. The Approach Which Should be Adopted to Recovery of Pure Economic Loss
(a) Doctrinal Considerations
Murphy makes an important point. It is not enough that a rule of law be defensible on moral and economic terms. It should, in addition, provide a logical basis upon which individuals can predicate their conduct and courts can decide future cases. The history of the problem in different jurisdictions demonstrates a clear need to allow recovery of economic loss for negligence in some cases where the criteria of physical damage and reliance do not apply. On the other hand, a fair and functional legal system cannot accept that all economic loss related to negligence should be recoverable. Judges seem able to pick out deserving cases when they see them. The difficulty lies in formulating a rule which explains why judges allow recovery of economic loss in some cases and not in others.
Such difficulties are not new to the common law. It was the great insight of Justice Oliver Wendell Holmes that the common law resides most fundamentally not in a set of a priori principles but in the decisions of the courts. The task of doctrine is to identify the factors which unite the different applications with a view to formulating emergent principles, recognizing that absolute logical formulations may not in all cases be possible or practical.
The decisions of the House of Lords in Murphy and of this Court in Kamloops illustrate two different approaches to the problem of defining the legal parameters of common law rules. The House of Lords in Murphy appears to have taken the view that what is required is a rule which deals with the problem in an exhaustive and definitive way. The criterion of physical damage to the plaintiff's person and property, supplemented by the exception of reliance, provides such a rule. The approach of Anns, in rejecting arbitrary categories and considering new cases on a policy basis as they arise, does not provide such a rule. Therefore Anns was rejected and the narrow but precise physical damage‑reliance rule reinstated.
The approach adopted by this Court in Kamloops is quite different.
No attempt was made to formulate an all‑inclusive rule governing when damages in negligence for pure economic loss can be recovered. The Court began from the proposition that recovery of pure economic loss was available in some but not all cases. This much had been established in Rivtow. But it went on to state that the case before it was not like Rivtow. It then embarked on a consideration of whether in the category of cases before it (negligence by public authorities causing financial loss to third parties) recovery should be allowed. On the one hand, the Court, per Wilson J., determined that the circumstances imposed a duty of care on the defendants toward the plaintiff and that allowing recovery would accomplish "a number of worthy objectives." On the other, the Court satisfied itself that allowing recovery in this case would not open the floodgates of indeterminate liability. Accordingly, recovery was allowed. The approach of the Court in Kamloops is summarized by Irvine "Case Comment: Kamloops v. Nielsen" (1984), 29 C.C.L.T. 185, at p. 190, as follows:
In its identification of the bête noire of indeterminate liability; in its apparent rejection of any wild‑goose chase for a universal formula of admission or exclusion of economic loss claims; in its readiness to look, case by case, for factors which inherently serve to negate the prospect of an avalanche of liability; this judgment seems to be in the mainstream of constructive modern thinking on the issue...
It is my view that the incremental approach of Kamloops is to be preferred to the insistence on logical precision of Murphy. It is more consistent with the incremental character of the common law. It permits relief to be granted in new situations where it is merited. Finally, it is sensitive to danger of unlimited liability.
But where, one may ask, are future courts to find guidance? The answer is that as the courts recognize new categories of cases where economic recovery is available, rules will emerge. This is what happened in the case of Hedley Byrne. Up to that time, it was accepted that there could be no recovery for negligent misstatement causing economic loss. The court held that there could be, and formulated conditions (reliance) which would limit claims and avoid the spectre of open floodgates. This decision was transmuted to a rule of general application which has functioned without difficulty and to the betterment of justice ever since.
Other categories of exceptions have been established in Canada: economic loss is recoverable in the absence of physical damage where there is a duty to warn (Rivtow), and where a duty lies on public officials to pursue their statutory duty (Kamloops). It is not suggested that either has led to difficulty of application. In the United States, it is recognized that pure economic loss can be recovered in certain `joint venture' situations and in the case of environmental damage adversely affecting one's livelihood. Again, these extensions are arguably capable of application without undue difficulty.
If this approach is followed, as it has been to date in Canada, new categories of cases will from time to time arise. It will not be certain whether economic loss can be recovered in these categories until the courts have pronounced on them. During this period, the law in a small area of negligence may be uncertain. Such uncertainty however is inherent in the common law generally. It is the price the common law pays for flexibility, for the ability to adapt to a changing world. If past experience serves, it is a price we should willingly pay, provided the limits of uncertainty are kept within reasonable bounds.
The foregoing suggests that the incremental approach to the problem of determining the limits for the recovery of pure economic loss which was adopted by this Court in Kamloops should be confirmed. Where new categories of claim arise, the court should consider the matter first from the doctrinal point of view of duty and proximity, as well as the pragmatic perspective of the purposes served and the dangers associated with the extension sought.
The doctrinal inquiry introduces considerations which the cases have traditionally treated under the concept of proximity. Proximity may be usefully viewed, not so much as a test in itself, but as a broad concept which is capable of subsuming different categories of cases involving different factors. Deane J. in Sutherland Shire Council v. Heyman (1985), 60 A.L.R. 1, at pp. 55‑56, in a passage cited by MacGuigan J.A., in the judgment below at p. 165, describes proximity as follows:
The requirement of proximity is directed to the relationship between the parties in so far as it is relevant to the allegedly negligent act or omission of the defendant and the loss or injury sustained by the plaintiff. It involves the notion of nearness or closeness and embraces physical proximity (in the sense of space and time) between the person or property of the plaintiff and the person or property of the defendant, circumstantial proximity such as an overriding relationship of employer and employee or of a professional man and his client and what may (perhaps loosely) be referred to as causal proximity in the sense of the closeness or directness of the causal connection or relationship between the particular act or course of conduct and the loss or injury sustained. It may reflect an assumption by one party of a responsibility to take care to avoid or prevent injury, loss or damage to the person or property of another or reliance by one party upon such care being taken by the other in circumstances where the other party knew or ought to have known of that reliance. Both the identity and the relative importance of the factors which are determinative of an issue of proximity are likely to vary in different categories of case. That does not mean that there is scope for decision by reference to idiosyncratic notions of justice or morality or that it is a proper approach to treat the requirement of proximity as a question of fact to be resolved merely by reference to the relationship between the plaintiff and the defendant in the particular circumstances. The requirement of a relationship of proximity serves as a touchstone and control of the categories of case in which the common law will adjudge that a duty of care is owed. Given the general circumstances of a case in a new or developing area of the law of negligence, the question what (if any) combination or combinations of factors will satisfy the requirement of proximity is a question of law to be resolved by the processes of legal reasoning, induction and deduction. On the other hand, the identification of the content of that requirement in such an area should not be either ostensibly or actually divorced from notions of what is "fair and reasonable ..."
The matter may be put thus: before the law will impose liability there must be a connection between the defendant's conduct and plaintiff's loss which makes it just for the defendant to indemnify the plaintiff. In contract, the contractual relationship provides this link. In trust, it is the fiduciary obligation which establishes the necessary connection. In tort, the equivalent notion is proximity. Proximity may consist of various forms of closeness ‑‑ physical, circumstantial, causal or assumed ‑‑ which serve to identify the categories of cases in which liability lies.
Viewed thus, the concept of proximity may be seen as an umbrella, covering a number of disparate circumstances in which the relationship between the parties is so close that it is just and reasonable to permit recovery in tort. The complexity and diversity of the circumstances in which tort liability may arise defy identification of a single criterion capable of serving as the universal hallmark of liability. The meaning of "proximity" is to be found rather in viewing the circumstances in which it has been found to exist and determining whether the case at issue is similar enough to justify a similar finding.
In summary, it is my view that the authorities suggest that pure economic loss is prima facie recoverable where, in addition to negligence and foreseeable loss, there is sufficient proximity between the negligent act and the loss. Proximity is the controlling concept which avoids the spectre of unlimited liability. Proximity may be established by a variety of factors, depending on the nature of the case. To date, sufficient proximity has been found in the case of negligent misstatements where there is an undertaking and correlative reliance (Hedley Byrne); where there is a duty to warn (Rivtow); and where a statute imposes a responsibility on a municipality toward the owners and occupiers of land (Kamloops). But the categories are not closed. As more cases are decided, we can expect further definition on what factors give rise to liability for pure economic loss in particular categories of cases. In determining whether liability should be extended to a new situation, courts will have regard to the factors traditionally relevant to proximity such as the relationship between the parties, physical propinquity, assumed or imposed obligations and close causal connection. And they will insist on sufficient special factors to avoid the imposition of indeterminate and unreasonable liability. The result will be a principled, yet flexible, approach to tort liability for pure economic loss. It will allow recovery where recovery is justified, while excluding indeterminate and inappropriate liability, and it will permit the coherent development of the law in accordance with the approach initiated in England by Hedley Byrne and followed in Canada in Rivtow, Kamloops and Hofstrand.
I add the following observations on proximity. The absolute exclusionary rule adopted in Stockton and affirmed in Murphy (subject to Hedley Byrne) can itself be seen as an indicator of proximity. Where there is physical injury or damage, one posits proximity on the ground that if one is close enough to someone or something to do physical damage to it, one is close enough to be held legally responsible for the consequences. Physical injury has the advantage of being a clear and simple indicator of proximity. The problem arises when it is taken as the only indicator of proximity. As the cases amply demonstrate, the necessary proximity to found legal liability fairly in tort may well arise in circumstances where there is no physical damage.
Viewed in this way, proximity may be seen as paralleling the requirement in civil law that damages be direct and certain. Proximity, like the requirement of directness, posits a close link between the negligent act and the resultant loss. Distant losses which arise from collateral relationships do not qualify for recovery.
In many of the cases discussed above, the judiciary has focused upon the relationship between the tortfeasor and the plaintiff as an indication of proximity, a focus closely related to the foreseeability analysis inherent to all negligence actions. In the classic case of Hedley Byrne, the reliance analysis focuses upon the connection between the party who made the negligent misstatement and the injured party, i.e., is that plaintiff a party that the tortfeasor ought reasonably to have foreseen would rely on his or her statement? The judgments below focused on the relationship between the tortfeasor Norsk and the plaintiff CN both within and outside their discussion of proximity. A more comprehensive, and I submit objective, consideration of proximity requires that the court review all of the factors connecting the negligent act with the loss; this includes not only the relationship between the parties but all forms of proximity ‑‑ physical, circumstantial, causal or assumed indicators of closeness. While it is impossible to define comprehensively what will satisfy the requirements of proximity or directness, precision may be found as types of relationships or situations are defined in which the necessary closeness between negligence and loss exists.
While proximity is critical to establishing the right to recover pure economic loss in tort, it does not always indicate liability. It is a necessary but not necessarily sufficient condition of liability. Recognizing that proximity is itself concerned with policy, the approach adopted in Kamloops (paralleled by the second branch of Anns) requires the Court to consider the purposes served by permitting recovery as well as whether there are any residual policy considerations which call for a limitation on liability. This permits courts to reject liability for pure economic loss where indicated by policy reasons not taken into account in the proximity analysis.
I conclude that, from a doctrinal point of view, this Court should continue on the course charted in Kamloops rather than reverting to the narrow exclusionary rule as the House of Lords did in Murphy.
(b) Pragmatic Considerations
Are there practical reasons why the recovery of economic loss should be confined to cases where the plaintiff has sustained physical damage or injury or relied on a negligent misrepresentation? Will extension of recovery of economic loss to other situations open the floodgates of liability, prove so uncertain as to be unworkable, or have an adverse economic impact? Such questions are difficult to answer, but some assistance may be gained from looking at what has happened where the rule has been broadened and from examining the merits of the economic arguments urged in support of restricting recovery.
(1) The Comparative Evidence
The comparative historical perspective provides little support for the need for a rule which confines recovery of economic loss to cases where the plaintiff has suffered physical loss or has relied on a negligent misstatement. The civil law in Canada and abroad appears to function adequately without recourse to such a rule. In the common law jurisdictions of Canada, where the availability of damages for pure economic loss has been accepted for a decade and a half, the twin spectres of unlimited recovery and unworkable uncertainty have not materialized. And to the extent that recovery for pure economic loss has been allowed in the United States, it seems not to have provoked adverse consequences but rather to have satisfied the public demand for justice so essential to maintaining the vitality of the law of negligence.
(2) Economic Theory
The arguments advanced under this head proceed from the premise that a certain type of loss should not be seen in terms of fault but seen rather as the more or less inevitable by‑product of desirable but inherently dangerous (or `risky') activity. Viewing the activity thus, it is argued that it may well be just to distribute its costs among all who benefit from that activity, and conversely unfair to impose it upon individuals who (assuming human error to be the inevitable by‑product of human activity) are viewed as the "faultless" instruments causing the loss. This basis for administering losses has been variously described as "collectivisation of losses" or "loss distribution": see Fleming, The Law of Torts, supra, at pp. 8‑9. It arguably amounts to a rejection or diminution of the concept of personal fault on which our law of tort (and the civil law of delict) is based.
Three arguments are put forward: (1) the insurance argument; (2) the loss spreading argument; and (3) the "contractual allocation of risk" argument. None of them, in my view, establishes that the extension of recovery granted by the courts in this case is unfair or inefficient.
The insurance argument says that the plaintiff is in a better position to predict economic loss consequent on an accident, and hence better able to obtain cheap insurance against the contingency. From a macro‑economic point of view, this will result in an overall saving. The argument, however, depends on a number of questionable assumptions. As Bishop, "Economic Loss in Tort" (1982), 2 Oxf. J. Legal Studies 1, at p. 2, puts it:
It is said that the victim, even when he sustains large losses, is the least cost insurer where financial loss is concerned. This argument must overcome two difficulties. First, the common law restriction of financial loss recovery reduces incentives to tortfeasors to take care. For example it is cheaper for a builder to dig without checking for the presence of gas mains or electricity cables. Such reduced care will, in the long run, result in more accidents. So, if the insurance argument is to be sustained, the victim must be not only the better insurer, but better by some margin so great that it justifies the losses from more frequent and more severe injury. Second, it seems doubtful that either victim or tortfeasor could in fact insure at reasonable cost in the insurance markets of the real world. There does exist `key man' or business interruption insurance, but no general insurance against lost profit ‑‑ a type of insurance that would suffer from extreme moral hazard problems. The price of market insurance will always include some cost for administration. Most firms will find the price too high to justify purchase. Usually the only insurance available will be self‑insurance. Why should we assume that victims do that better than tortfeasors?
The loss spreading justification asserts that it is better for the economic well‑being of society to spread the risk among many parties rather than place it on the shoulders of the tortfeasor. Again, this argument is based on questionable assumptions. To quote Bishop, supra, at p. 2, once more:
[This argument] is a variant of the insurance argument. The tortfeasor, for example a small construction firm, easily could be bankrupted by the claims, for example those arising from interrupted power supply. In such cases it is said that numerous small losses to victims are to be preferred to one large loss to the tortfeasor. The victims as a class are natural self‑insurers of the loss. The tortfeasor would have to engage in expensive market transactions to insure. Perhaps this is so, but there are two points against it. First not only the question of justice or of efficient risk distribution are involved. Where losses are spread by relieving the tortfeasor of liability we can expect more accidents, and so more losses, to occur. Second, some of the victims may sustain large losses not small ones.
In any case, the loss spreading rationale cannot justify the numerous cases where there is only one victim. [Emphasis in original.]
A third argument focuses on the ability of persons who stand to suffer economic loss due to the damage to the property of another, to allocate the risk within their contracts effectively with property owners. The law of negligence has no business compensating such persons, it is argued, because it makes better economic sense for them to provide for the possibility of damage to the bridge by negotiating a term that in the event of failure the owner of the bridge would compensate them. The argument, applied to the facts of this case, proceeds as follows: the lessee (CN) would negotiate for indemnification in the event of damage to the bridge; any increase in the lease payments, should they result, would be based on estimates derived from information obtained directly from the parties who will suffer the loss; in the event of damage to the bridge by the negligence of a third party, the lessee (CN) would claim under its contract with the lessor (PWC) for indemnification in the amount negotiated; the lessor could, as the party suffering physical damage, turn around and claim against the tortfeasor (Norsk) for the consequent economic losses including the amount it had to pay out under its contract to the lessee CN. Such a loss is reasonably foreseeable and falls within the established exception for recovery of economic loss where physical damage is suffered as well. In this way, relational economic losses are `channelled' rather than denied.
The proponents of this position argue that judicial affirmation of a rule that recovery of economic loss is confined to cases where the plaintiff has sustained physical damage to its person or property or has relied in the sense of Hedley Byrne, will send a clear message to the business community to plan its affairs accordingly. Following this argument, the Court can presume that if CN failed to contract for this indemnification: (a) CN paid less for its lease; (b) CN did not consider the risk of unavailability to be significant enough to negotiate for such indemnification (or, alternatively, to insure itself); or (c) CN did not act reasonably and was itself negligent in organizing its business affairs. As such, the preclusion of CN from recovery is justified.
The "contractual allocation of risk" argument rests on a number of important, but questionable assumptions. First, the argument assumes that all persons or business entities organize their affairs in accordance with the laws of economic efficiency, assigning liability to the "least‑cost risk avoider". Second, it assumes that all parties to a transaction share an equality of bargaining power which will result in the effective allocation of risk. It is not considered that certain parties who control the situation (e.g., the owners of an indispensable bridge) may refuse to indemnify against the negligence of those over whom they have no control, or may demand such an exorbitant premium for this indemnification that it would be more cost‑effective for the innocent victim to insure itself. Thirdly, it overlooks the historical centrality of personal fault to our concept of negligence or "delict" and the role this may have in curbing negligent conduct and thus limiting the harm done to innocent parties, not all of whom are large enterprises capable of maximizing their economic situation. Given the uncertainty of these premises, it is far from clear that the Court should deny recovery of pure economic loss on the basis of arguments based on allocation of risk.
(3) Summary of Pragmatic Considerations
I conclude that it has not been shown that the approach enunciated by this Court in Kamloops threatens to open the floodgates of indeterminate liability, leads to undue uncertainty, or causes unfair or inefficient economic allocation of resources. On the contrary, the Kamloops approach is arguably sensitive to these concerns. Moreover, should the courts in following this approach extend liability too far, it is open to the legislatures of this country to impose limits. There is no practical reason evident at this stage for the courts to retreat to the inflexibility of a rule that never countenances recovery of economic loss except where the plaintiff has suffered physical damage or injury or has relied on a negligent misrepresentation.
4. Application to this Case
The plaintiff CN suffered economic loss as a result of being deprived of its contractual right to use the bridge damaged by the defendants' negligence. Applying the Kamloops approach, its right to recover depends on: (1) whether it can establish sufficient proximity or "closeness", and (2) whether extension of recovery to this type of loss is desirable from a practical point of view.
The first question is whether the evidence in this case establishes the proximity necessary to found liability. The case does not fall within any of the categories where proximity and liability have been hitherto found to exist. So we must consider the matter afresh.
A number of factors have been suggested in support of a finding of the necessary proximity. One might fasten on the fact that damaging the bridge raised the danger of physical injury to CN's property. CN's property ‑‑ its trains ‑‑ were frequently on the bridge and stood to be damaged by an accident involving the bridge. Whether they were in fact damaged is immaterial to the question of proximity. What is important is that this danger indicates a measure of closeness which has traditionally been held to establish the proximity necessary to found liability in tort for pure economic loss. However, to found the decision on this criterion would be to affirm the minority position of Laskin and Hall JJ. in Rivtow that danger of physical loss is sufficient to found liability. I note that the majority's restriction of recovery of economic loss to the duty to warn has been doubted. Wilson J. in Kamloops noted that the problem of concurrent liability in contract and tort may have played a major role in the majority decision in Rivtow, and (at p. 34) that "as in the case of Hedley Byrne, we will have to await the outcome of a developing jurisprudence around that decision also". MacGuigan J.A. below stated at p. 166: "In my observation, courts will always find sufficient proximity where there is physical danger to the plaintiff's property". However it is not necessary to address that issue in this case since other factors clearly indicate the necessary proximity.
In addition to focusing upon the relationship between the appellant Norsk and CN -‑ a significant indicator of proximity in and of itself -‑ the trial judge based his conclusion that there was sufficient proximity on a number of factors related to CN's connection with the property damaged, the bridge, including the fact that CN's property was in close proximity to the bridge, that CN'S property could not be enjoyed without the link of the bridge, which was an integral part of its railway system and that CN supplied materials, inspection and consulting services for the bridge, was its preponderant user, and was recognized in the periodic negotiations surrounding the closing of the bridge.
MacGuigan J.A. summarized the trial judge's findings on proximity as follows, at p. 167:
In effect, the Trial Judge found that the CNR was so closely assimilated to the position of PWC that it was very much within the reasonable ambit of risk of the appellants at the time of the accident. That, it seems to me, is sufficient proximity: in Deane J.'s language, it is both physical and circumstantial closeness.
Such a characterization brings the situation into the "joint" or "common venture" category under which recovery for purely economic loss has heretofore been recognized in maritime law cases from the United Kingdom (The Greystoke Castle, supra) and the United States (Amoco Transport, supra). The reasoning, as I apprehend it, is that where the plaintiff's operations are so closely allied to the operations of the party suffering physical damage and to its property (which ‑‑ as damaged ‑‑ causes the plaintiff's loss) that it can be considered a joint venturer with the owner of the property, the plaintiff can recover its economic loss even though the plaintiff has suffered no physical damage to its own property. To deny recovery in such circumstances would be to deny it to a person who for practical purposes is in the same position as if he or she owned the property physically damaged.
The second question is whether extension of recovery to this type of loss is desirable from a practical point of view. Recovery serves the purpose of permitting a plaintiff whose position for practical purposes, vis‑à‑vis the tortfeasor, is indistinguishable from that of the owner of the damaged property, to recover what the actual owner could have recovered. This is fair and avoids an anomalous result. Nor does the recovery of economic loss in this case open the floodgates to unlimited liability. The category is a limited one. It has been applied in England and the United States without apparent difficulty. It does not embrace casual users of the property or those secondarily and incidentally affected by the damage done to the property. Potential tortfeasors can gauge in advance the scope of their liability. Businesses are not precluded from self‑insurance or from contracting for indemnity, nor are they `penalized' for not so doing. Finally, frivolous claims are not encouraged.
I conclude that here, as in Kamloops, the necessary duty and proximity are established, that valid purposes are served by permitting recovery, and that recovery will not open the floodgates to unlimited liability. In such circumstances, recovery should be permitted.
In deference to the learned judgments of my colleagues, I add the following comments. With respect to the reasons of my colleague Stevenson J., I, like La Forest J., would not accept, by itself, the "known plaintiff" test or the "ascertained class" test, which, to borrow La Forest J.'s phrase, places a premium on notoriety. With respect to the reasons of La Forest J., we are in agreement that the broad and flexible approach set out in Anns governs the right to recover for economic loss in tort. We also agree that the law of tort does not permit recovery for all economic loss. We further agree that where the plaintiff establishes a joint venture with the owner of the damaged property, it should be able to recover economic loss. Where we differ, in the final analysis, is on the test for determining joint venture.
La Forest J. says that the right to recovery in cases such as this depends exclusively on the terms of the formal contract between the plaintiff and the property owner. If the contract creates a possessory interest or a joint venture, or if it provides for indemnification by the property owner, the plaintiff may recover against a tortfeasor who damages the property and causes economic loss. I do not read the authorities which have considered the implications of a joint venture between the plaintiff and the owner of the damaged property as confining themselves to the formal terms of the contract. I prefer a more flexible test which permits the trial judge to consider all factors relevant to their relationship. The terms of the contract are an important consideration in determining whether economic loss is recoverable. But the contract may tell only part of the story between the parties. If the evidence establishes that having regard to the entire relationship between the owner of the damaged property and the plaintiff, the plaintiff must be regarded as standing in the relation of joint or common venturer (or a concept akin thereto) with the property owner with the result that in justice his rights against third parties should be the same as the owner's, then I would not interfere. Here as elsewhere in the law of tort, the question is where the balance between certainty and flexibility should be struck. It is my conviction, based on the development of the law relating to recovery of economic loss thus far, that the balance must be struck this side of rigid categorization which denies the possibility of recovery in new cases which may not meet the categorical test.
From the point of view of policy, I share La Forest J.'s concern with avoiding recovery which increases the cost of dealing with a given loss and agree with the importance of the considerations he raises as to the contractual allocation of the risk. While important, I do not find these considerations to be exclusively determinative of the issue. For the reasons given earlier, the policy arguments against recovery are not conclusive, particularly when the individual case is considered. In general, the narrower the scope of tort liability, the cheaper liability insurance. But that is not the whole answer. It may be that elimination of all tort liability for accidents would be the best solution from the point of view of economics, given that casualty insurance is cheaper than liability insurance. But for reasons of principle and policy the law rejects such a conclusion.
I agree too that generally people should be able to predict when they can recover economic loss from third parties, so they can determine in advance how to arrange their affairs, i.e. whether to purchase casualty (or accident) insurance or not. I suggest the test I propose permits this in substantial measure, while leaving open the door to future developments in the law; at a minimum if there is no special connection, physical or circumstantial, between the plaintiff's operations and the property damaged, recovery cannot be assumed and casualty insurance should be purchased. I doubt greater predictability in practical terms can be achieved. Is it truly realistic to suggest that a business firm will decide whether or not to purchase insurance on the basis of what a particular contract with the owner of a particular property provides, as La Forest J. suggests? A company such as C.N. has a host of contracts to consider when assessing whether to buy insurance to cover loss resulting from accidents. Some will meet La Forest J.'s criteria, some will not. I suspect that such decisions as to insurance are more likely to be made on the more global basis of asking whether there is any significant risk of loss in the operations which may not be recovered by suing third parties. Moreover, no plaintiff can be sure it will recover its loss, even if the law permits recovery; the party at fault, for example, may be insolvent or uninsured. If there is doubt on any of these questions, the prudent firm will purchase casualty insurance. So predictability is revealed as a more complex matter than looking at a particular contract.
In the end, I conclude that a test for recovery of economic loss outside situations akin to Hedley Byrne -- whether `contractual relational' economic loss or otherwise -- should be flexible enough to meet the complexities of commercial reality and to permit the recognition of new situations in which liability ought, in justice, to lie as such situations arise. With the greatest respect, it seems to me that a test, which is confined to the terms of the formal contract between the owner of the property damaged and the person who suffers economic loss as a consequence of that damage, may not fill these objectives.
Disposition
I would dismiss the appeal with costs.
//Stevenson J.//
The following are the reasons delivered by
Stevenson J. -- I have read the judgment of my colleague Justice McLachlin and while I agree with her conclusion, I reach it by a somewhat different analysis and characterization.
Issue
The appellants have formulated the issue in the following way:
Where A negligently damages the property of B which results in a contractual disruption and consequent economic loss to C:
(i)Does the law recognize a proximity in relationship between A and C sufficient to support a duty of care, the breach of which gives rise to liability?
(ii)If so, does the requisite proximity exist between Railway and tug in this case?
The General Exclusionary Rule
I first must make it clear that, in Canada, we do not accept a rule that pure economic loss is not recoverable in a negligence action. Many of the authorities are canvassed in the judgment of the Federal Court of Appeal, [1990] 3 F.C. 114, and I do not propose reviewing all of them.
I agree with what was said in this Court in Agnew-Surpass Shoe Stores Ltd. v. Cummer-Yonge Investments Ltd., [1976] 2 S.C.R. 221, at p. 252, where Pigeon J. wrote:
It is now settled by the judgment of this Court in Rivtow Marine Ltd. v. Washington Iron Works that recovery for economic loss caused by negligence is allowable without any recovery for property damage.
Also, in B.D.C. Ltd. v. Hofstrand Farms Ltd., [1986] 1 S.C.R. 228, at p. 239, Estey J. wrote:
...in principle, a defendant could be held liable in tort for economic losses arising wholly in the absence of associated physical injury or damages.
It should also be noted that in Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2, the Court allowed the recovery of a pure economic loss.
While the general exclusionary rule has been emphatically re-affirmed in England in Murphy v. Brentwood District Council, [1991] 1 A.C. 398, I see no justification for our so doing. A review of the case law discussing the rule satisfies me that there is no satisfactory rationale for a general exclusionary rule and that we should, rather than apply an indefensible general rule, examine the policy considerations that led to its application in the kind of case we are considering, a claim for economic loss where the claimant has suffered no damage to property or person.
The general exclusionary rule is often traced to Cattle v. Stockton Waterworks Co. (1875), L.R. 10 Q.B. 453. In that case, the plaintiff had contracted to build a tunnel for a lump sum, but the defendant -‑ a third party ‑‑ negligently flooded the tunnel causing an increase in the cost of performance of the contract. Recovery was denied but not simply because the damage was purely economic. Recovery was also denied because the loss was a "relational loss" consequent upon the negligent infliction of damage to the property of another.
Simpson & Co. v. Thomson (1877), 3 App. Cas. 279 (H.L.), was the first case that explicitly said that one cannot recover an economic loss if one has not also suffered a physical loss. In that case an insurance company claimed for its economic loss. Lord Penzance said at p. 290 about claims for pure economic losses that
[s]uch instances might be indefinitely multiplied, giving rise to rights of action which in modern communities, where every complexity of mutual relation is daily created by contract, might be both numerous and novel.
...
[An action can only lie] in the name, and therefore, in point of law, on the part of one who had either some property in, or possession of, the chattel injured.
The Extension of the Duty of Care
The general exclusionary rule was faithfully followed for many years. Then came Donoghue v. Stevenson, [1932] A.C. 562 (H.L.), a case that is so well known that a review is trite. That case was not concerned with pure economic loss as such, but its general principles on where a duty of care should lie have influenced the whole law of negligence. The exclusionary rule could, in fact, be described simply as the denial of a duty of care for pure economic losses. In Donoghue, the House of Lords was also confronted with a situation where traditionally, without the benefit of a contract, there was no duty of care. The House of Lords enunciated the principles to follow in order to establish a duty of care. Lord Atkin said at p. 580:
You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be -- persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.
The House of Lords found a duty where traditionally there was none.
An "Exception" to the Exclusionary Rule: Negligent Misstatements
In Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.), the defendant had made a negligent misstatement to a bank about the creditworthiness of a certain company. The bank gave the information to the plaintiff who relied on it and ended up losing money. Interestingly, the case was dismissed because of a disclaimer clause found in the letter sent to the bank. Nevertheless, in a long dictum, the Law Lords recognized a right to compensation for purely economic losses caused by a negligent misstatement.
At page 536, Lord Pearce interpreted Morrison Steamship Co. v. Greystoke Castle (Cargo Owners) (The Greystoke Castle), [1947] A.C. 265 (H.L.), as authority for the proposition that "economic loss alone, without some physical or material damage to support it, can afford a cause of action".
Other Direct "Exceptions"
Exceptions became more and more frequent. I will first consider the exceptions to the exclusionary rule itself to which I will refer as the direct exceptions (for a list of many of those exceptions see Chambers, "Economic Loss" in Finn, Essays on Torts (1989), p. 43). I will then consider the indirect exceptions, which are means of circumventing the rule without expressly creating a new exception.
One direct exception is that for the negligent performance of a service (Feldthusen, Economic Negligence (2nd ed. 1989), at p. 129). It is found in Ross v. Caunters, [1980] Ch. 297. In that case, a solicitor negligently drafted a will causing the plaintiff to lose part of her inheritance ‑‑ a pure economic loss. The plaintiff was allowed to recover.
Yet another exception is that for defective products. A defective product has not yet caused physical harm but will eventually cause some. The cost of repair is in fact a purely financial loss and there has been no physical injury. Yet some commentators argue that "[e]conomic loss in products liability is a different type of pure economic loss" (Feldthusen, supra, at p. 170) because the economic loss would not be distinguishable from the possible physical harm. The matter will often be governed by statute but at common law the exception could be called the "imminent risk exception".
Some would argue that an example of this last exception can be found in the opinion of Laskin J., as he then was, in Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189, at pp. 1216 et seq. The plaintiff had chartered a crane for its logging business. The defendants knew it needed repair but withheld that information until they had no choice but to break the news: a similar crane belonging to someone else had collapsed and killed someone. Had the plaintiff known of the defect it would have had the crane repaired at a convenient time rather than at the height of the logging season. The plaintiff claimed the profits it lost because of a shutdown of its operation. They also claimed the cost of repairing the crane. At page 1218, Laskin J. wrote:
The present case is not of the Hedley Byrne type, ... but recovery for economic loss alone is none the less supported under negligence doctrine. It seems to me that the rationale of manufacturers' liability for negligence should equally support such recovery in the case where, as here, there is a threat of physical harm and the plaintiff is in the class of those who are foreseeably so threatened. . .
On this point Laskin J. was in dissent. Ritchie J. for the majority reinstated the decision of the trial judge which allowed the recovery of the loss of profits on the basis of a duty to warn but denied the cost of repairs. Although one might wonder why he did not go as far as Laskin J. did, Ritchie J. for the majority wrote at p. 1215:
I am conscious of the fact that I have not referred to all relevant authorities relating to recovery for economic loss under such circumstances, but I am satisfied that in the present case there was a proximity of relationship giving rise to a duty to warn and that the damages awarded by the learned trial judge were recoverable as compensation for the direct and demonstrably foreseeable result of the breach of that duty. This being the case, I do not find it necessary to follow the sometimes winding paths leading to the formulation of a "policy decision".
Both the majority and the dissent in Rivtow seemed willing to admit that pure economic losses could be recovered. Most commentators would admit that the majority in Rivtow introduces another exception to the exclusionary rule and some would argue that a second exception is introduced by the dissent. The first exception is that in matters of product liability, one can recover a purely economic loss limited to the lost profits when that loss is caused by a breach of the duty to warn of the known defects of a product.
The second exception, more doubtful because it is based on the dissent of Laskin J., is that one can recover the cost of repairs -- a pure economic loss -- when there is a risk of injury to property or persons. That "exception" was mentioned by Lord Wilberforce in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.), at p. 760.
The Reasons for the Rule
In Kamloops, supra, Wilson J. questioned the need for the exclusionary rule in the following manner (at pp. 28-29):
How, it is asked, can one justify to injured plaintiffs the difference in treatment the law accords to physical and to economic loss caused by a defendant's negligent acts? In one you are compensated by the wrongdoer: in the other you have to bear the loss yourself. Does it make sense to permit the recovery of economic loss for negligent words but not for negligent acts? What is the significant difference between them? Why, if economic loss is reasonably foreseeable as a consequence of negligent acts, should it not be as recoverable as reasonably foreseeable physical injury to persons or to property? And should Chief Judge Cardozo's fear of indeterminate liability to an indeterminate class preclude recovery by a very specific plaintiff in a very specific amount? Can a policy consideration which leads to a manifest injustice in certain types of cases be a good policy consideration? Is there some rationale whereby injustice in specific cases can be avoided and Chief Judge Cardozo's fear guarded against at the same time?
Some argue that there is a fundamental distinction between physical damage (personal and property damage) and pure economic loss and that the latter is less worthy of protection. Professor Feldthusen has attempted to make this argument in Economic Negligence, supra, at pp. 8-14, but I am left unconvinced. Although I am prepared to recognize that a human being is more important than property and lost expectations of profit, I fail to see how property and economic losses can be distinguished.
Some say that the rule has a policy justification in insurance and in loss spreading. McLachlin J. answers that assertion.
The real reason for the rule is obvious to me. It was eloquently stated by Cardozo C.J. in Ultramares Corporation v. Touche, 174 N.E. 441 (N.Y. 1931), at p. 444: he feared "liability in an indeterminate amount for an indeterminate time to an indeterminate class". In my view that is an appropriate general test for relational losses, but is not a justification for a blanket acceptance of a bar on the recovery of economic losses. I return later to the problem of relational losses.
Many judges, lawyers and jurists seem extremely concerned about what life would be like after the death of the exclusionary rule against recovery of pure economic loss. The worst apocalyptic scenarios are feared. Everyone will go bankrupt, business will be impossible to conduct, the cost of insurance will be astronomical. The floodgates will be opened and our legal system will collapse. I do not share these fears.
First I have examined numerous exceptions to the exclusionary rule which have effectively abolished the rule in many areas where it used to apply. Has anyone seen any of the predicted catastrophic consequences?
Second, some personal injury cases can entail enormous liabilities. Liability for damage to property can also run in tens of millions of dollars. Oil spills and other environmental catastrophes can cause tremendous personal and property damage. Yet no one suggests that such tortfeasors should not be held liable. Why should the extent of potential liability for economic loss prevent recovery when it does not for property and personal damage? If our legal system is able to deal with disastrous personal and property damage, it should be able to deal with disastrous economic damage.
Third, this Court has the benefit of being the final court of appeal in a country that has two legal traditions: the English common law and the French civil law. Our two legal traditions are independent and should not be confused. Concepts and solutions found in one tradition should not be imposed on the other tradition. But this does not mean that there is no place for comparative law on this Court. The case at bar is a good example of how useful comparative law can be.
The civil law of Quebec and the civil law of France have no categorical rule preventing the recovery of pure economic loss (see Jutras, "Civil Law and Pure Economic Loss: What Are We Missing?" (1986-87), 12 Can. Bus. L.J. 295; Tetley, "Damages and Economic Loss in Marine Collision: Controlling the Floodgates" (1991), 22 J. Mar. Law & Com. 539; Herbots, "Le "duty of care" et le dommage purement financier en droit comparé", [1985] Rev. dr. int. et dr. comp. 7; note that the German civil law tradition has such a rule: Markesinis, A Comparative Introduction to the German Law of Torts (2nd ed. 1990), at pp. 37 et seq.). Yet, the French civil law system works well, insurance is not impossible to get, business is conducted as anywhere else in the world. Because of the experience this Court has in the civil law it cannot be frightened by apocalyptic scenarios about life after the rule against the recovery of pure economic loss.
As a result, I conclude that there is in Canada no general exclusionary rule precluding recovery of pure economic loss in a negligence action. This does not mean, however, that all economic losses are recoverable in a negligence action. There are policy reasons which preclude recovery of certain types of economic losses.
Relational Losses
That takes me back to Cattle v. Stockton, supra, which is the case upon which the relational loss rule is based. As the appellants correctly point out, that case denies recoverability for "relational losses" consequent upon the negligent infliction of damage to the property of another. To limit recovery to the owner and possessor imposes some restraint. As the appellants point out that case is seminal. See Candlewood Navigation Corp. v. Mitsui O.S.K. Lines Ltd. (The Mineral Transporter), [1986] A.C. 1 (P.C.), at p. 25; Leigh and Sillavan Ltd. v. Aliakmon Shipping Co., [1986] A.C. 785 (H.L.), and Murphy, supra. Candlewood grounds the exceptions on reasons of practical policy. Once this Court embraced the Anns approach, as it did in Kamloops, exceptions to recovery must be based on some acceptable policy.
Like the loss in Cattle v. Stockton, the loss in this case is a relational loss. Fleming, The Law of Torts (7th ed. 1987), discusses relational losses at pp. 162 et seq. He describes relational losses as those which do not arise directly from an injury but rather which arise as a result of a relationship with the injured party. Relational losses usually arise as a result of damage to another's property. Fleming notes that the law's "most ingrained opposition" to the recovery of economic loss in tort has been for relational losses. The reluctance to allow recovery of such losses is illustrated by numerous cases, such as Cattle v. Stockton, Simpson & Co. v. Thomson, supra, Société anonyme de remorquage à hélice v. Bennetts, [1911] 1 K.B. 243, and Weller & Co. v. Foot & Mouth Disease Research Institute, [1966] 1 Q.B. 569. According to Fleming, the reason that the law is reluctant to allow recovery of relational losses is not merely that those losses are purely economic. Rather the law is concerned that recovery of relational losses would be oppressive, as most accidents entail repercussions for all persons with whom an injured party is associated.
In other words, the reluctance to allow recovery for relational losses arises because of the possibility of indeterminate liability. The concern is not infinite liability (the "floodgates") but indeterminate liability: Cardozo C.J. feared "indeterminate" liability, not "infinite" liability. The courts already deal with massive liability where there is damage to persons or property, and can also do so for damage which is purely economic. However, it would be oppressive to expose defendants to indeterminate liability. Defendants should not be responsible for all of the consequences of their acts, even if they are negligent. Defendants should be responsible to those they directly injure, but not to all those who are affected by some relationship with the injured party. At some point, we must all bear the risk that persons with whom we are associated will be harmed. This responsibility begins at the point at which the defendant's liability could become indeterminate. For policy reasons and for reasons of fairness to defendants, the law must deny recovery of economic losses which give rise to the possibility of indeterminate liability. The appellants acknowledge that pragmatic rationale as being at the root of this limitation when they invoked United States cases on the subject, so the question we face is starkly a policy one.
Relational losses usually create the possibility of indeterminate liability. Recovery of relational losses is therefore exceptional. In Caltex Oil (Aust.) Pty. Ltd. v. The Dredge "Willemstad" (1976), 11 A.L.R. 227 (H.C.), recovery for damage to the relational interest is acknowledged to be exceptional. The respondent also acknowledges that the recovery of relational losses is exceptional (respondent's factum, p. 6, at para. 1.1). As a matter of policy some limit on recovery of relational losses must exist to prevent indeterminate liability. The need for some limitation is recognized in Rivtow and acknowledged in Kamloops. Commentators also generally accept the need for a limitation, and also express a need for certainty so that commercial enterprises have some appreciation of what risk is to be borne by whom. See, for example, Smith, Liability in Negligence (1984), at p. 166; Winfield and Jolowicz on Tort (13th ed. 1989), at p. 86, and Fleming, supra, at pp. 162 et seq. Moreover it is clear that the civil law has developed some form of limitation through the use of concepts of foreseeability, although Jutras, supra, suggests that civil law may have gone too far in allowing compensation for pure economic loss which is not related to damage to a proprietary interest (at p. 311). Yet aside from the danger of indeterminate liability, there is no reason in principle that bars recovery of relational losses.
The Limit of Liability
Where do we draw the line? The decision in the courts below was very much influenced by the application of the doctrine of proximity. This elusive concept is both embraced and rejected by commentators on the law of negligence. It seems to be given a secondary role in Anns but a primary role in Murphy. It is a separate subject in some commentaries, omitted from the index of others except in the context of remoteness of damage. I express my reservations about the use of "proximity" as a test. In my view, proximity expresses a conclusion, a judgment, a result, rather than a principle. If a loss is not proximate, it may be said to be too remote. I am impressed by the criticism of the concept of proximity which has been expressed by commentators, such as McHugh, "Neighbourhood, Proximity and Reliance", in Finn, supra, at pp. 36-37, and by judges, such as Brennan J. in San Sebastian Pty. Ltd. v. Minister Administering the Environmental Planning and Assessment Act 1979 (1986), 162 C.L.R. 340 (H.C. of A.), at p. 368. The concept of proximity is incapable of providing a principled basis for drawing the line on the issue of liability.
Rather than rely on the term "proximity", which figured in the judgments appealed from, I prefer to echo the approach of Mason J. in Caltex, supra, at p. 274, and address the rationale for disallowing economic losses consequent upon damage to property: "the apprehension of an indeterminate liability". A defendant will then be liable for economic damage due to his negligent conduct when he can reasonably foresee that a specific individual, as distinct from a general class of persons, will suffer financial loss as a consequence of his conduct.
In Anns, Lord Wilberforce formulated a general theory of tort liability on the basis of a two-stage test (at pp. 751-52). At the first stage, a prima facie duty of care is established by reasonable foreseeability of harm. At the second stage, the prima facie duty of care can be negated or reduced in scope by policy considerations. In Kamloops, this Court accepted the Anns formulation of tort liability. As Wilson J. expressed the Anns test in Kamloops (at pp. 10-11), two questions must be asked to determine whether or not a duty of care exists:
(1)is there a sufficiently close relationship between the parties ... so that, in the reasonable contemplation of the [defendant], carelessness on its part might cause damage to that person? If so,
(2)are there any considerations which ought to negative or limit (a) the scope of the duty and (b) the class of persons to whom it is owed or (c) the damages to which a breach of it may give rise?
Although in Murphy the House of Lords expressly overruled Anns, in my view this Court should not depart from the general formulation of duty of care which it accepted in Kamloops.
The line must be drawn by considering the policy concerns which underlie the need to limit the recovery of relational losses. The policy rationale which precludes recovery for most relational losses does not exist if there is no danger of indeterminate liability. There is no danger of indeterminate liability, and thus no policy reason to deny recoverability, when the defendant actually knows or ought to know of a specific individual or individuals, as opposed to a general or unascertained class of the public, who is or are likely to suffer a foreseeable kind of loss as a result of negligence by that defendant. For sake of convenience, this can be called the "known plaintiff" exception to the usual position that relational losses cannot be recovered for the policy reason that indeterminate liability could result.
With a known plaintiff, the scope of liability cannot become indeterminate. Liability is kept within a limited and determinate scope. The trial judge recognized that where there is a known plaintiff there is a restricted scope for recovery, and he cited the fact that the appellants actually knew that the respondent would be harmed by their negligence as one reason for allowing recovery (1989), 26 F.T.R. 81, at p. 100). In Candler v. Crane, Christmas & Co., [1951] 2 K.B. 164 (C.A.), Denning L.J., as he then was, in a dissenting judgment which was approved by the House of Lords in Hedley Byrne, suggested that limiting liability to the known plaintiff would be a sufficient guard against indeterminate liability for negligent misstatement. Denning L.J. recognized a duty of care for negligent misstatement but "confined the duty to cases where the accountant prepares his accounts and makes his report for the guidance of the very person in the very transaction in question" (p. 183). Denning L.J. noted that this approach was sufficient to dispose of the case before him, but he expressly left open the possibility that there could be a duty of care to a specific class of individuals, as opposed to a specific individual. However, Denning L.J. did preclude the possibility of extending liability generally, as such an extension would create the indeterminate liability feared by Cardozo C.J.
The known plaintiff approach was also followed by Gibbs and Mason JJ. in Caltex. Gibbs J. would still find a general exclusionary rule to preclude recovery of pure economic loss but would find an exception where there is a duty of care and the defendant has knowledge or means of knowledge that the individual plaintiff, not a member of an unascertained class, will suffer loss as a result of the defendant's negligence. Mason J. began from a different perspective with respect to the exclusionary rule but came to essentially the same conclusion. He held that limitations on the recovery of economic loss should be related to the principal factor inhibiting the recognition of a general duty of care, namely the fear of indeterminate liability. He would require reasonable foreseeability that a specific individual, rather than a general class, will suffer economic loss as a result of negligence. In Ross v. Caunters, supra, the views of Gibbs and Mason JJ. were approved and applied. Recovery was held to be possible only if the defendant knew or ought to have known that negligence would injure the individual plaintiff, not merely as a member of an indeterminate or unascertained class.
However, there has not been unanimous approval of the known plaintiff approach. The approach was doubted in Junior Books Ltd. v. Veitchi Co., [1983] 1 A.C. 520 (H.L.), at pp. 532-33, and expressly disapproved in Candlewood, supra, except with respect to actions for negligent misstatement. In Candlewood it was felt that the known plaintiff approach would not create a satisfactory control mechanism with reasonable certainty.
I cannot agree with this conclusion. While the known plaintiff approach may not be an adequate final limit on recovery of relational economic loss, it would seem that the known plaintiff rule at least precludes the threat of indeterminate liability. The effectiveness of the known plaintiff rule can be demonstrated by comparing Ross v. Caunters with Clarke v. Bruce Lance & Co., [1988] 1 All E.R. 364 (C.A.). In Ross, the court recognized that a solicitor is liable to a disappointed beneficiary under a will when negligence in the preparation of the will invalidates the bequest. In Clarke, the court held that when advising a testator a solicitor does not owe a duty of care to the general body of legatees who could be affected by the testator's actions. A duty of care to the general body of legatees would create the possibility of indeterminate liability. In Clarke, the court found no duty of care because the solicitor cannot be expected "to contemplate the plaintiff as a person likely to be affected by any lack of care" (p. 369). Thus the known plaintiff rule was used in Ross to permit recovery where there was no danger of indeterminate liability, and used in Clarke to deny recovery where there was a danger of indeterminate liability.
It is not necessary, for the purposes of this appeal, to determine where the precise limit to recovery of relational losses lies. This limit has vexed courts for many years and a precise limit may be impossible to express. Nonetheless, the known plaintiff approach does provide an appropriate basis for excluding the relational loss exclusionary rule. There is no danger of indeterminate liability when the defendant actually knows or ought to know of an identifiable plaintiff, as opposed to a general or unascertained class of the public, who is or are likely to suffer loss as a result of negligence by that defendant. There is accordingly no policy reason for excluding recovery for such a relational loss. There may be other exceptions. For example, it might be possible to permit recovery to a known specific class of plaintiffs, rather than a known individual plaintiff, without creating the possibility of indeterminate liability. Relational losses should be recoverable wherever the policy concern about indeterminate liability does not apply. At the very least, this policy concern does not apply where the defendant knows or ought to know of the specific plaintiff who is likely to be harmed.
Disposition
Viewed in this light the question in this case becomes: as a matter of policy is this foreseeable consequence of negligent navigation to be compensable? More specifically, is there a danger of indeterminate liability? On one hand, we have the genuine concern that losses are not out of proportion to the neglect, that some losses fall where they lie. On the other, we have the principle that a person who acts carelessly should be called upon to provide compensation as between himself or herself and an innocent party.
The appellants do not deny that the respondent's loss was foreseeable or that the other usual elements necessary to found a liability in negligence were present. One navigating near a bridge would ordinarily realize that damage to the bridge structure will cause damage to the users of the bridge. To use Lord Atkins' question: ought this particular plaintiff have been in the contemplation of these defendants? Ought this class of plaintiff, a known bridge user, a person with a contractual right to use the bridge be in contemplation? The answer is affirmative.
Viewed in this way this case becomes somewhat easier to decide in that one cannot readily see a policy reason for excluding liability. The loss was identifiable, the victim identifiable, the damage almost inevitable. The defendants ought to have known that the plaintiff would suffer economic loss as a result of their negligence. In fact, they even had actual knowledge that such a loss would occur. They even knew of the precise manner in which this plaintiff would be harmed. Would we deny recovery in such a case? Liability would in no way be out of proportion with the neglect. There is no danger of indeterminate liability.
The plaintiff here builds upon the breach of a duty of care to property. It does not assert any duty to protect its contractual relationships, which would raise a question of the relative duties and rights in such situations, discussed in Cattle v. Stockton itself. It hinges its argument upon the recognition that the class of plaintiffs needs to be limited: see Haig v. Bamford, [1977] 1 S.C.R. 466, at p. 483, and Kamloops, supra, at p. 35. It is therefore unnecessary, for the purposes of this case, to determine whether or not interference with contractual duties can give rise to a duty of care in tort.
The question in this case may be viewed as one of who bears the risk of loss. Is the risk of loss borne by the plaintiff, who has no definable proprietary interest, or the defendants who must have foreseen that the plaintiff would sustain a loss of use? Policy or pragmatic considerations might justify a consideration of insurability, but that would entail empirical studies not available to us. This is one of the rare situations in which the law reform bodies have not undertaken studies that might assist in answering the question of who is better able to carry on or pass on the risk. In a case such as this one we might ask whether the carriers or the barge operators ought to carry the risk -- the users or consumers of one product or the other?
In my view, the plaintiff was and ought to have been within the contemplation of the crew operating the tug. Economic loss to the plaintiff was foreseeable, in no way indeterminate or uncertain. Its nature and extent were almost predictable. The specific plaintiff was actually foreseen by the defendants. I see no policy rationale for excluding liability on the facts of this case.
I would therefore dismiss the appeal with costs.
Appeal dismissed with costs, La Forest, Sopinka and Iacobucci JJ. dissenting.
Solicitors for the appellants: Campney & Murphy, Vancouver.
Solicitors for the respondent: McEwen, Schmitt & Co., Vancouver.