2) Negligent Performance of a Service

Pure economic loss may also be caused by the negligent failure to perform a service. In most situations, services are provided pursuant to a contract between the service supplier and the plaintiff. That contract will, in the absence of exempting provisions to the contrary, contain a warranty that the services will be performed with reasonable skill and care. A failure to perform that obligation will give rise to an action for breach of contract. The nature of the loss presents no obstacles to a contract action. Contract law, however, provides incomplete protection in respect of the negligent performance of services in two situations. First, contract law provides no remedy for economic loss caused by the negligent performance of a gratuitous service. If the service is free, there is no consideration, and an essential element of a contract is absent. Secondly, the negligent performance of a contractual service may cause economic loss to a third person who stands to benefit directly or indirectly from the promised performance. The rule of privity of contract prevents the third party from suing on the contract. Third parties who stand to gain from the performance of gratuitous services are doubly disadvantaged in contract law because of the absence of both consideration and the lack of privity. One answer to this problem is to reform contract law and free it from the constraints of consideration and privity doctrine. In due course, this may occur but the reform of traditional contract law has proved to be a slow, incremental, and conservative process. Consequently, innovative lawyers have sought to outflank the narrow and rigid law of contract by turning to the dynamism and flexibility of negligence law to broaden liability for the negligent performance of services.

It will be apparent that the problem with expanding the duty of care into this area is less one of indeterminacy and more one of finding criteria to identify relationships that, while not contractual, are sufficiently equivalent to contract to warrant the imposition of liability. The courts have, therefore, been influenced by the ideas of an assumption of responsibility by the service provider to the plaintiff and a reasonable and justifiable reliance by the plaintiff on the service provider. A relationship evidencing these characteristics is often sufficient to support a duty of reasonable care to avoid economic loss to the plaintiff in the performance of a service.

a) The Negligent Performance of a Gratuitous Service to the Plaintiff

The negligent performance of a gratuitous service directly to the plaintiff will often give rise to a duty of care. An assumption of responsibility and foreseeable reliance, coupled with proof of negligence and damage generated by the plaintiff's reliance, is normally sufficient to impose liability. [Note 86: Feldthusen, above note 68 at 132.] This may be illustrated by some situations arising from the placement of insurance. [Note 87: See, for example, Fine's Flowers Ltd. v. General Accident Assurance Co. (1977), 17 O.R. (2d) 529 (C.A.).] A defendant may gratuitously undertake to secure insurance for the plaintiff. The defendant may carry out that task negligently by, for example, making misrepresentations to the insurer which invalidate the insurance policy, by failing to insure fully the plaintiff's interests, or by failing to ensure compliance with some condition of the insurer on which the coverage depends. The willingness to undertake an important task such as this is often not only indicative of an assumption of responsibility by the defendant, but it also generates reasonable and foreseeable reliance by the plaintiff. The defendant will be liable for uninsured losses resulting from his negligence.

An allied and more difficult issue arises where the defendant has promised to perform a gratuitous service but has failed to carry it out at all. Courts are more cautious in this situation because a more direct attack is being made on the contract rule that there is no obligation to perform a gratuitous promise, and on the negligence rule that there is no general duty of affirmative action. Nevertheless, there would seem to be no significant difference between a person who, for example, gratuitously undertakes to secure insurance for another person and does it negligently and another who undertakes the same task and does not do it at all. An assumption of responsibility and reasonable reliance may also be found in the latter situation and a duty may well be imposed.

It can, however, be expected that, where there has been a failure to commence the performance of a gratuitous promise, compelling evidence of assumption of responsibility and reliance will be required. Maxey v. Canada Permanent Trust Co. [Note 88: (1984), 9 D.L.R. (4th) 380 (Man. C.A.).] is illustrative. The defendant mortgagee was concerned that the plaintiff mortgagor had not properly insured the mortgaged property, thereby placing the mortgagee's security interest in jeopardy. The defendant threatened to take out the necessary insurance at the plaintiff's expense if the plaintiff did not secure adequate coverage. The bank placed insurance to cover its own interest for a year but it did not, at any time, insure the mortgagor's interest. The house was uninsured when it burned down. The plaintiff attempted to recover his loss on the ground that he relied on the defendant's assurance that it would insure the property in a way that would protect his interest. The Manitoba Court of Appeal reversed the trial judgment and held that the defendant was not liable. The defendant had not clearly assumed a responsibility to protect the plaintiff's interests and it was not reasonable for the plaintiff to rely on the defendant to protect his interest.

b) The Negligent Performance of a Contract of Service Causing Economic Loss to a Third Party

The rule of privity of contract has encouraged third-party beneficiaries to a contract to sue in tort when a negligent performance of a contract causes them economic loss. Again, the concepts of assumption of responsibility and reasonable reliance are influential in these cases. There is, however, in some cases the added problem of indeterminacy. There may be large numbers of beneficiaries who indirectly or incidently stand to benefit from the contractual performance of the defendant. This problem of incidental contractual beneficiaries is equally a problem for those who would reform the law of contract. It is difficult to find appropriate language or concepts to determine the range of third-party beneficiaries who ought to be given a personal right to enforce a contract. The courts are, therefore, likely to take into account additional factors in deciding if the service provider owes a duty of care to the plaintiff third party. Consideration may be given to the size of the pool of potential plaintiffs, the end and aim of the contract, and whether or not it was intended that the plaintiff should benefit from the performance of the contract.

The Supreme Court addressed this issue in B.D.C. Ltd. v. Hofstrand Farms Ltd. [Note 89: [1986] 1 S.C.R. 228.] The defendant courier entered into a contract with the Crown to deliver an envelope from a governmental department to a land registry office by a certain date. Delivery was delayed because of the defendant's negligence. This resulted in certain grants of land not being registered to the plaintiff in sufficient time to allow it to perform a lucrative contract with another party. The plaintiff blamed the courier for the deal falling through. The Court held that the defendant did not owe a duty of care to the plaintiff. The Court observed that the defendant had no knowledge of the contents of the envelope, no knowledge of the plaintiff, and no knowledge of the plaintiff's contract. Consequently, there was no real basis for concluding that the defendant had assumed responsibility to the plaintiff, that the end and aim or intention of the contract was to benefit the plaintiff, or that the plaintiff had acted in reliance on the defendant. At most it might have been foreseen that some person or class of persons had a financial interest in the contents of the envelope and that they might suffer some loss as a result of its late delivery. A duty based on that degree of foreseeability would, however, create severe indeterminacy problems. The Court concluded that there was insufficient proximity between the parties to support a duty of care.

A useful contrast to B.D.C. is found in the House of Lords decision in White v. Jones. [Note 90: [1995] 2 A.C. 207 (H.L.). See also Earl v. Wilhelm, [1998] 2 W.W.R. 522 (Sask. Q.B.).] It is typical of a number of "wills cases" that have arisen in the last few years. In White the defendant solicitor was retained by the testator to draft and execute a new will designed to distribute his estate to the plaintiffs. The defendant failed to carry out that task in a timely and competent manner and the testator died before the new will was operative. The estate was distributed to other beneficiaries under an earlier will. The House of Lords found that the defendant was liable to the plaintiffs. Even in the absence of any act of reliance by the plaintiffs, the factors in favour of a duty of care were compelling. First, lawyers assume a general responsibility for the drafting and execution of valid wills, and testators, beneficiaries, and the public rely in a general way upon their competence to carry out that task. Second, the direct purpose and intention of a contract to draft a will is to ensure that the testator's estate is, in due course, distributed according to the testator's wishes. Third, the disappointed beneficiaries are members of a limited class of persons who are known by name to the defendant and the extent of the solicitor's liability is controlled by the size of the estate. This allays any indeterminacy concerns. Fourth, practical justice dictates a remedy because the estate cannot sue since it has suffered no loss, and, unless a duty of care is recognized, the persons who have suffered the loss (the disappointed beneficiaries) will have no claim because they were not parties to the contract of professional services. Fifth, recognition of a duty of care may provide some deterrence against poor legal practice.

These two cases indicate the many factors that are influential in deciding if a service provider owes a duty of care to a third person. Nevertheless, the ideas of an assumption of responsibility and reasonable reliance are likely to be found most compelling. They, most comfortably, fill the void of a contractual relationship.

The central role of assumption of responsibility was emphasized by the House of Lords in Henderson v. Merrett Syndicates Ltd. [Note 91: (1994), [1995] 2 A.C. 145 (H.L.).] In that case, the plaintiffs were members (known as names) of underwriting syndicates that were managed by the defendants. Some of the defendants were managing agents of the plaintiffs (as distinct from those who were combined member/managing agents) who did not have a direct contractual link with the names. The members, whom they represented, were referred to as indirect names. The managing agents determined which risks should be insured, which insured risks should be reinsured, and which claims should be settled. The plaintiffs who suffered catastrophic losses sued inter alia the managing agents for their failure to carry out their responsibilities with reasonable skill and care. The House of Lords held that, in spite of the absence of a direct contractual link, the managing agents owed a duty of care to the indirect names. The defendants had assumed responsibility to the plaintiffs and they in turn had relied on the defendants and their skill and expertise.

c) Negligent Misrepresentation and Negligent Performance of a Service

It is not always easy to distinguish between cases that are characterized as negligent misrepresentation cases and those that are characterized as negligent performance of a service cases. Negligent misrepresentations are often the end product of a long period of professional work that is sabotaged by a single negligent error in the course of its performance. Emphasis may be placed on the performance of the task or the erroneous words that are its product. An example of this is Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd. [Note 92: Above note 80.] where erroneous plans and specifications for the design and construction of a highway prepared by the defendant engineering firm resulted in loss to the plaintiff contractor who relied on them to its detriment. The Court chose to consider the case as one of negligent misrepresentation, albeit that the negligence arose in the engineering and design process.

There are also cases that do not appear to fit easily into either category. In Spring v. Guardian Assurance Plc., [Note 93: [1995] 2 A.C. 296 (H.L.).] for example, the defendant employer provided a reference for the plaintiff, a former employee. In this reference, the defendant included erroneous and damaging information that prevented the plaintiff from securing employment. The House of Lords held that the provider of a reference owes a duty of care to the person who is the subject of the reference and imposed liability. The defendant had voluntarily assumed responsibility for preparing an accurate reference and the plaintiff depended on the defendant to discharge this important and influential task carefully. The case may be categorized as one of negligent misrepresentation but it is not a case where the misrepresentation was made to the plaintiff. It was provided directly to the prospective employer of the plaintiff. Nor was the loss caused by the plaintiff's reliance on the representation. Another example is found in the cases of Martel Building Ltd. v. Canada [Note 94: [1998] 4 F.C. 300 (C.A.).] and Atlantic Leasing Ltd. v. Newfoundland, [Note 95: (1998), 164 Nfld. & P.E.I.R. 119 (Nfld. C.A.).] both dealing with the renewal of long-term commercial leases. In Martel the Crown was held to be under a duty of care to act fairly both in the negotiations for a lease renewal and in the tendering process that took place when the negotiations broke down. In Atlantic the Crown was held to be under a duty of care to make a decision about dispensing with the tendering process in respect of the lease in a timely manner when it was aware of the reasonable reliance of the tenant on an extension and the tenant's reasonable expectation that a decision in its favour was forthcoming.

These cases indicate that any approach which uses categories to analyse cases will, inevitably, produce difficulties at the margins. Nevertheless, in the area of economic losses, the advantages of classification probably outweigh the disadvantages of the alternatives of either dealing with all economic cases on the basis of some elusive, all- encompassing general principle or approaching them as isolated single instances that are a law unto themselves. The occasional misfit cases are manageable under the basic concepts of assumption of responsibility, reliance, and proximity of the relationship and the overriding limitations dictated by the risk of indeterminacy.