3) Relational Economic Loss

Relational economic loss occurs when the defendant negligently damages the property or person of a third party and, because of the relationship between that property or that person and the plaintiff, the plaintiff suffers pure economic loss. The loss is relational because the plaintiff is at least one step removed from the person who suffers the property damage, personal injury, or death. Relational economic loss flowing from property damage, personal injury, or death gives rise to similar policy considerations. They are not, however, controlled by the same legal principles.

a) Relational Economic Loss Arising from Property Damage

Relational economic loss arising from property damage may be contractual or non-contractual. Contractual relational economic loss arises where the defendant has interfered with or damaged the property of a third person with whom the plaintiff has a contractual relationship. The property damage disrupts or interferes with the performance of the contract, causing the plaintiff to lose some economic advantage or benefits. A plaintiff may, for example, have a contractual right to use a privately owned bridge. The bridge may be damaged and temporarily closed because of the defendant's negligence. This may force the plaintiff to use more expensive alternative transportation routes and it may additionally cause a loss of customers and a loss of profit. Non-contractual relational economic loss arises where there is no contract between the property owner and the plaintiff but, nevertheless, damage to the property adversely affects the plaintiff's business interests. For example, the defendant may damage a public bridge, which then needs to be temporarily closed for repairs. A number of businesses in the immediate area that depend upon the bridge may suffer economic loss from increased transportation costs and/or a loss of customers.

Claims for both contractual and non-contractual relational economic loss give rise to severe indeterminacy problems. There is the potential for a multitude of claims leading to a burdensome liability that is totally disproportionate to the degree of the defendant's fault. For example, a single act of negligence damaging transportation routes, communication systems, energy distribution systems, or the environment may give rise to many more contractual and non-contractual relational economic loss claims than could be accommodated without severe disruptions to the business world, to liability insurance systems, and to the courts. There is general agreement that strong controls must be placed on recovery for relational economic loss arising from property damage.

i) Contractual Relational Economic Loss

In the last few decades, there has been much debate about how the courts should deal with contractual relational economic loss. Broadly speaking, there have been two views. The first is to apply an exclusionary rule that disallows all contractual relational economic loss claims except those that fall into a few exceptional categories of cases where identifiable policy factors strongly support recovery. The other view is that contractual relational economic loss claims should be dealt with on a case-by-case basis and should be allowed where, on the facts, there are no insuperable indeterminacy problems. It is argued that economic loss is not qualitatively different from property damage, and there is no pressing reason to arbitrarily exclude all these claims from the operation of the fault system and its compensatory and deterrent aspirations. All that is needed, on this view, is an adequate control device to keep liability within tolerable limits.

This difference of approach was evident in the Supreme Court decision in Canadian National Railway v. Norsk Pacific Steamship Co. [Note 96: [1992] 1 S.C.R. 1021 [Norsk].] In that case, the defendant was the owner of a tug that negligently struck a railway bridge spanning the Fraser River. The bridge, which was owned by Public Works Canada, was closed for several weeks for repair. The plaintiff, Canadian National Railway, enjoyed a sophisticated contractual licence to use the bridge for its rail traffic. The defendant knew that the bridge was used by CN, that it was essential to CN's operation, and that CN was the main user of the bridge. CN sued for the cost of re- routing its trains while the bridge was closed. The plaintiff succeeded in the Supreme Court but the Court did not speak with a single voice. With the exception of one judge, the Court was evenly split between the views of McLachlin J., who wrote the leading judgment in favour of the plaintiff, and LaForest J., who wrote a powerful dissenting judgment. Stevenson J. broke the tie in favour of the plaintiff but he adopted an approach with which no other judge agreed.

McLachlin J. took a flexible, fact-sensitive, case-by-case approach that relied on the two branches of the Anns test to contain indeterminate liability. In her view, however, the first branch of the Anns test would be satisfied in the context of relational economic loss only if a much closer relationship of proximity was established between the parties than that arising from foreseeability alone. In contractual relational economic loss claims, a scrupulous examination of the facts must be undertaken to determine if there is sufficient closeness, including physical closeness, circumstantial closeness, causal closeness, and closeness arising from the assumption of responsibility, to support a prima facie duty of care. Reference must then be made to the second branch of the Anns test to determine if the prima facie duty of care should be negated on policy grounds. On the facts, McLachlin J. found sufficient proximity between the parties to support a prima facie duty that was not negated by policy concerns. [Note 97: McLachlin J. also supported her judgment on the ground that the parties were involved in a joint venture, a concept that is discussed later in this chapter.]

LaForest J. held that the exclusionary rule must be applied to contractual relational economic loss claims and no duty of care arises in respect of that loss unless the case falls within narrow exceptional categories, none of which applied to the case at hand. It was not only the indeterminacy concerns that led him to this conclusion. He noted that negligence liability was not required on deterrent grounds in these cases since the owner of the damaged property will always be able to sue the tortfeasor. The issue, therefore, narrowed to a determination of whether or not it was good policy to utilize the most expensive compensatory system yet devised (the fault/liability system) to allocate the plaintiff's loss to the defendant. In his view, there were good reasons not to do so. First, the incremental extension of negligence liability based on proximity would produce much uncertainty and unpredictability when the primary need of business persons and their insurers is certainty. Second, most persons and businesses are able to meet their compensatory needs in more efficient and less expensive ways. They may, for example, be able to channel their foreseeable economic losses to the property owner by appropriately worded terms of their contract. They may also purchase first-party business interruption and loss insurance that is tailored to their particular needs. These reasons were sufficient to support the exclusionary rule and its application to the facts at hand.

Norsk left the law in an unsatisfactory state. Two visions for the development of negligence law in respect of contractual relational economic loss were presented. In many cases, the choice will make no difference to the result of a case, but at the heart of each is a different attitude to these claims. McLachlin J.'s more liberal approach demanded of the defendant compelling reasons why there should not be liability for contractual relational economic loss. LaForest J.'s more cautious approach demanded of the plaintiff compelling reasons why there should be liability for contractual relational economic loss.

The Supreme Court tried to resolve these differences in Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd. [Note 98: [1997] 3 S.C.R. 1210 [Bow Valley].] One of the many issues in that case was a claim for contractual relational economic loss suffered by the users of an offshore oil-drilling rig. The rig was built by the defendant, Saint John Shipbuilding Ltd., for Bow Valley Husky (Bermuda) Ltd. A component of the heating system known as thermaclad was supplied by the defendant Raychem. The rig was leased by the owner, Bow Valley Husky (Bermuda) Ltd., to the plaintiffs. During the drilling of an exploratory well, the thermaclad caught fire and, as a result of the fire, the rig was out of service for several months for repairs. During this time, the plaintiffs were obliged, under their contracts, to pay day rates (rental) to the owner and they suffered additional financial losses in respect of contracts with suppliers. The plaintiffs claimed that the defendants had a duty to warn them of the inflammability of the thermaclad and their failure to do so caused them contractual relational economic loss.

The Court recognized that the defendants had a duty to warn the plaintiffs of the risk of fire but it rejected their claim for contractual relational economic loss. In a judgment concurred in by LaForest J. and, on this point, agreed to by the other members of the Court, McLachlin J. sought to accommodate the different views in Norsk. First, she held that contractual relational economic loss is recoverable only in special categories of exceptional cases. This amounts to a recognition of a general exclusionary rule subject to exceptions. Second, the exceptional categories of cases currently recognized by the Supreme Court include cases where the plaintiff has some possessory or proprietary interest in the damaged property, general average cases, cases where the defendant and plaintiff are involved in a joint venture, and transferred loss cases. [Note 99: These categories are discussed below.] Third, although the categories of exceptional cases are not closed, the Court will not assiduously seek to develop new categories. There must be compelling policy reasons in favour of recognizing a new category. New categories may be recognized in situations where the deterrent effect of the potential liability of the property owner is low or where, despite a degree of indeterminate liability, the plaintiff had no opportunity to allocate the risk of economic loss to the owner of the property, either because of the kind of transaction involved or because of an inequality of bargaining power. Fourth, the approach in Anns must be used to determine if a new category of exceptional cases should be recognized.

McLachlin J. held that the case did not fall within any existing exceptional category of cases. It, therefore, fell to be examined under the Anns test. First, foreseeability of the economic loss that is, in itself, sufficient to establish a prima facie duty of care was satisfied on the facts of the case. Second, the policy factors dictated that the prima facie duty must be negated. In the Court's opinion, the indeterminacy concerns were insuperable. A number of methods to control extensive liability and to distinguish the plaintiffs' loss from that of others (including confining liability to the users of the rig) were rejected on the grounds that they were not sufficient to meet the indeterminacy problems or they were arbitrary and without legal or social justification. Furthermore, there was no need for additional deterrence since the rig owner sued the defendants, and there had been every opportunity for the plaintiffs to channel their economic losses back to the owner by way of contract because the owners and the users were individual corporate entities of the same corporate conglomerate.

One important consequence of Bow Valley is that it has shifted the focus of attention in respect of contractual relational economic loss claims from a search for an appropriate general principle to control liability to an examination of the exceptional categories of cases that are now recognized by the Court. A brief review of those categories will indicate the current scope of recovery for contractual relational economic loss and may provide a guide to categories that may be recognized in the future. [Note 100: 1 A more detailed description of these categories is found in the judgments in Norsk, above note 96, and in Feldthusen, above note 68 at 244-59.]

aa) The Plaintiff Has a Possessory or Proprietary Interest in the Damaged Property

In most cases of contractual relational economic loss, the plaintiff has no more than a contractual relationship with the property owner. In some cases, however, the plaintiff may, in addition, have some proprietary or possessory interest in the property, making it appear that the plaintiff is the owner in all but name. Since few plaintiffs will have this kind of interest, the indeterminacy concerns created by contractual relational economic loss are allayed. The most common situation is that of a demise or bare boat charter (lease) of a ship. In these cases, the charterer takes complete possession and control of the ship, supplies its own crew, and in essence becomes the de facto owner of the ship for the duration of the charterparty. If the ship is put out of service because of damage caused by the defendant's negligence, the charterer may sue the defendant directly for the loss of use profits even though the plaintiff is not the owner of the damaged property. There is some uncertainty about the position of time charterers. Time charterers do not take over possession or control of the ship but merely give instructions to the owner's captain and crew to carry goods at the charterers' direction. These distinctions may not, however, be sufficient to justify a different solution.

bb) General Average Contribution

In the course of a voyage, a ship may be in peril and the shipowner may incur expenses to save the ship and continue the voyage with minimal disruption. The expenses may include salvage and towing fees, repair costs, pilotage, harbour levies, and the cost of unloading and reloading the ship if that is necessary to complete the repairs. The cargo owners are obliged to contribute to these expenses in what are known as general average contributions. Tort law may bear on this issue when a ship is imperilled by the negligence of another party. For example, a minor collision at sea necessitating repairs may be caused by the negligence of another ship. In those circumstances, the cargo owners may recover the contribution that they have made under the doctrine of general average contribution from the tortfeasor even though they have no possessory or proprietary interest in the ship and their cargo is unharmed. This may be justified on the grounds that the shipowner and the cargo owners are engaged in a joint venture, there are no indeterminacy concerns, and the plaintiffs recover only expenditures that the owner would have been able to recover but for the contribution.

cc) Joint Venture

Joint ventures arise where a number of people use property owned by one of them for a joint business enterprise. When the defendant negligently damages or destroys the property, all of the participants may suffer economic losses. These financial losses are recoverable directly from the tortfeasor by the owner and non-owners of the property. The best example is the "loss of the catch" situation. Commercial fishermen may agree to participate in a commercial fishing expedition with the owner of a trawler. The terms of the agreement may allocate a share of the catch to all involved as their remuneration. An action may be brought by all the participants directly against a tortfeasor who damages and disables the fishing trawler by all the participants. The reasons for allowing this claim mirror those supporting the general average claims.

dd) Transferred Loss

A transferred loss claim arises most commonly in respect of a contract for the sale of goods. The contract may allocate the risk of damage to the buyer before the ownership of the goods passes from the seller. If, during this period, the goods are damaged by the negligence of a third person, the owner may have no claim because she has suffered no loss (the risk being allocated to the buyer) and the buyer may have no claim because he has no ownership in the damaged goods. The buyer's claim for the contractual relational economic loss may be supported on the grounds of fairness, the need for deterrence, and the lack of indeterminacy problems. [Note 101: 1 The plaintiffs' argument in Bow Valley that its claim was one for transferred loss from the owner was rejected on the grounds that it is confined to physical damage and that the losses of the owners and the plaintiffs were not the same.]

Overall, there seems to be little room for any vigorous expansion of these special categories. The exceptions are narrow and predominantly maritime in nature. The Supreme Court now seems to have set its collective face against contractual relational economic loss claims, and a court that has expressed itself to be concerned about the certainty and predictability in the allocation of relational business losses arising from negligently damaged property is unlikely soon to increase the scope of liability.

ee) Pre-Bow Valley Authorities

All earlier authorities dealing with contractual relational economic loss should now be re-assessed in the light of Bow Valley. [Note 102: 1 Above note 98.] Special attention must be given to the two earlier decisions of the Supreme Court, neither of which was expressly overruled or doubted by the Court in Bow Valley.

The first is Rivtow Marine Ltd. v. Washington Iron Works, [Note 103: 1 [1974] S.C.R. 1189 [Rivtow].] which, on its facts, is not dissimilar to Bow Valley. The Court allowed recovery for a loss of profits caused by the defendant manufacturer's delay in issuing a timely warning of a dangerous defect in a crane installed on a floating barge. The delay in warning forced the plaintiff, who had leased the barge from its owner, to do repairs in the plaintiff's busiest season rather than during the off-season when its loss of profits would have been less. The plaintiff recovered the avoidable loss of profits caused by the defendant's negligence. Both Rivtow and Bow Valley involve the failure to give warnings to those who have contracted to use vessels manufactured in whole or in part by the defendants. One difference is that the plaintiff in Bow Valley sued for the payment of day rates and associated expenses rather than a loss of profits. Nevertheless, the cases are sufficiently alike to have deserved some explanation by the Court in Bow Valley of the material points of difference.

The second is Norsk. [Note 104: 1 Above note 96.] The status of Norsk would seem to be in some doubt since Bow Valley. It was not included in the list of exceptional categories in Bow Valley and it could be regarded as impliedly overruled. However, McLachlin J., in her judgment in Norsk, also held that the owner of the bridge and the plaintiff were participants in a joint venture. The case may, therefore, be assigned to that exceptional category. In his judgment in Norsk, LaForest J. did not agree with her characterization of the case as one of joint venture. Furthermore, if Norsk is interpreted as a joint venture case, it signals a broad and loose notion of joint venture that would provide a great deal of opportunity for an extension of liability. Indeed, the mere fact of a contractual relationship between the property owner and the plaintiff is suggestive of at least some economic cooperation.

ii) Non-contractual Relational Economic Loss

The Supreme Court has not had an opportunity since Bow Valley to address non-contractual relational economic loss but there seems little doubt that the exclusionary rule applies. The indeterminacy concerns are even more severe in this class of relational economic loss. The extent of liability for contractual relational economic loss is necessarily restricted to those who have contractual relationships with the property owner. Non-contractual relational economic loss may be suffered by any member of the public who in some way is dependent upon the property of another. Star Village Tavern v. Nield [Note 105: 1 (1976), 71 D.L.R. (3d) 439 (Man. Q.B.). This case was referred to in chapter 1.] is one of a number of cases of non-contractual relational economic loss arising from the interruption of public transportation routes. In that case, the plaintiff suffered a loss of profits from his tavern when a provincial bridge was closed temporarily in order to repair damage to it caused by the defendant's negligence. The plaintiff was one of many businesses that may have been affected adversely by the defendant's conduct. The Court rejected the plaintiff's claim. There is no significant loss of deterrence in these situations since the property owner will, normally, be able to sue for his damage. There will be much less opportunity to channel the losses to the property owner by way of contract but first-party loss insurance is available to cover both contractual and non-contractual relational economic loss.

b) Relational Economic Loss Arising from Personal Injury or Death

Personal injury or death may also cause relational economic loss to third persons including family members, partners, business associates, employees, and customers. These situations give rise to the same kind of policy concerns as relational economic loss arising from property damage. They have not, however, traditionally been dealt with on the basis of any general principle. Both the common law and legislation have recognized some discrete and narrow categories of contractual and non-contractual relational economic loss claims arising from personal injury or death.