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The Canadian approach to negligent misrepresentation: a critique of the reliance model of liability Fairlie, John 2003

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THE CANADIAN APPROACH TO NEGLIGENT MISREPRESENTATION: A CRITIQUE OF THE RELIANCE MODEL OF LIABILITY by John Fairlie B.Mus. (1978), LL.B. (1982), The University of British Columbia A thesis submitted in partial fulfillment of the requirements for the degree of Master of Laws in The Faculty of Graduate Studies (Faculty of Law) We accept this thesis as conforming to the required standard The University of British Columbia August 2003 ©John Fairlie, 2003 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of ^.r^^x^a, ^-U A^OQ ^ ^TV<Lo b.^p ^<VJ The University of British Columbia Vancouver, Canada Date Ao^u-V" 2.q j ?J^CN^ DE-6 (2/88) 11 ABSTRACT The Canadian Approach to Negligent Misrepresentation: A Critique of the Reliance Model of Liability by John Fairlie This thesis is presented on recent developments in the law of negligent misrepresentation in Canada, focusing on the debate surrounding the appropriate basis of liability and its significance in commercial settings. Since Hedley Byrne first opened up the law of negligence to careless words and economic loss, there has been some confusion as to the precise nature of the duty of care. Two models of liability have competed for recognition, one based on voluntary assumption of responsibility by the defendant and one based on reasonable reliance by the plaintiff. The former is in fact a hybrid model of liability which has elements of traditional contract and traditional tort liability. The latter is more consonant with traditional tort liability alone. In 1997, the Supreme Court of Canada adopted the reliance model of liability. In considering the appropriateness of the reliance approach, I examine the undedying philosophies and policy objectives relevant to tort law law generally and negligence law specifically. The significance of corrective justice and distributive justice theories are considered, the latter increasingly being raised in argument- before the courts. The role of economic efficiency in detemining the appropiate form of liability is also considered. A large part of my research concerns the interplay of the many other policies, some conflicting, which the courts have identified as part of the duty of care issue in negligence. Some of these policies include the need to deter harmful behaviour, the desire to promote independence and self-sufficiency, and concerns about overlap with contractual principles. I argue that in adopting the reliance model Canada's highest court has sacrificed, among other tilings, coherence of approach by the law to economic dealings and certainty in the law's application. I argue that a hybrid model based on voluntary assumption of responsibility or consent is the most effective way to balance the competing policies and theories of responsibility in this area. s iii TABLE OF CONTENTS Abstract ii Table of Contents iiCitation and Language Notes v Table of Cases vTable of Statutes xv List of Figures xvii Acknowledgements xviiChapter 1 Introduction 1 1.1 The Nature of the Claim1.2 Thesis Plan : 4 1.2.1 Research Approach 4 Research "In" the Law '. 6 Research "On" the Law 8 1.2.2 Thesis Outline 9 1.3 Proposal for Improvement 10 Chapter 2 The Micron Construction Decision 11 2.1 Facts of Micron Construction 2 2.2 In the British Columbia Supreme Court 4 2.3 In the British Columbia Court of Appeal2.4 Hard Case? 17 Chapter 3 In Theory - A Conceptual Framework 22 3.1 Introduction 23.2 Tort Law as an End in Itself - Corrective Justice 4 3.3 Tort Law as an Instrument 28 3.3.1 Distributive Justice 9 3.3.2 Law and Economics 32 The Enterprises of Law and Economics Core Assumptions 3 Wealth Maximization as a Norm 5 Efficiency and Wealth Maximization 36 Efficiency and Tort Law 41 3.3.3. General Functions of Tort Law 8 3.4 Negligence and Duty of Care 50 3.4.1 Proximity and Policy — An Overview 53.4.2 Closeness, Directness, Justice and Fairness 9 3.4.3 Policies Supporting the Imposition of a Duty of Care 62 3.4.4 Counter Policies and General Negligence 64 Individualism 65 Change is Bad 7 Avoidance of Political Interference 68 Certainty3.4.4.5 Special Considerations 69 Floodgates 70 3.4.5 Counter Policies and Economic Negligence Loss Spreading 1 Indeterminate Liability Social Loss Neutrality 2 Laisse^-Faire 3 3.4.6 A Note on Efficiency and Duty of Care 80 iv 3.5 Implications for a Theory of Liability in Negligent Misrepresentation 81 3.5.1 Duty of Care and Negligent Misrepresentation 85 Closeness, Directness, Justice and Fairness 6 Policies Supporting the Imposition of a Duty of Care 89 Counter Policies 90 3.5.2 Efficiency and Negligent Misrepresentation 101 Direct Advice 102 Basic Contract 4 Free Rider 7 A Note on Public Authorities 109 3.5.3 Choosing the Right Rule The Reliance Model 110 The Consent Model 2 And the Winner Is? 5 Chapter 4 In Practice - Negligent Misrepresentation in Canada 117 4.1 A Tort is Born 114.2 Consenting Parents 123 4.2.1 Contractual Relationships 124.2.2 Fiduciary Relationships 4 4.2.1 The Special Relationship Extension 136 4.3 Negligent Misrepresentation Today 8 4.3.1 The Approach to Negligence Law Generally 134.3.2 The Special Case of Economic Negligence 9 General Duty or Remoteness? 141 Comparison with Intentionally Caused Economic Loss Professor Feldthusen's Taxonomy 142 4.3.3 Negligent Misrepresentation — A Short History 150 The Early Years Hercules and Reliance 3 Micron Construction Revisited ; 156 4.3.4 Negligent Misrepresentation and Disclaimers 161 General Non-contractual Disclaimers 162 Contractual Exclusions of Liability 164 4.3.5 The Position in Quebec 166 4.4 A Comparison with Other Jurisdictions 169 4.4.1 United Kingdom4.4.2 Australia 178 4.4.3 New Zealand 182 4.4.4 United States 4 4.4.5 Summary 9 Chapter 5 Conclusions 191 5.1 Summary and Argument5.2 Proposal for Improvement 6 5.3 In the Meantime 202 5.4 Suggestions for Further Study 203 Glossary 207 Bibliography 9 Appendix Concurrent liability in Negligent Misrepresentation and Contract 216 Index 220 CITATION AND LANGUAGE NOTES I have endeavoured to follow the citation protocols of the Canadian Guide to Uniform Legal Citation, 5th ed. (Toronto: Carswell 2002). Neutral citations, for instance, appear as parallel citations if the case is reported (e.g., M. Hasegawa <& Co. v. Pepsi bottling Group (Canada) Co. (2002), 213 D.L.R. (4th) 663, [2002] 7 W.W.R. 600, 2002 BCCA 324). In the footnotes, when citing cases, I have included no more than two parallel citations for report services, but in the Table of Cases, I have included all those readily available. Pinpoint numbers in the citations refer to page numbers unless otherwise specified (e.g., para, for paragraph). In referring the reader to other places in the thesis, "supra" and "infra''' refer to earlier and later footnotes, and "above" and "below" refer to earlier and later passages in the narrative. In researching this thesis, I found myself starting to use more words ending in "ism" than I had done previously, words like instrumentalism, contractualism, neo-libeiralism, etc. Instinctively, I hesitate to use these and other very specialized words, but they have a purpose, I discovered, which is to save space. I have included most of the difficult ones in the glossary following Chapter 5. In Chapter 4, there is a comparative survey which includes the United Kingdom, Australia and New Zealand. For the sake of brevity, in Chapter 4 and elsewhere in the thesis, I refer to the collection of these three countries together with Canada as the Commonwealth. I recognize that generalizing about the Commonwealth position from these four countries is a gross oversimplification, ormtting as it does many Commonwealth jurisdictions with different and varied approaches to the law, including some like the Maldives and Mozambique, which have no common law component at all. Finally, I have placed negligent misrepresentation cases into three main groups and given them names: "direct advice", "basic contract" and "free rider". These categories are described and graphically represented in three figures in section 3.5. As I explain, these expressions are my own and not generally accepted terminology in this context. VI TABLE OF CASES Canada A. (C.) v. Chtchley (1998), 166 D.L.R. (4th) 475, 184 WAX. 248, 60 B.C.L.R. (3d) 92, 113 B.C.A.C. 248,13 Admin. L.R. (3d) 157, 43 C.C.L.T. (2d) 223, 42 R.F.L. (4th) 427 (CA.) AlririsAuto Service Ud. v. Clew Holdings Ud. [1997] 9 W.W.R. 5, 157 Sask. R. 278, 33 B.L.R. (2d) 11, 37 C.C.L.T. (2d) 135,13 R.P.R. (3d) 107 (Q.B.) Athey v. Uonati, [1996] 3 S.C.R. 458, 140 D.L.R. (4th) 235, 203 N.R. 36, [1997] 1 W.W.R. 97, . 132 W.A.C. 243, 81 B.C.A.C. 243, 31 C.C.L.T. (2d) 113 Barratt v. North Vancouver (District), [1980] 2 S.C.R. 418, 114 D.L.R. (3d) 577, 33 N.R. 293, 27 B.C.L.R. 182,14 C.C.L.T. 169,13 M.P.L.R. 116, 8 M.V.R. 294 B. D.C. Ud. v. Hofstrand Farms Ud, [1986] 1 S.C.R. 228, 36 C.C.L.T. 87, (sub nom. Ho/strand Farms Ud. v. B.D.C. Ud) 26 D.L.R. (4th) 1, 65 N.R. 261, [1986] 3 W.W.R. 216, 33 B.L.R. 293, {sub nom. Hofstrand Farms Ud. v. British Columbia) 1 B.C.L.R. (2d) 324 BG Checo International Ud. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12, 99 D.L.R. (4th) 577, 147 N.R. 81, [1993] 2 W.W.R. 321, 35 W.A.C. 241, 75 B.C.L.R. (2d) 145, 20 B.C.A.C. 241,14 C.C.L.T. (2d) 233, 5 C.L.R. (2d) 173 B. (K.L.) v. British Columbia (2001), 197 D.L.R. (4th) 431, [2001] 5 W.W.R. 47, 249 W.A.C. 52, 87 B.C.L.R. (3d) 52,151 B.C.A.C. 52, 4 C.C.L.T. (3d) 225, 2001 BCCA 221 B. (Al) v. British Columbia (2001), 197 D.L.R. (4th) 385, [2001] 5 W.W.R. 6, 249 W.A.C. 70, 87 B.C.L.R. (3d) 12,151 B.C.A.C. 70, 4 C.C.L.T. (3d) 163, 2001 BCCA 227 Bow Valley Husky (Bermuda) Ud. v. Saint John Shipbuilding Ud., [1997] 3 S.C.R. 1210, 153 D.L.R. (4th) 385, 221 N.R. 1, 490 A.P.R. 269,158 Nfld. & P.E.I.R. 269, 37 B.L.R. (2d) 1, 48 C.C.L.I. (2d) 1, 40 C.C.L.T. (2d) 235 Brown v. British Columbia (Minister of Transportation & Highways), [1994] 1 S.C.R. 420, 112 D.L.R. (4th) 1, 164 N.R. 161, [1994] 4 W.W.R. 194, 67 W.A.C. 1, 89 B.C.L.R. (2d) 1, 42 B.C.A.C. 1, 20 Admin. L.R. (2d) 1,19 C.C.L.T. (2d) 268, 2 M.V.R. (3d) 43 Canadian Aerv Service Ud. v. O'Malley (1973), [1974] S.C.R. 592, 40 D.L.R. (3d) 371, 11 C.P.R. (2d) 206 Canadian National Railway v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021, 91 D.L.R. (4th) 289,137 N.R. 241,11 C.C.L.T. (2d) 1, 53 F.T.R. 79n Canson Enterprises Ud. v. Boughton <& Co., [1991] 3 S.C.R. 534, 85 D.L.R. (4th) 129, 131 N.R. 321, [1992] 1 W.W.R. 245, 61 B.C.L.R. (2d) 1, 6 B.C.A.C. 1,13 W.A.C. 1, 9 C.C.L.T. (2d) 1, 39 C.P.R. (3d) 449, 43 E.T.R. 201 Carman Construction Ud. v. Canadian Pacific Railway, [1982] 1 S.C.R. 958, 136 D.L.R. (3d) 193, 42 N.R. 147,18B.L.R. 65 Central <& Eastern Trust Co. v. Rafuse, [1986] 2 S.C.R. 147, 31 D.L.R. (4th) 481, 69 N.R. 321, 186 A.P.R. 109, 75 N.S.R. (2d) 109, 34 B.L.R. 187, 37 C.C.L.T. 117, 42 R.P.R. 161, [1986] R.R.A. 527 vn Cominco Ltd. v. Bilton (1970), [1971] S.C.R. 413,15 D.L.R. (3d) 60 Consumers Distributing Co. p. Seiko Time Canada Ltd., [1984] 1 S.C.R. 583, 10 D.L.R. (4th) 161, 29 C.C.L.T. 296, 3 C.I.P.R. 223, 1 C.P.R. (3d) 1, {sub nom. Seiko Time Canada Ltd. v. Consumers Distributing Co) 54 N.R. 161 Cooper v. Hobart, [2001] 3 S.C.R. 537, 206 D.L.R. (4th) 193, 277 N.R. 113, [2002] 1 W.W.R. 221, 261 W.A.C. 268, 96 B.C.L.R. (3d) 36,160 B.C.A.C. 268, 8 C.C.L.T. (3d) 26, 2001, 2001 SCC 79 CordiaLtd. v. Montreal (Ville), [2000] Q.J. No. 2709 (S.C), online: QL (OJ). Crocker v. Sundance Northwest Resorts Ltd., [1988] 1 S.C.R. 1186, 64 O.R. (2d) 64 (note), 51 D.L.R. (4th) 321, 86 N.R. 241, 29 O.A.C. 1, 44 C.C.L.T. 225, [1988] R.R.A. 444 D'Amato v. Badger, [1996] 2 S.C.R. 1071, 137 D.L.R. (4th) 129, 199 N.R. 341, [1996] 8 W.W.R. 390,129 W.A.C. 110, 22 B.C.L.R. (3d) 218, 79 B.C.A.C. 110, 31 C.C.L.T. (2d) 1 Dobson v. Dobson, [1999] 2 S.C.R. 753, 242 N.R. 201, 547 A.P.R. 201, 214 N.B.R. (2d) 201, 45 C. C.L.T. (2d) 217, 33 C.P.C. (4th) 217, {sub nom. Dobson (Litigation Guardian of) v. Dobson) 174 D. L.R. (4th) 1, 44 M.V.R. (3d) 1 Edgeworth Construction Ltd. v. N.D. Lea <& Associates Ltd., [1993] 3 S.C.R. 206, 107 D.L.R. (4th) 169, 157 N.R. 241, [1993] 8 W.W.R. 129, 53 W.A.C. 221, 83 B.C.L.R. (2d) 145, 32 B.C.A.C. 221,11 B.L.R. (2d) 101,17 C.C.L.T. (2d) 101,12 C.L.R. (2d) 161 Edwards p. Harris-Intertybe (Canada) Ltd. (1983), 40 O.R. (2d) 558 (S.C), affd (1984), 46 O.R. (2d) 286, 9 D.L.R. (4th) 319 (CA.) Edwards p. Law Society of Upper Canada, [2001] 3 S.C.R. 562, 206 D.L.R. (4th) 211, 277 N.R. 145, 56 O.R. (3d) 456 (headnote only), 153 O.A.C. 388, 34 Admin. L.R. (3d) 38, 8 C.C.L.T. (3d) 153,13 C.P.C. (5th) 35, 2001 SCC 80 Ford p. Quebec (Procureurgeneral), [1988] 2 S.C.R. 712, 90 N.R. 84, {sub nom. Ford p. Quebec (Attorney General)) 54 D.L.R. (4th) 577, 10 C.H.R.R. D/5559, 36 C.R.R. 1, {sub nom. Chaussure Brown's Inc. p. Quebec (Procureurgeneral}) 19 Q.A.C. 69 Frame p. Smith, [1987] 2 S.C.R. 99, 42 D.L.R. (4th) 81, 78 N.R. 40, 23 O.A.C. 84, 42 C.CL.T. 1, [1988] 1 C.N.L.R. 152, 9 R.F.L. (3d) 225 Fraser-Reid p. Dmumtsekas, [1980] 1 S.C.R. 720,103 D.L.R. (3d) 385, 29 N.R. 424, 9 R.P.R. 121 Fraser Riper Pile <&DredgeUd. p. Can-Dipe Services Ltd., [1999] 3 S.C.R. 108,176 D.L.R. (4th) 257, 245 N.R. 88, [1999] 9 W.W.R. 380, 207 W.A.C. 287, 67 B.C.L.R. (3d) 213,127 B.CA.C 287, [2000] 1 Lloyd's Rep. 199, 50 B.L.R. (2d) 169, 11 C.CL.I. (3d) 1, 47 C.CL.T. (2d) 1, [1999] I.L.R. 1-3717 G. (E.D.) P. Hammer (2001), 197 D.L.R. (4th) 454, [2001] 5 W.W.R. 70, 249 W.A.C. 34, 86 B.C.L.R. (3d) 191,151 B.CA.C 34, 4 C.C.L.T. (3d) 204, 2001 BCCA 226 Guerin p. K, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 59 B.C.L.R. 301, [1985] 1 C.N.L.R. 120, 20 E.T.R. 6, 36 R.P.R. 1, {sub nom. Guerin p. Canada) 13 D.L.R. (4th) 321, 55 N.R. 161 Haig p. Bamford (1976), [1977] 1 S.C.R. 466, 72 D.L.R. (3d) 68, 9 N.R. 43, [1976] 3 W.W.R. 331, 27 C.P.R. (2d) 149 VU1 Hercules Managements Ud. v. Ernst <& Young, [1997] 2 S.C.R. 165, 146 D.L.R. (4th) 577, [1997] 8 W.W.R. 80, 31 B.L.R. (2d) 147, 35 C.C.L.T. (2d) 115, (sub nom. Hercules Management Ud. v. Ernst & Young) 115 Man. R. (2d) 241, 211 N.R. 352,139 W.A.C. 241 Hodgkinson v. Simms, [1994] 3 S.C.R. 377, 117 D.L.R. (4th) 161, 171 N.R. 245, [1994] 9 W.W.R. 609, 80 W.A.C. 1, 97 B.C.L.R. (2d) 1, 49 B.C.A.C. 1, 16 B.L.R. (2d) 1, 6 C.C.L.S. 1, 22 C.C.L.T. (2d) 1, 57 C.P.R. (3d) 1, 95 D.T.C. 5135, 5 E.T.R. (2d) 1 Hunter Engineering Co. v. Syncrude Canada Ud., [1989] 1 S.C.R. 426, 57 D.L.R. (4th) 321, 92 N.R. 1, [1989] 3 W.W.R. 385, (sub nom. Syncrude Canada Ud. v. Hunter Engineering Co) 35 B.C.L.R. (2d) 145 Inland Feeders Ud. v. Virdi, [1980] 5 W.W.R. 346, 12 M.P.L.R. 52, 12 C.C.L.T. 177 (B.C.S.C.), rev'd (1981) 32 B.C.L.R. 45, (sub nom. Virdi v. Inland Feeders Ud) [1982] 1 W.W.R. 551, 18 C. C.L.T. 292,17 M.P.L.R. 120,129 D.L.R. (3d) 685,22 R.P.R. 50 (CA.) Irwin Toy Ud. v. Quebec (Attorney General), [1989] 1 S.C.R. 927, 58 D.L.R. (4th) 577, 94 N.R. 167, 24 Q.A.C. 2, 25 C.P.R. (3d) 417, 39 C.R.R. 193 Jacobi v. Griffiths, [1999] 2 S.C.R. 570, 174 D.L.R. (4th) 71, 241 N.R. 201, [1999] 9 W.W.R. 1, 203 W.A.C 161, 63 B.C.L.R. (3d) 1, 124 B.CA.C 161, 44 CC.E.L. (2d) 169, 46 C.C.L.T. (2d) 49 John Burrows Ud. v. Subsurface Surveys Ud., [1968] S.C.R. 607, 68 D.L.R. (2d) 354 /. Nunes Diamonds Ud. v. Dominion Electric Protection Co., [1972] S.C.R. 769, 26 D.L.R. (3d) 699 Just v. British Columbia, [1989] 2 S.C.R. 1228, 64 D.L.R. (4th) 689, 103 N.R. 1, [1990] 1 W.W.R. 385, 41 B.C.L.R. (2d) 350, 41 Admin. L.R. 161, 1 CCL.T. (2d) 1, 18 M.V.R. (2d) 1, [1990] R.R.A. 140 Keith Plumbing & Heating Co. v. Newport City Club Ud. [see Micron Construction Ud. v. Hongkong Bank of Canada] Kamloops (City) v. Nielsen [see Nielsen v. Kamloops (City)] LAC Minerals Ud. v. International Corona Resources Ud., [1989] 2 S.C.R. 574, 69 O.R. (2d) 287, 61 D. L.R. (4th) 14, 101 N.R. 239, 36 O.A.C. 57, 26 C.P.R. (3d) 97, 6 R.P.R. (2d) 1, 35 E.T.R. 1 (sub nom. International Corona Resources Ud. v. LAC Minerals Ud) 44 B.L.R. 1 Law Estate v. Simice (1994), 21 CCL.T. (2d) 228 (B.C.S.C), affd (1995), [1996] 4 W.W.R. 672, 111 W.A.C. 89,17 B.C.L.R. (3d) 1, 67 B.CA.C 89, 27 CCL.T. (2d) 127 (CA.) Utwin Construction (1973) Ud. v. Pan (1988), 52 D.L.R. (4th) 459, (sub nom. Utwin Construction (1973) Ud. v. Kiss) 29 B.C.L.R. (2d) 88 (CA.) London Drugs Ud. v. Kuehne <& Nagel International Ud., [1992] 3 S.C.R. 299, 97 D.L.R. (4th) 261, [1993] 1 W.W.R. 1, 73 B.CL.R. (2d) 1, 43 C.C.E.L. 1, 13 CCL.T. (2d) 1, (sub nom. London Drugs Ud. v. Brassart) 143 N.R. 1,18 B.CA.C 1, 31 W.A.C. 1 Machtinger v. HOJ Industries Ud., [1992] 1 S.C.R. 986, 7 O.R. (3d) 480 (note), 91 D.L.R. (4th) 491, 40 C.C.E.L. 1, 92 C.L.L.C. 14,022, (sub nom. Ufebvre v. HOJ Industries Ud) 136 N.R. 40, 53 O.A.C. 200 Mattel Building Ud. v. Canada, [2000] 2 S.C.R. 860, 193 D.L.R. (4th) 1, 262 N.R. 285, 3 CC.L.T. (3d) 1, 5 C.L.R. (3d) 161,186 F.T.R. 231(note), 36 R.P.R. (3d) 175, 2000 SCC 60 Mclnerney v. MacDonald, [1992] 2 S.C.R. 138, 93 D.L.R. (4th) 415, 137 N.R. 35, 317 A.P.R. 271, 126 N.B.R. (2d) 271,12 C.CL.T. (2d) 225, 7 C.P.C. (3d) 269 M. Hasegawa & Co. v. Pepsi Bottling Group (Canada) Co. (2002), 213 D.L.R. (4th) 663, [2002] 7 W.W.R. 600,1 B.C.L.R. (4th) 209,169 B.CA.C 261,11 C.CL.T. (3d) 249,2002 BCCA 324 Micron Construction Ltd. v. Hongkong Bank of Canada {sub nom. Keith Plumbing & Heating Co. v. Newport City Club Ltd.) (2000), 184 D.L.R. (4th) 75, [2000] 6 W.W.R. 65, 221 W.A.C. 59, 75 B. C.L.R. (3d) 186, 135 B.CA.C 59, 3 B.L.R. 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(4th) 449, 138 N.R. 81, [1992] 4 W.W.R. 577, 19 W.A.C. 1, 68 B.C.L.R. (2d) 29, 9 B.CA.C 1,12 C.CL.T. (2d) 1 Nunes Diamonds Ltd. v. Dominion Electric Protection Co. [see /. Nunes Diamonds Ltd. v. Dominion Electric Protection Co.] Pepsi-Cola Canada Beverages (West) Ltd. v. RW.D.S.U., Local558, [2002] 1 S.C.R. 156, 208 D.L.R. (4th) 385, 280 N.R. 333, [2002] 4 W.W.R. 205, 265 W.A.C. 22, 217 Sask. R. 22, 2002 C.L.L.C. 220-008, 78 C.L.R.B.R. (2d) 161, 90 C.R.R. (2d) 189, 2002 SCC 8 Peso Silver Mines Ltd. (N.P.L) v. Cropper, [1966] S.C.R. 673, 58 D.L.R. (2d) 1, 56 W.W.R. 641 Porky Packers Ltd. v. The Pas (Town) (1976), [1977] 1 S.C.R. 51, [1976] 3 W.W.R. 138 Priestman v. Colangelo, [1959] S.C.R. 615,19 D.L.R. (2d) 1,124 CCC 1, 30 CR. 209 Queen v. Cognos Inc., [1993] 1 S.C.R. 87, 99 D.L.R. (4th) 626, 147 N.R. 169, 60 O.A.C. 1, 45 C.C.E.L. 153,14 C.C.L.T. (2d) 113, 93 CL.L.C 14,019 R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606, 93 D.L.R. (4th) 36, 74 CCC (3d) 289, 43 C.P.R. 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App. Div. 1983) Sucarseco, Re The, 294 U.S. 394, 55 S.Ct. 467 (1935) Cltramares Corp. v. Touche, 255 N.Y. 170,174 N.E. 441 (CA. 1931) United States v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947) XV TABLE OF STATUTES Canada Constitution Canadian Charter of Rights and Freedoms, Part 1 of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), c. 11, s. 2(b) Federal Competition Act, R.S.C. 1985, c. C-34, Part VI British Columbia Consumer Protection Act, R.S.B.C. 1996, c. 69 Insurance Act, R.S.B.C. 1996, c. 226 Infants Act, R.S.B.C. 1996, c. 223 Sale of Goods Act, R.S.B.C. 1996, c. 410 Securities Act, R.S.B.C. 1996, c. 418 Trade Practice Act, R.S.B.C. 1996, c. 457 New Brunswick Law Reform Act, S.N.B. 1993, c. L-1.2 Quebec Civil Code of Quebec, S.Q. 1991, c. 64 United Kingdom Contract (Rights of Third Parties) Act 1999 (U.K.) Misrepresentation Act 1967 (U.K.) Unfair Contract Terms Act 1977 (U.K.) Australia Property Law Act 1969 (W.A.) Property Law Act 1974 (Qld.) Trade Practices Act 1974 (Ausd.) New Zealand Contracts (Privity) Act 1982 (N.Z.) Fair Trading Act 1986 (N.Z.) xvi United States (Restatements) Restatement (Second) of Contracts § 90(1) (1981) Restatement (Second) of Contracts § 304 (1981) Restatement (Second) of Torts % 552 (1977), § 895C (1979) Restatement (Third) of Torts: Products Liability §§ 1 -2 (1998) Restatement (Third) of Torts: Liability for Physical Harm (Tentative Draft) § 3 (2002) XVII LIST OF FIGURES Figure 3.3-1 The Marginal Hand Formula 43 Figure 3.5-1 Direct Advice Gratuitously Provided 82 Figure 3.5-2 Negligent Misrepresentation in Basic Contract Settings 83 Figure 3.5-3 Negligent Misrepresentation and the Free Rider 84 > XVU1 ACKNOWLEDGEMENTS I wish to express my appreciation to my wife, Christine Matthews, who planted the idea of going back to school for a year to further my legal studies, and whose enthusiasm was inspiring. Also, I would like thank: the U.B.C. Law School library staff for their assistance in setting up electronic research accounts, providing information about new releases, and helping me locate hard-to-find volumes in storage; the LL.M. seminar leaders, Professors Wesley Pue and Joel Bakan for introducing me to new ideas about and approaches to the law; the law firm of Fraser Milner Casgrain, and particularly Kelly Geddes, for background information about the Micron Construction case and for making copies of court documentation; and Capilano College, for making this year possible. 1 Chapter 1 INTRODUCTION The use of words, a defining human characteristic, is subject to legal regulation in a number of ways. Criminal sanctions flow from using words to promote hatred, to commit perjury and to obtain property through fraud; we must honour our promises in contracts or risk claims against us; and we can be held civilly liable if we injure others by deceit or if we defame them. The question to be examined in this thesis relates to the nature of civil responsibility to others when we are careless with our words. To what degree are we or should we be responsible to others for the reliance they place on our words in such circumstances? In proposing a thesis on the common law relating to negligent misrepresentation I had to consider whether more ink was justified in this already heavily inked area. William Paley's comment almost 200 hundred years ago is as apt today as it was then: .. .when a writer offers a book to the public upon a subject on which the public are already in possession of many others, he is bound by a kind of literary justice to inform his readers, distinctly and specifically, what it is he professes to supply and what he expects to improve.1 In this introduction I hope to justify more words on this topic. After a brief discussion of the nature of the claim, I describe my thesis plan (what I profess to supply) together with a proposal for improvement. 1.1 THE NATURE OF THE CLAIM Liability for negligent misrepresentations outside of contractual or fiduciary relationships is a relatively new addition to the common law. It involves responsibility for pure economic loss.2 1 From the preface to William Paley, Principles of Moral and Political Philosophy, 20th ed. (London: Printed for J. Faulder, 1814). This same passage was quoted in the preface to the first edition of Geoffrey Cheshire's contracts text, The Law of Contract (London: Butterworths, 1945) and reprinted in later editions (the most recent edition is Michael Furmston, Cheshire, Fifoot <& Furmston's Law of Contract, 14th ed. (London: Butterworths, 2001)). 2 While there is some doubt, most opinion now supports the view that cases involving careless words causing physical loss (i.e., personal injury or property damage) fall to be decided under general negligence principles: see discussion in Lewis N. Klar, Tort Law, 2nd ed. (Scarborough: Carswell, 1996) at 174-78. Negligent misrepresentation causing physical loss is not considered in this thesis. 2 Only since 1963 and the seminal House of Lords decision in Hedley Byrne & Co. v. Heller & Partners Lid? has Anglo-Canadian law recognized such a claim. Two elements of the claim were novel. Negligence law was being extended to cover words, and to cover pure economic loss.4 One of the concerns with extending liability in this way was the spectre of mdeterrninate liability. Misinformation could lead to extraordinary financial losses. Words and money can travel great distances and with ease. The courts have addressed this and other concerns by circumscribing the liability rules for negligent misrepresentation. Ordinary negligence rules, which may be sufficient to found a duty of care in cases of physical loss, are not adequate to the task in this area. Something more is required. All five Law Lords wrote judgments in Hedley Byrne. Simply put, they decided that liability for careless words was premised on the need for a "special relationship" between the parties, which was conceived as an analogue to fiduciary and contractual relationships, relationships where such liability has already been recognized. What constituted a special relationship was not entirely clear but two requirements were stressed: reliance by the information recipient, on the one hand, and voluntary assumption of responsibility by the information provider, on the other. The former focuses on the expected behaviour of the plaintiff (in response to the defendant's conduct) and the latter looks to some form of assent by the defendant. More recendy, the House of Lords in Williams v. Natural Life Health Foods Lid.5 appears to have adopted voluntary assumption of responsibility as the touchstone of liability. In Canada, the Supreme Court of Canada has favoured a test based on foreseeable and reasonable reliance: see Hercules Managements Lid. v. Ernst & Young.6 Both of these concepts have difficulties. Neither is consistently defined in the case law. Another problem is that the two concepts often appear together (as they did in Hedley Byrne) and their relationship is not always clearly settled. Further, the contexts in which they are to be applied are not always well defined. Do they only apply to economic loss cases, for instance? Or could they have broader application in negligence or tort law generally?7 3 (1963), [1964] A.C. 465, [1963] 2 All E.R. 575 (H.L.) [Hedley Byrne cited to A.C] 4 In fact, negligently caused economic loss could already be recovered, but only in a limited context: see infra note 696 and accompanying text. 5 [1998] 1 W.L.R. 830, [1998] 2 All E.R. 577 (H.L.) [Williams cited to ALL E.R.]. 6 [1997] 2 S.C.R. 165,146 D.L.R. (4th) 577 [Hercules cited to S.C.R.]. 7 See Kit Barker, "Unreliable Assumptions in the Modem Law of Negligence" (1993) 109 Law Q. Rev. 461 at 462-63. The weaknesses and strengths of these concepts will be analyzed in the following chapters. 3 A test of liability based on reliance fits the traditional model for tort liability, one where legal responsibility is imposed by reference to a fixed standard of conduct. Voluntary assumption of responsibility, on the other hand, bears some resemblance to the contract model, where the parties have the power to define the nature of their relationship. H.L.A. Hart described the difference between rules of liability in contract and tort as follows: There is some analogy.. .between.. .general orders [i.e., rules of conduct backed by the threat of force, such as the criminal law] and the law of torts, the primary aim of which is to provide individuals with compensation for harm suffered as the result of the conduct of others. Here too the rules which determine what types of conduct constitute actionable wrongs are spoken of as imposing on persons, irrespective of their wishes, 'duties' (or more rarely 'obligations') to abstain from such conduct. .. .But there are important classes of law where this analogy with orders backed by threats altogether fails, since they perform a quite different social function. Legal rules defining the ways in which valid contracts or wills or marriages are made do not require persons to act in certain ways whether they wish to or not. Such laws do not impose duties or obligations. Instead, they provide individuals with facilities for realizing their wishes, by conferring legal powers upon them to create, by certain specified procedures and subject to certain conditions, structures of rights and duties within the coercive framework of the law.8 The duty of care in negligent misrepresentation based on assent or voluntary assumption of responsibility is analogous to the contract model, but it is not identical. For instance, an agreement is not required. The choice is solely the defendant's whether the duty is undertaken. Also, the level of care will be typically set according to the usual standard in negligence law: the standard of the reasonable person, or possibly a modified standard based on a reasonable person similarly situated to the defendant. Such an approach incorporates elements of both traditional tort and contract liability. Throughout the thesis, for brevity, I frequendy refer to the "foreseeable and reasonable reliance" test as the reliance model, and the "voluntary assumption of responsibility" or "assumption of responsibility" tests (they are generally taken to mean the same thing) as the consent model. 8 H.L.A. Hart, The Concept of Law, 2nd ed. (Oxford: Oxford University Press, 1994) at 27-28. Hart went on to describe a system of law made up of primary duty-imposing rules and secondary rules which confer powers: see c. V. Secondary rules include a subset which he referred to as "rules of change". Rules of change comprise in part private power-conferring rules such as the rules relating to the formation of contracts, which in effect contemplate "the exercise of limited legislative powers by individuals" (at 96). 4 1.2 THESIS PLAN 1.2.1 Research Approach The nature of the analysis of an area of law, such as this one, depends on the type of research undertaken. No standard or agreed taxonomy of legal research categories seems to exist. One attempt at classification was put forward in a report on law and learning to the Social Sciences and Humanities Research Council of Canada9 - it identified four main areas of legal research: conventional research, legal theory, fundamental research and law reform research.10 Conventional research is the process of locating, updating, analyzing and synthesizing legal rules, usually for the purpose enabling legal practitioners to resolve specific legal problems. This type of research is sometimes referred to as doctrinal research. Comparative and historical legal research is possible using conventional research methods.11 Legal theory, or theoretical research, while it may be grounded in conventional research attempts to go one step further by providing a unifying theory or perspective. Legal theory is described in the Law and Learning report as follows: Legal theory.. .is explanatory and evaluative: it seeks to tell us, for example, how judges do or should decided cases, or how particular solutions do or should reflect underling values in the law. Inevitably, therefore, legal theory makes certain assumptions about the nature of knowledge, language, law or society, and risks leaving such assumptions unstated and unexplored.12 The idea of developing a unifying legal theory based on underlying social policies, values or objectives is not new. In one of the most famous common law cases, McAlister (Donoghue) v. Stevenson,^ Lord Atkin outlined a general principle in the field of negligence law based on the concept of neighbourhood or proximity. His neighbour principle drew on moral teaching which he believed was ingrained in British law; specifically, he based his principle on the golden maxim that you should do unto others as you would have them do unto you. He was thus able to bring the existing categories of negligence under one analytical framework, a 9 Canada, Report to the Social Sciences and Humanities Research Council of Canada by the Consultative Group on Research and Education in Law, Law and Learning (Ottawa: Supply and Services Canada, 1983) [Law and Learning report]. 10 Ibid, at 65-71. At 66, the authors point out that while these terms might help to typify research for the purposes of comparison, each is an artificial construct not likely to be a completely accurate characterization of any particular work. Further, these research approaches are not mutually exclusive. 11 However, both historical and comparative research can also take on an interdisciplinary dimension and therefore become fundamental research, described below. 12 Law and Learning report, supra note 9 at 68. 5 framework, it should be noted, which at the time the case was decided did not include careless words. In more recent times, a similar struggle is underway as courts grapple with determining an appropriate theory of liability to explain fiduciary doctrine outside of established categories.14 This could have implications for how the liability should be approached in negligent misrepresentation. A theory, properly so-called, should have predictive value15 and not be purely descriptive. There is a danger when fashioning a new theory that it will merely describe elements or conditions of liability from past cases without carefully considering whether future cases with those same elements ought also to attract liability. A theory soundly based on underlying policies, values and objectives should avoid this pitfall. The Law and Learning report describes both conventional and theoretical research as research "in" the law. Academics involved in fundamental research proceed from the assumption that research "in" the law is limited and that to gain a deeper understanciing of the law it is necessary to look outside the law. The social sciences, economics, politics, philosophy, psychology, to name a few external chsciplines, all can offer valuable insights into the law. The mterdisciplinary component is what characterizes fundamental research, however, perhaps more significant than its non-legal perspective is the frequent use of non-traditional means of analysis, such as statistical and empirical analysis.16 Reliance on external data may show that a theoretically attractive branch of the law is not working well in practice. The Law and Learning report describes fundamental research as research "on" the law. Law reform research is research which is directed at bringing about change in the law. The Law and Learning report points out that some of the mterdisciplinary research in this area is undertaken by groups with a partisan bias espousing a particular viewpoint. This can result in 13 [1932] A.C. 562, [1932] All E.R. Rep. 1 [Donoghue cited to A.C.]. This case is discussed in more detail in Chapters 3 and 4. 14 Fiduciary doctrine is described in section 4.2.2. 15 Certainly in the "hard" sciences, theories are tested by their predictive ability. 16 It should be noted that these seemingly extra-legal methods of research are not completely foreign to more traditional research. For example, in interpreting legislation, particularly constitution provisions, courts may consider the external context, or legislative facts, using Brandeis briefs. A Brandeis brief may include evidence in the form of statistics, surveys, reports, studies, etc. It is not uncommon for such evidence to be used now to challenge cultural stereotypes and to present non-traditional perspectives. See Ruth Sullivan, Statutory 6 a lack of rigorous criticism by its authors.17 A second more serious problem in the opinion of the Law and Learning report is that much of the law reform research is "located toward the doctrinal end of the methodological spectrum" and, as a result, fails to deal with difficult issues.18 As mentioned, the various research approaches are not mutually exclusive19 or, to borrow a phrase from constitutional law, are not watertight compartments. For example, policy considerations20 and the search for underlying theories and principles have always been a part of traditional or conventional legal analysis, albeit with roles that have been and still are confined or limited. But the historical focus on doctrinal research and limited use of other types of research touches on what is the central criticism of the Law and Learning report, i.e., that we (Canada) "must take all types of research — especially fundamental research "on" the law — much more seriously". In my thesis I include all these forms of research. However, the primary focus is on research "in" the law. Research "In" the Law When the House of Lords in Hedley Byrne conceived of liability for careless words based on a special relationship between the parties, they were expanding the common law incrementally and by analogy (to fiduciary and contractual relationships). The Supreme Court of Canada in Hercules21 decided that it was no longer appropriate to treat negligent misrepresentation as a discrete area of negligence. The Court brought it under the umbrella of the general "neighbour principle" theorized in Donoghue and modified in Anns v. Merton London Borough CounciP2 and later Canadian cases.23 Under this general approach, duty of care is analyzed in Interpretation (Concord, Ontario: Irwin Law, 1997) at 130-31, and Peter W. Hogg, Constitutional Law of Canada, 4th ed. loose-leaf (Scarborough: Carswell, 1997) c. 57. 17 This argument would not apply to publicly funded research by law professors. 18 See the Law and Learning report, supra note 9 at 70. A survey, for example, of B.C. Law Reform Commission (now the B.C. Law Institute) reports reveals a large number of works with little or no interdisciplinary analysis. It should be noted, however, that most law reform commissions do strive for impartiality, which, according to the report, is more difficult for those pursuing privately funded interdisciplinary work. 19 See supra notes 10 and 16. 20 The infusion of policy into legal reasoning borders on being interdisciplinary in some areas, such as when courts consider free and fair competition in economic torts cases. 21 Supra note 6. 22 (1977), [1978] A.C. 728, [1977] 2 All E.R. 492 (H.L.) {Anns cited to A.C.]. 7 two stages. The focus at the first stage is on proximity or neighbourhood, i.e., the specific relationship between the parties. At the second stage the focus shifts to other considerations which extend beyond the parties themselves. According to Hercules, the test at stage one in the careless words context is foreseeable and reasonable reliance. One effect of adopting this test has been to limit the defendant's power to control his or her exposure to liability when giving advice or information. Canada now takes a quite different approach to England, the birthplace in the Commonwealth of the tort of negligent misrepresentation; in England, the defendant's assent is a pre-condition to liability. My "internal" research focuses on an examination of the competing philosophies, policies and social objectives in this area to determine whether they support the new Canadian approach. Underlying the law of torts generally is the principle of corrective justice.24 In Whiten v. Pilot Insurance Co.,25 LeBel J., in dissent on another point, referred to this principle: 152 Since [the Middle Ages], in the common law, tort law has been viewed primarily as a mechanism of compensation. Its underlying organizing structure remains grounded in the principle of corrective justice, although policy concerns may play at times a considerable part in determining the outcome of a particular case, as, for example, in actions based on the tort of negligence.26 Corrective justice refers to the idea that undeserved losses or gains should be eJaminated. It protects the existing distribution of wealth primarily through compensation. The question to be explored is, what is or should be an "undeserved" loss or gain according to this principle? Related to this idea of justice is Lord Atkin's theory of legal responsibility, referred to above, based on religious or moral tenets. These ideas are generally considered to be deontological in nature, i.e., concerned with the inherent nature of duty. Other considerations, external to the relationship, are also examined. Conceptions of distributive justice, for instance, traditionally viewed as foreign to tort law, are now being discussed with more frequency in the case law. Some of the different forms of distributive justice relevant to this area include those based on "deep pockets" and loss spreading. Of the 23 The neighbour principle and duty of care analysis more generally is discussed in section 3.4. 24 Corrective justice can be considered "internal" because of its acceptance as an underlying theory by the courts, but it could also be classed as a branch of philosophy and its analysis a form of external research. The same can be said of distributive justice, although it is more "external" because it is not generally accepted as a relevant consideration. Again, this difficulty of classification only highlights the overlap between the various types of research. 25 [2002] 1 S.C.R. 595, 209 D.L.R. (4th) 257, 2002 SCC 18 [Whiten]. 8 more clearly recognized "external" policies, some support the imposition of duties of care. For example, there is the need to protect members of the public from certain kinds of behaviour and to deter harmful conduct. Against these policies must be balanced various counter policies which support restraint in recognizing duties of care. For instance, there is the idea that the law should promote self-sufficiency and independence. Certainty is another important objective the courts have recognized. And in the field of economic negligence, special considerations arise. Besides the mdeterminacy problem already mentioned, there are concerns that the doctrines of free and fair competition and freedom of contract will be negatively impacted. Finally, a special consideration that relates to negligent misrepresentation is that freedom of speech will be duriinished without a carefully prescribed conception of liability. These theories and policies are examined with a view to determining which model of liability in negligent misrepresentation most effectively balances the competing objectives served by the law. Research "On" the Law In addition to research in the law, I consider an external perspective: the vantage of the economist. The law and economics movement was developed principally in the United States as a means of scientifically assessing the merit of various legal rules and policies. In part, it is a response to the failure of utilitarianism to offer a measurable technique for assessing the happiness of the population in question.27 The economic analysis of law assumes that individuals are rational, that they seek to maximize their wealth, and that they respond to incentives. The idea of wealth maximization plays a central role in law and economics theory. For some theorists like Richard Posner and Guido Calabresi wealth maximization is a normative precept. For others like Ronald Dworkin it lacks the status of a "value". Another important component of economic theory is the concept of "efficiency". Efficiency standards allow economists to compare different states of affairs. In this context, the measured "state" is wealth. Existing or proposed laws can be judged according to how efficient they are in maximizing wealth. A bad law would be one that wastes resources. 26 Ibid, at para. 152. 27 See M.D.A. Freeman, Lloyd'sIntroduction to jurisprudence, 7th ed. (London: Sweet & Maxwell, 2001) at 557. 9 Needless to say there have been criticisms of the some of the basic assumptions of law and economics theory. For instance, efficiency determinations do not account for what could be a prior unfair distribution of wealth. In this respect, it bears some resemblance to the idea of corrective justice. Another criticism of law and economics theory is that it does not account for values that cannot be quantified in financial terms. I do not propose to challenge the law and economics theory itself, however, but rather to examine the theory primarily as it relates to tort law, and to determine if it offers any insights into the appropriate basis of liability in negligent misrepresentation. There has been little scholarship in this particular area. Part of reason is the special status of "information'', as opposed to more traditional forms of property or services, in economic theory. Information is difficult to value and easy to reproduce. Other difficulties relate to the range of contexts in which negligent misrepresentation claims can arise. They can arise in simple advice situations like Hedley Byrne, in the context of contractual negotiation or performance, or in wider contexts, such as the auditors' liability cases, where large numbers of shareholders or investors rely on corporate financial statements. There is also a considerable range of differences depending on the particular defendant. For instance, a large bank will likely be able to spread liability costs more efficiendy than a small firm of accountants. As will become apparent, given the complexity of the questions involved, making a final decision about the most efficient rule of liability would require complex experimentation with different rules. Possible avenues of such research are suggested in the final chapter. 1.2.2 Thesis Outline This thesis is about what the appropriate basis of liability for negligent misrepresentation causing pure economic loss should be. The emphasis is on the duty question as opposed to the other elements of the cause of action. As mentioned, Hercules brought the Hedley Byrne claim under traditional negligence duty analysis and in the process, intentionally or not, sacrificed the voluntarism that was part the law previously, at least according to Hedley Byrne. A recent decision of the British Columbia Court of Appeal, Micron Construction Lid. v. Hongkong Bank of Canada,2* highlights the significance of this change. A bank was held liable for a 28 Micron Construction Ltd. v. Hongkong Bank of Canada (sub nom. Keith Plumbing & Heating Co. v. Newport City Club Ud) (2000), 184 D.L.R. (4th) 75, [2000] 6 W.W.R. 65, 2000 BCCA 141, rev'g (11 June 1998), Vancouver 10 negligently prepared credit reference given gratuitously to a construction contractor. As a result of its reliance on the reference, the contractor suffered damages. Without more, this is not remarkable case. However, the bank had given its opinion with a disclaimer of liability. By focusing on the reasonableness of the contractor's reliance and the not the assumption of responsibility by the bank, the Court of Appeal was able to find the bank liable. In Chapter 2, I discuss the facts in detail and introduce the problems posed by the reasoning. The following chapters explore the law in more detail. Chapter 3 looks first at general tort theory including corrective justice and various mstrumentalist objectives (economic analysis is included here). Next, the idea of duty of care in negligence is considered, tracing its development from Donoghue up to the present. The final section considers the implications of the many theories and policies for an approach to Uability in negligent misrepresentation. In Chapter 4, the focus shifts from the theoretical to how the theory has manifested itself in the law. At the end of the chapter there is a comparative analysis with the law in four other countries: the United Kingdom, Australia, New Zealand and the United States. Chapter 5 is described briefly in the next section. 1.3 PROPOSAL FOR IMPROVEMENT Chapters 5 sets out my conclusions why the reliance model of liability is flawed. I argue that in order to most effectively balance the competing policies and objectives in this area a new model should be substituted based on consent. I include some specific proposals for improvement. I suggest how the consent the model could be clarified and implemented, and I also set out some indicators of consent that could be used to assess whether a defendant has assumed an obligation in a particular case. Recognizing that the reliance test in Hercules is here to stay for a while, I have included a brief section on how to "manage" the current reliance regime in terms of controlling liability. The final section makes some suggestions for further study. C953064 (B.C.S.C.), additional reasons at (28 September 1998), Vancouver C953064 (B.C.S.C.), leave to appeal to S.C.C. refused 264 N.R. 200 (note), 152 B.CA.C. 23 (note), 250 W.A.C. 23 (note) (S.C.C). Although this case is reported under the name, Keith Plumbing & Heating Co. v. Newport City Club Lid., the only contestants at trial and on appeal were Micron Construction Ltd. and the Hongkong Bank of Canada. For this reason, it is commonly referred to as the Micron Construction decision, and I refer to it as such throughout this thesis. Paragraph references are to the Court of Appeal decision. 11 Chapter 2 THE MICRON CONSTRUCTIONDECISION In February 2000, the British Columbia Court of Appeal handed down a decision29 which has been described as "revolutionary"30 and which has significant implications for the banking community, other professional organizations, and advice-givers generally. In an apparent break with almost 40 years of precedent starting with the seminal case, Hedley Byrne, the B.C. Court held that an inaccurate banking credit opinion which included a standard disclaimer of responsibility was actionable. There is a concern about the potential "chilling effect" the decision will have on the willingness of institutions and professions to provide gratuitous advice and information.31 Although the argument before the three appeal judges was almost exclusively concerning fraud,32 Esson J.A., writing for the majority of the Court, dispensed with this argument summarily,33 and based his judgment on the law of negligent misrepresentation. Besides being an mteresting story about grandiose plans, high flyers and business risk, this case also focuses attention on one of the more difficult areas of the law: liability for careless words. The Canadian courts have recently broken ranks with other jurisdictions in their treatment of this area and Micron Construction serves to highlight the importance of having fair and workable principles — a predictable set of guideposts — for the commercial world when it comes to 29 Micron Construction, supra note 28. 30 Susan A. Griffin, "Hedley Byme Revisited" in Torts - 2001 (Vancouver: The Continuing Legal Education Society of British Columbia, 2001) c. 2 at 2.1.14. Susan Griffin is a partner with Fraser Milner Casgrain, the law firm representing the Hongkong Bank of Canada in the Micron Construction case. See also Jan Weir, in "B.C.C.A. Overrules Hedley Byrne" (June 2000) 20 Lawyers Wkly. No.7, 15, who described the decision as "radical". 31 Griffin, ibid, at 2.1.22. 32 In its factum, the appellant Micron Construction only raised the issue of fraudulent misrepresentation, and the written argument of the respondent Hongkong Bank of Canada only responded to that issue. Similarly, the focus of the oral argument before the British Columbia Court of Appeal was on fraudulent misrepresentation: Kelly Geddes interview, June 13, 2002. Kelly Geddes, a former partner with Fraser Milner Casgrain, was part of the team presenting the case for the Hongkong Bank of Canada. 33 Esson J.A. held that the fraud argument raised a credibility issue and that it was not open to the Court of Appeal to disturb the factual finding of the trial judge that there had been no intent to deceive: Micron Construction, supra note 28 at para. 27. 12 liability for negligent misinformation. While a successful suit against a bank for careless advice might not inspire a cri de cceur for a change in the law from many customers, a closer look at the judgment reveals that it has broader implications worth considering. 2.1 FACTS OF MICRON CONSTRUCTION A large-scale project was conceived by a number of Hong Kong "industrialists and developers"34 to develop an 18-hole executive golf course, a country club house and an adjacent residential area in Squamish, British Columbia. As well, the developers contemplated as part of the project the conversion of an existing bunding in downtown Vancouver into a luxurious business, social and recreation club ("city club") to complement the golf and country club facilities in Squamish. The corporate vehicle for the developers of the city club was Newport City Ltd. ("Newport"), the general contractor was Ledcor Industries Ltd. ("Ledcor"), and the banker for the developers was the Hongkong Bank of Canada35 ("Bank"). Only the city club went beyond the pknning stage, construction of which began in July 1994. Micron Construction Ltd. ("Micron"), which had won the bid on the supply and installation of form-work and the placing of concrete for a total of $1.4 million, was the first major trade on the job after demolition. Ledcor had pressed the Bank for confirmation that the financing315 was in place a number of times, and the Bank knew that any assurances would be passed on to subtrades bidding on the city club. The Bank, through one of its representatives, Mr. Tarn, had provided some letters which Ledcor felt were not sufficient because they were qualified.37 Finally, Mr. Tarn provided the following letter which concluded with a disclaimer of responsibility: Confidential September 29,1994 TO WHOM IT MAY CONCERN 34 As described by the Hongkong Bank of Canada: Micron Construction, ibid, at para. 3. 35 The Hongkong Bank of Canada is now called the Hongkong and Shanghai Banking Corporation or HSBC. 36 As noted in the reasons for judgment, the financing arrangement for the city club was not typical for construction projects of this magnitude. Instead of the Bank giving a commitment to provide sufficient funds to complete the project, all that was offered was a line of credit with no obligation of advance funds unless fully secured: Micron Construction, supra note 28 at para. 5-6. 37 These two written communications had provided that financing was "subject to final approval and necessary legal documentations" and "subject to fulfilment of certain security and documentation requirements", respectively: Micron Construction, ibid, at para. 11. 13 Dear Sir/Madam RE: NEWPORT CITY CLUB LTD. This is to confirm that the captioned company has maintained an operating account with this Bank, to which loan facilities of low to medium eight figures have been authorized, on secured basis, to finance the acquisition and renovation of their premises at 1155 West Georgia Street, Vancouver. The said account is being operated as agreed. This bank reference is given at the request of the captioned and without any responsibility on the Bank and its signing officers, [emphasis added] This was taken as an assurance that secure financing was in place and this assurance was passed on to some of the subtrades, including Micron. In fact, security for the financing was not fully in place. Shortly after writing this letter, Mr. Tam left the employment of the Bank and starting working as a financing consultant with an office in the same bunding as Newport. Newport was one of his clients. The trial judge and the Court of Appeal accepted the fact that, despite the appearance of a conflict of interest, Mr. Tam did not intend to mislead.38 However, the Court of Appeal did find that he had at least acted without reasonable care in drafting this letter given that it was not qualified in the clear way in which the earlier communications had been which was likely the result of his lack of impartiality at this time.39 After two consecutive progress payments were delayed, Micron and its bank, the Royal Bank, sought further assurances from the Hongkong Bank of Canada. In early November, over the phone, both the account representative who had taken over for the now departed Mr. Tam and the branch manager negligently asserted, but again without intent to deceive, that financing was secure.40 Micron concluded that the lateness of the payments was the result of bureaucratic delay. The trial judge found that these oral assurances were ckrifying "extensions" of the September letter, but the Court of Appeal found that they were separate unqualified assurances as the financial wherewithal of the developers.41 The significance of this distinction was important to how the disclaimer in the September letter related to these later conversations. By January 1995, it became clear that the security for the financing required by the Bank was not going to materialize — Newport was unable to meet its commitments and the project was 38 Ibid, at paras. 35, 41-42. 39 Ibid. 40 Ibid, at para. 57. 41 Ibid, at para. 105. 14 closed down. Micron commenced an action against the Bank for negligent and fraudulent misrepresentation. The Bank believing that its disclaimer of responsibility provided a clear answer based on Hedley Byrne applied for dismissal by way of a summary trial.42 2.2 IN THE BRITISH COLUMBIA SUPREME COURT Micron argued that a summary trial was not appropriate to deal with a claim of fraudulent misrepresentation. The trial judge held that Micron had not placed sufficient evidence before the Court to support the fraud claim, but dismissed the Bank's application to dismiss as premature giving Micron a chance to adduce additional evidence. The order of dismissal was made with liberty to renew, which the Bank did several months later. The same trial judge heard the renewed application. She held that the evidence did not support a fmding that the representations were false, or that the Bank's representatives knew" they were false or made the representations recklessly. Micron's claim for fraudulent misrepresentation was therefore dismissed.43 Concerning the negligent misrepresentation claim, the trial judge did not deal specifically with whether the conduct of the Bank was negligent as distinct from fraudulent. But it was apparent that she believed the disclaimer, which was almost identical to the one in Hedley Byrne, was conclusive of the negligent misrepresentation claim.44 Given her fmding that the representations were not false, this would have been sufficient reason to dismiss this claim. 2.3 IN THE BRITISH COLUMBIA COURT OF APPEAL Micron appealed to the British Columbia Court of Appeal. The only respondent was the Bank, the claim having been dropped against the other defendants. Micron's appeal was based solely on fraudulent misrepresentation. Presumably, counsel for Micron believed the negligent misrepresentation argument would be unsuccessful because of the disclaimer. As mentioned, the fraud claim was dismissed in short order.45 However, without the benefit of written argument,46 Esson J.A. went on to write a groundbreaking judgment based on 42 Pursuant to British Columbia, Rules of Court, r. 18A. 43 Micron Construction, supra note 28 at para. 25. 44 Ibid, at para. 26. 45 Supra note 33. 15 negligent misrepresentation.47 The majority of the Court of Appeal was of the view that while the fraud issue had been based in part on viva voce evidence the factual issues concerning the negligent misrepresentation claim were based almost entirely on written evidence. The Court of Appeal was therefore in as good a position as the tidal judge to resolve these issues.48 Esson J.A. accepted Queen v. Cognos Inc.49 as authority for the required elements for an action for negligent misrepresentation: 1) duty of care based on "special relationship", 2) false misrepresentation, 3) negligence, 4) reasonable reliance on the misrepresentation, and 5) damages.50 He held that were it not for the disclaimer, it was clear that Micron had established all five elements. However, while the disclaimer had no bearing on the second, third and fifth elements, it had a significant bearing on the first and fourth elements, duty of care and actual reasonable reliance.51 Perhaps the most interesting and significant part of the Court of Appeal's analysis, then, had to do with its treatment of the disclaimer. As mentioned in Chapter 1, the Supreme Court of Canada in 1997 in Hercules clarified some of the uncertainty concerning the first element, duty of care or "special relationship". Esson J.A. concluded that Hercules, which brought negligent misrepresentation witiiin the Anns framework of analysis, had rejected the voluntary assumption of responsibility theory from Hedley Byrne.52 The new test at stage one oiAnns was foreseeable and reasonable reliance, with limitations not relevant to this case to be considered at stage two. The resolution of Micron Construction therefore depended on whether the test of foreseeable and reasonable reliance was met. Foreseeability was not an issue in this case. The reasonableness of the reliance, according to Hercules, was to be determined by reference to various indicia.51 Esson J.A. found that the indicia were all present on the facts and was prepared to assume, 46 Kelly Geddes interview, supra note 32. 47 A more detailed discussion of the analysis in Micron Construction appears in Chapter 4, where negligent misrepresentation is discussed in a broader context — see section 48 Micron Construction, supra note 28 at para. 30. 49 [1993] 1 S.CR. 87, 99 D.L.R. (4th) 626 {Cognos cited to S.C.R.]. Cognos is discussed in more detail in Chapter 4 (section 50 Micron Construction, supra note 28 at para. 59, and infra note 634 and accompanying quote, where the elements are set out in more detail. 51 Micron Construction, ibid, at para. 59. 52 Ibid, at paras. 82-83 53 See infra note 646 and accompanying list of factors. 16 absent the disclaimer, that the reliance was reasonable.54 In discussing the relevance of the (disclaimer to the reasonable reliance question, Esson J.A. emphasized certain factual similarities between Hedley Byrne and Micron Construction: 1) Each case involved a business setting where the plaintiff was considering whether to enter into a contract with a party whose creditworthiness was uncertain.55 2) In both cases, the reason for the plaintiffs inquiry was that it would incur heavy costs and liabilities in advance of payment by the other party.56 3) As in Hedley Byrne, there was no alternative source of information for the plaintiff in this case.57 4) Each case involved standard banking disclaimers, which were not clear to those not versed in banking practice.58 He also noted some factual distinctions: 1) The communication in Hedley Byrne was not directiy between the plaintiff and the defendant bank but through an intermediary (the plaintiffs own bank). Here, the communication was initially between Ledcor directly (on its own behalf and on behalf of "incoming trades" including Micron) and the Bank.59 2) In the initial communication in Hedley Byrne it was made clear that the information was sought "without responsibility on your part". A majority of the Law Lords stressed this fact. Here, there was no such qualification in the request; in fact, Newport, when it saw a draft of the September letter, had asked that the disclaimer be removed. The disclaimer in this case was therefore entirely unilateral.60 3) In Hedley Byrne it was more a case of an error in judgment. Here, there was a clear case of negligence on the part of the Bank — little effort to give a fair assessment had been made.61 4) In Hedley Byrne there was just the one reference. Here, in addition to the September letter containing the disclaimer, there were the November oral communications which were not qualified by a disclaimer.62 Was it still reasonable to rely on the information in the face of the disclaimer? Esson J.A. concluded that it was. He focussed on two of the facts just listed: that there was no alternative source of information and that the disclaimer was unclear. In the result, the Court of Appeal set aside the dismissal of the action by the trial judge and remitted the case to the trial court to assess damages. 54 In fact, Esson J.A. preferred the expression "justifiable reliance". See infra note 653. 55 Micron Construction, supra note 28 at para. 65. 56 Ibid. 57 Ibid, at paras. 94,102. 58 Ibid, at para. 98. 59 Ibid, at para. 65. 60 Ibid. 61 Ibid. para. 81. 62 Ibid, paras. 43-57,104-06. 17 Ryan J.A., in dissent, was of the opinion that the cusclaimer was detetrninative of the negligent misrepresentation claim, just as it had been in Hedley Byrne. 2.4 HARD CASE? Is Micron Construction a case that turns on a unique set of facts, or is it a marked departure from the approach taken by the courts since Hedley Byrne (at least until Hercules)} If it is the former, the case is not of singular importance. If the latter view is accepted, the adage "hard cases make bad law" may be appropriate. Was Esson J.A. distorting the law in this particular case to avoid a harsh result creating a bad precedent in the process? On the first point, that this is a unique case, a closer look at the facts as found by the majority is necessary. In finding that Micron reasonably relied on the written and verbal communications with the Bank, Esson J.A. emphasized that the Bank was Micron's only source of information and that the disckimer was unclear. These factual findings are questionable. Concerning the lack of an alternative source, while information from the Bank may have been the most comforting, Micron could have approached Newport, or even the Hong Kong mdustrialists, for additional financing details. And concerning the disclaimer's lack of clarity, the statement that the information was given "without any responsibility on the Bank" is a standard wording, as acknowledged by the Court, and does not seem particulady arcane. Micron's president testified that the disclaimer "sounds like boiler plate" and that "there has to be some truth in the top part of the letter".63 This suggests that he understood the disclaimer's meaning; it was more that he did not think he should have to take it at face value. If Esson J.A. were relying heavily on these factual inferences in support of his reasonable reliance conclusion, which seems to be the case, his reasoning is unconvincing because the inferences were not justified. Even accepting these factual inferences, however, it should also be noted that they were factual similarities with Hedley Byrne. Why then a different conclusion? One reason, of course, was Esson J.A.'s argument that Hercules changed the law affecting the significance of these facts? But he didn't stop there. At the end of his judgment he added that the Bank, having failed on the reasonable reliance issue even with its disclaimer, "would have been liable on the law as it 63 Ibid, at para. 116. 18 stood before Herculef'64. This somewhat cryptic comment is not supported by authority, particularly Hedley Byrne itself. And what of the other facts Esson J.A. emphasized? The other factual similarities with Hedley Byrne, i.e., that both cases involved a business setting and that the defendant's creditworthiness was important to a plaintiff who was advancing significant credit, do not raise any particular issues relating to the chsclaimer. However, the factual cHstinctions merit some comment. The first one, that in Hedley Byrne the communication was through the plaintiffs bank as intermediary whereas in Micron Construction the communication was initially with Ledcor directly (on its own behalf and on behalf of Micron), is not much of a distinction. As far as Micron was concerned it was communicating through an intermediary or agent, at least initially, just as in Hedley Byrne. True, in the later November conversation, Micron was cornmunicating directly with the Bank, but whether communication is direct or through an agent does not seem to be of great significance. In Hedley Byrne, for example, the representation was treated as if it were made directly.65 The communications in the two cases were sufficiently similar in terms of directness; this first distinction should not have been given any appreciable weight. The second distinction was that in Hedley Byrne the mquirer made it clear that the information was sought without an expectation of responsibility on the part of the bank whereas in Micron Construction there was no such initial qualification. Esson J.A. quoted at some length three of the five Law Lords in Hedley Byrne who would have found liability but for the cHsclaimer. He argued that they all placed some weight on the fact that not only the response but also the mquiry was qualified.66 This appears at first glance to be a significant difference. Of the three Law Lords, Lord Pearce mosdy clearly referred to the importance of both the initial request and the disclaimer. However, he did not say the disclaimer by itself would have been insufficient to prevent the assumption of a duty.67 The other two did not base their decision 64 Ibid, at para. 107. 65 See Hedley Byrne, supra note 3 at 482 (per Lord Reid). 66 Micron Construction, supra note 28 at para. 72. 67 Hedley Byrne, supra note 3 at 539-40. 19 on this fact.68 A strong argument could be made therefore that the majority in Hedley Byrne would have reached the same conclusion if only the response had been qualified. The third distinction was that Micron Construction involved a clear case of negligence bordering on recklessness whereas in Hedley Byrne there was a mere error in judgment. Lord Reid did mention in passing that the complaint was "not negligence in the ordinary sense of carelessness, but rather misjudgment."69 However, the case was not decided on that point, but rather the threshold issue of whether a special relationship or duty of care existed. A closer examination of the degree of carelessness would have been necessary if the duty issue had been resolved in favour of the plaintiff. Generally, mere errors in judgment are not actionable in negligence. Whether liability for such errors (akin to the strict liability occurring in contract for broken promises and inaccurate representations) ought to be recognized in negligent misrepresentation is another question. But there was no indication in Hedley Byrne that the existence of the duty was dependent on the degree of negligence involved. This cUstinction does not justify a different conclusion. If Esson J.A. were arguing that the disclaimer was not clear enough to oust responsibility for recklessness or gross negligence as opposed to ordinary negligence, that point was not apparent. His complaint with the disclaimer, discussed above, seemed to be that it was generally vague and not even sufficient to shield the defendant from a claim for ordinary negligence. The fourth distinction, the fact that there were multiple representations in Micron Construction unlike in Hedley Byrne, does not support a contrary result either. Esson J.A. held that the question whether the disclaimer extended to the November conversations was academic, because even if it did Micron's reliance was still reasonable.70 In other words, the number of representations simply reinforced his conclusion as to the reasonableness of the reliance, but had no bearing on the disclaimer's effectiveness. He had already held that the disclaimer was ineffective because the Bank was the only source of information and the Disclaimer was unclear. 68 69 70 All five judgments are discussed in more detail in section 4.1. Medley Byrne, supra note 3 at 489. Micron Construction, supra note 28 at para. 106. 20 A further distinction has been put forward as a basis for lindting Micron Construction and supporting the finding that the disclaimer was ineffective: the personal conflict of interest of Mr. Tarn, the Bank representative providing the initial credit reference.71 The spectre of bias, however, was not something on which Esson J.A. based this part of his decision. The discussion of Mr. Tarn's conflict of interest was in the section of his reasons dealing with negligence, specifically, whether Mr Tarn had exercised reasonable care in providing the assurances relating to the financing. This relates to the third of the five elements of the negligent misrepresentation claim. When Esson J.A. continued with his discussion of the disclaimer and Hedley Byrne, rekting as it does to the first element, he did not refer back to the conflict of interest question. Esson J.A. apparently did not consider this relevant to the question of the reasonableness of reliance in the face of the disclaimer. To summarize the position thus far: If the Court of Appeal's finding that the disclaimer was ineffective turned on the facts and not the new legal regime, it is questionable because the two factual inferences most strongly relied on were not supported by the evidence, and further, even if they were, they did not justify the Court's conclusion (these same inferences could also have been drawn in Hedley Byrne). Also, none of the factual differences with Hedley Byrne were of sufficient importance to allow the Court (and the plaintiff) to ignore the terms under which the financing information was provided. The facts of Micron Construction are not that unique. Despite Esson JA.'s statement that the Bank would have been liable on the kw as it stood before Hercules, he did take a close look at the changes in the kw after Hedley Byrne and particularly as brought about by Anns and Hercules. He concluded that Hercules, in adopting the foreseeable and reasonable reliance test at the first stage of Anns, had rejected the voluntary assumption of responsibility theory. This meant that a cusclaimer, if it were an effective shield to a claim for negligent misrepresentation in the past, was now just one more circumstance courts consider in deciding the reasonable reliance question. But does Hercules go this far? Accepting the facts as Esson J.A. found them, does the new test in Hercules allow for the disclaimer to be overridden? Or did Esson J.A. distort even the new kw? There is considerable doubt whether La Forest J., when he fashioned the new test for liability in 71 See, for example, Susan A. Griffin, "Hedley Byrne Revisited" in Torts - 2001 (Vancouver: The Continuing Legal Education Society of British Columbia, 2001) c. 2 at 2.1.19. ( 21 Hercules, anticipated that disclaimers in cases like Hedley Byrne would no longer be as effective.72 He did not have to consider the question directly because there was no disclaimer in the case before liim. Although a conclusion on this matter was not clearly reached during the summary trial proceedings in Micron Construction, it seems that the trial judge and the parties were proceeding on the basis that a Hedley Byrne-type disclaimer would still be a full answer to a negligent misrepresentation claim. The appeal judgment in Micron Construction launches a discussion about what Hercules has really done. Whether Micron Construction is a misinterpretation of a fundamentally sound approach to negligent misrepresentation or whether the reliance model of liability is itself fundamentally flawed is the subject of the next three chapters. 72 This point is discussed in more detail in section 22 Chapter 3 IN THEORY - A CONCEPTUAL FRAMEWORK 3.1 INTRODUCTION Theoretical approaches to the law are numerous and varied or, to paraphrase Lord Lloyd of Hampstead, there are many rooms in the mansion that is jurisprudence.73 One method of classification separates these approaches into two main camps: analytical jurisprudence and normative jurisprudence.74 These two camps are not mutually exclusive and various theories, perspectives and expositions of the law challenge distinctions that might be drawn between them (e.g., normative ethics versus metaethics), or have elements of both (e.g., critical legal studies, feminist perspectives).75 Analytical jurisprudence generally concerns critical, explanatory and value-free assessments of the law.76 Sometimes the assessments are philosophical in nature, exarnining the internal logic of a system of rules; sometimes the investigations are more empirical in nature. Analytical jurisprudence has many strands and continues to develop new ones.77 Some established areas include the analysis of basic concepts such as cause and responsibility, the creation of conceptual frameworks, the rational justification of mstitutions and practices, and the exarnination of the relation between social objectives and the law.78 73 See Lloyd's Introduction to jurisprudence, supra note 27 at 10. 74 See generally Simon Deakin, "The Evolution of Tort" (1999) 19 Oxford J. Legal Stud. 537, and Jules Coleman, "Tort Law and Tort Theory: Preliminary Reflections on Method" in Gerald J. Postema, ed., Philosophy and the Law of Torts (Cambridge: Cambridge University Press, 2001) at 183. 75 See Lloyd's Introduction to Jurisprudence, supra note 27 at c. 13,14. 76 Even this statement requires qualification, however, because not all analytical jurists believe in the complete separation of law and morals. Hart, for instance, argues for an "inclusive" or "soft" positivism which recognizes the binding value of moral principles provided certain conditions are satisfied: see The Concept of Law, 2nd ed., supra note 8 at 250-54. Others still maintain the more traditional positivist belief that legal status can never be determined by moral argument: see Lloyd's Introduction to Jurisprudence, ibid, at 334. 77 Postmodernism, poststructuralism, deconstruction theory, and discourse analysis — which deal in part with whether objective truth is ascertainable, and with the logic of language systems and their hidden assumptions -can be characterized as forms of analytical criticism. 78 See generally Lloyd's Introduction to Jurisprudence, supra note 27 at c. 6 (passim). 23 Normative jurisprudence, on the other hand, generally concerns the tightness or wrongness of the law based on various conceptions of justice, fairness and morality.79 It involves making value judgments, i.e., it is evaluative "not explanatory. Because there are no universally accepted, and some might say provable, standards of right and wrong, it depends less on "logic" and empiricism than analytical jurisprudence. Some normative analysis focuses on the consequences of the legal response (e.g., utilitarianism, distributive justice), and some is deontological in character, i.e., it is concerned less with the consequences of the legal response and more with duty and responsibility without regard to extrinsic effects (e.g., corrective justice). The maxim "Let justice be done though the heavens may fall"80 reflects the essence of much deontological theory. Another way to classify legal criticism is to focus not on the sometimes difficult separation between analytic and normative approaches, but on the degree to which law is or should be used to further various goals. Viewed this way, the areas of analytical jurisprudence which deal with social objectives, though not evaluative, bear some resemblance to normative approaches which are consequentialist in nature. The two main camps in this method of classification, then, are those which are mstrumentalist in nature, and those which consider duty and obligation without reference broader social objectives. In this chapter, I adopt this method of classification. In the next section, I consider corrective justice, the main deontological approach to tort law. Following this I review the main instrumentaUst approaches. The remaining two sections deal with the duty of care concept. In duty of care analysis, courts refer to both deontological and instrumentaHst theory, but they do so using the language of proximity and policy. Proximity and policy analysis is reviewed with particular emphasis on duties to avoid pure economic loss. The last section considers whether these approaches, subsumed as they are in the duty analysis, provide any insight into how the courts ought to define the duty to use words with care. 79 The word "normative" in this context can cause some confusion. Rules or norms prescribe a course of conduct and are distinguishable from their underlying facts. The study of what "ought" to be or "should" be, as opposed to what "is", is normative. In one sense, therefore, the study of law generally is normative. I use the word here in the sense described above, i.e., meaning evaluative in terms of rightness or wrongness. 80 From the Latin "Fiat justrtia, mat coelum". 24 3.2 TORT LAW AS AN END IN ITSELF - CORRECTIVE JUSTICE There is strength in the argument that tort law, for the most part, developed as a legal response based on a general conception that one has a moral responsibility for harm caused to another,81 and not as a tool for farmering social objectives. In England, ideas about broader purposes and functions that the law might serve beyond meting out "justice" in the particular case came well after basic rules of liability were in place. Some commentators such as Stephen Perry and Ernest Weinrib argue that principles of moral responsibility still form the main theoretical basis of tort law. It is clear that while cause may have played an important role in early English tort law, it was not the whole story. In fact, the development of this area of the law from the eighteenth century to the beginning of the twentieth century was largely concerned with the increasing importance of fault as an element of liability. Current jurisprudential debate in tort law tends to focus on two specific theories: corrective justice theory (which can be considered a deontological approach) and law and economics theory (which is mstrumentalist, and is discussed in the next section). Both involve normative assessments of tort law.82 Most discussions of corrective justice begin with Aristotle and his Nicomachean Ethics.83 In his description of justice in Book V,84 Aristotle refers to two particular forms of justice which have Other forms of responsibility have been debated in more general legal and moral discourse. Besides causal responsibility, one taxonomy also includes role responsibility (based on being in a position of authority in relation to some activity), capacity responsibility (based on the mental capacity of the actor), liability responsibility (based on various notions of fault) and collective responsibility (based on the connection a plurality of individuals has to the activity in question): see Christopher Kutz, "Responsibility" in Jules Coleman & Scott Shapiro, eds., The Oxford Handbook of jurisprudence and Philosophy of ham (Oxford: Oxford University Press, 2002) at 548-49. See generally Ellen F. Paul, Fred D. Miller & Jeffrey Paul, eds., Responsibility (Cambridge: Cambridge University Press, 1999) and Edgar Bodenheimer, Philosophy of Responsibility (Littleton, Colorado: Rothman, 1980). Benjamin C. Zipursky, "Philosophy of Private Law" in Jules Coleman & Scott Shapiro, eds., The Oxford Handbook of jurisprudence and Philosophy of Law (Oxford: Oxford University Press, 2002) c. 16 at 623-31. Zipursky criticizes both these approaches because they ignore the state's role as "enforcer" of private rights of action (at 631-32). The following brief summary is based on the original work: see Aristode, Nicomachean Ethics, trans, by David Ross and revised by JL. Ackrill & J.O. Urmson (Oxford: Oxford University Press, 1998) at V.4, 8. This work, as is the case with his other surviving writings, was likely drawn from lectures notes and was not meant to be read. It is divided into ten "books" and is in many respects incomplete and disjointed; it was almost certainly put together by later editors. See Jonathan Barnes, Aristotle: A Very Short Introduction (Oxford: Oxford University Press, 2000) at 4-5. 25 been considered important in the field of private law by later commentators: distributive justice and rectificatory justice (or corrective justice). Distributive justice, according to Aristode, provides for the distribution of a state's bounty (property and honours, for example) according to merit, but he may have been also thinking of a private law application, such as how partners in a business would share according to contribution. It is unlikely, however, that he had in mind tort law as we conceive it today when he described distributive justice. His account of corrective justice, on the other hand, is clearly concerned with justice in civil disputes generally. It does not question the fairness of the prior distribution of wealth, and assumes the parties are equally deserving. Where one party "inflicts" injury on another, restitution not punishment is required. It assumes a situation where the loss of the injured is equal to the gain of the person mfEcting the injury. Justice seeks the intermediate (alluding his idea of the "golden mean" developed elsewhere in the Nicomachean Ethics) and restores equality. The parties were equal before and now are two units apart; by requiring the return of the gain to the victim the balance is restored. Aristode realized that in many cases (such as those involving physical injuries) the person mfkcting injury would not ordinarily receive a gain in the traditional sense, but he suggested that for the purposes of his theory he would assume some kind of notional gain equal to the estimated loss. Aristode apparency contemplated a form of causal responsibility undedying his idea of corrective justice, but he also recognized that causation alone would not be sufficient. There were degrees of wrongdoing. Assuming voluntariness, the two culpable forms of wrongdoing were deliberately caused harm (premeditated action was worse than acting out of passion) and harm caused contrary to "reasonable expectation" (what he referred to as misadventure and what we now refer to as negligence). The Aristotelian concept of justice (both corrective and distributive justice) has been criticized as an elaborate statement of the obvious, i.e., that justice requires the rendering to each what she is owed. The argument is that Aristode fails to provide the necessary details for determining precisely what is a person's due, and therefore his concept of justice is not a useful 84 Book V is one of four books on moral virtue and is devoted entirely to justice. 26 one.85 This criticism is a little exaggerated, however, at least concerning corrective justice. It is true that the boundaries of corrective justice are less than clear when considered in relation to specific types of conduct, and certain forms of causation and fault, but the framework is there. Key to Aristotle's philosophy is the presumed initial state of equality which must be restored when disrupted. The details rekting to conduct, cause and fault must be worked out to reflect the particular legal system adopting this form of justice. The political and legal philosophy of Immanuel Kant, the interpretation of which is subject to debate, has been applied by some modern tort kw theorists to give normative substance to corrective justice. While Kant's social contract theory may underlie his political and legal writing,86 arguably more important for tort theory is his doctrine of right.87 Bound up in Kant's idea of right are his notions of freedom, free will, and reason. Right refers to the set of conditions whereby one person's will can be unified with the will of another under a universal kw of freedom. The principle of right also applies to actions: a right action is one that does not impinge on the free will or freedom of others.88 While Kant appears to be concerned about the potential effect of actions in determining their "tightness", the normative quality of the action derives from its conception by a free-willing self-determimng individual, not its actual effect. He writes: [A]n action done from duty derives its moral worth, notfrom the purpose which is to be attained by it, but from the maxim by which it is determined, and therefore does not depend on the realization of the object of the action, but merely on the principle of volition by which the action has taken place, without regard to any object of desire.89 [emphasis by Kant] 85 One notable exponent of this view is Hans Kelsen: see What is Justice? Justice, Law, and Politics in the Mirror of Science (Berkeley: University of California Press, 1957) at 125-136. See also Emest J. Weinrib, The Idea of Private Law (Cambridge, Massachusetts: Harvard University Press, 1995) at 66-68 for a summary of this critique. 86 See Immanuel Kant, "Theory and Practice" [or "On the Common Saying: This May Be True in Theory, but It Does Not Apply to Practice"] [1793] in Hans Reiss, ed., Kant: Political Writings, trans, by H.B. Nisbet, 2nd ed. (Cambridge: Cambridge University Press, 1991). See also Wolfgang Kersting, 'Tolitics, Freedom, and Order: Kant's Political Philosophy" in Paul Guyer, ed., The Cambridge Companion to Kant (Cambridge: Cambridge University Press, 1992) at 353-58, and Gregory C. Keating, "A Social Contract Conception of the Tort Law of Accidents" in Gerald J. Postema, ed., Philosophy and the Law of Torts (Cambridge: Cambridge University Press, 2001). 87 The doctrine of right and other related concepts, such as the categorical imperative, were developed in two main works: see Kant's "Fundamental Principles of the Metaphysics of Morals" [1785] and "Critique of Practical Reason" [1788] in Allen W. Wood, ed., Basic Writings of Kant, trans, by Thomas K. Abbott (New York: Modem Library, 2001). 88 See Kersting, supra note 86 at 344-45. 89 See "Fundamental Principles of the Metaphysics of Morals" in Basic Writings of Kant, supra note 87 at 158. 27 A lie, for Kant, therefore violates the principle of right action, even if in the particular case some good results from it. A modern exponent of corrective justice as a foundational theory of tort law following in the tradition of Aristode and Kant is Ernest Weinrib. Professor Weinrib and a few other writers such as Stephen Perry and Jules Coleman have provided a counterbalance to the predominance of instrumentalist theorizing in the last tliirty to forty years. Professor Weinrib argues that the Kantian idea of tight fills the void left by Aristotle's failure to explain why equality should be presumed.90 Kant's equality is not referenced to money or power, but to moral freedom and the power of self-determination. "Accordingly, the equality of corrective justice acquires its normative force from Kantian right."91 Weinrib believes that corrective justice is the underlying theory and is based on a special morality internal to tort law. There are two aspects of this internalism: first, corrective justice only concerns the relationship of doer and sufferer and is not oriented to some external ideal; and second, the morality is founded on doing and suffering (i.e., causation is a "constitutive of tort law as an identifiable legal field").92 Tort law, for Weinrib, is an end itself.93 The point has been made, however, that while corrective justice is generally considered a deontological theory, it is concerned with consequences in a limited sense, i.e., obligation based on a disruption of the status quo and the required restoration of the prior balance.94 Perry argues that to the extent corrective justice theorists focus on the victim's loss and the moral obligation of the causer to pay compensation, they are treating corrective justice as a form of "localized distributive justice".95 Another version of corrective justice is Coleman's "annulment theory", which holds that the wrongful gains and losses that must be corrected or annulled are not the responsibility of the 90 The Idea of Private Law, supra note 85 at 76-83. 91 Ibid, at 82. It should be noted that while Kant's doctrine of right has important implications for tort liability, Kant did not specifically refer to tort law or the civil law equivalent of delict in his writings: see Richard W. Wright, "Right, Justice and Tort Law" in David G. Owen, ed., Philosophical Foundations of Tort Law (Oxford: Oxford University Press, 1995) at 166. 92 See Ernest Q.] Weinrib, "The Special Morality of Tort Law" (1989) 34 McGill L.J. 403. 93 In Ernest J. Weinrib, "Understanding Tort Law" (1989) 23 Val. U.L. Rev. 485 at 526, the author poetically concludes that tort law, like a loving relationship, has no ulterior end, and in that sense "tort law is just like love"! 94 Deontological ethics in its purest form holds that certain acts are intrinsically wrong regardless of consequences, for example, the Kantian idea that it's wrong to tell a lie even if it hurts no one and has only positive results. But the consequentialist aspect of corrective justice, at least the version described above, is limited in the sense that doesn't look beyond the parties themselves. 28 causer but of society generally.96 Under this theory the importance of cause is dirrrinished. Compensation would be funded through a fault pool — persons at fault in the relevant activity would be required to pay into a fund regardless of whether they caused any injury. This version of corrective justice has not been generally accepted and has been criticized as being distributive justice (and not just a localized variety) dressed in another guise.97 Despite copious work on corrective justice theory, there is still no consensus about the extent of its application. Its relevance to actions causing physical loss seems clear. Beyond that, there are questions. For instance, are duties of affirmative action covered by theory?98 Are losses which result from indirect forms of causation requiring the reliance of the plaintiff properly targets of corrective justice? Concerning the nature of the loss, there is doubt whether pure economic loss is a "protected interest" in moral responsibility.99 Given that pure economic loss often occurs mdirectly as a result of the plaintiffs reliance, the need for corrective justice in this context is doubly tenuous. While some judges may hold that tort law generally is grounded in corrective justice,100 its application in certain contexts is far from clear. 3.3 TORT LAW AS AN INSTRUMENT Tort law furthers several social objectives, that is, it is "pluralistic".101 In this section, I consider the two most significant consequentialist viewpoints relevant to tort law, those relating to distributive justice and wealth maximization.102 In the last part of this section, I 95 Stephen R. Perry, "The Moral Foundations of Tort Law" (1992) 77 Iowa L. Rev. 449 at 467-474. 96 Jules L. Coleman, "Tort Law and the Demands of Corrective Justice" (1992) 67 Ind. L.J. 349. 97 See, for instance, Stephen R. Perry, in "Comment on Coleman: Corrective Justice"(1992) 67 Ind. L.J. 381. In the face of the criticism of Perry and others, Coleman modified his annulment theory in "The Mixed Conception of Corrective Justice" (1992) 77 Iowa L. Rev. 427. The difference between the mixed conception and the more traditional doing-suffering model is that the focus is on the loss not the wrong. Under the mixed view not all wrongs causing loss are the subject of corrective justice, only those causing wrongful loss for which the wrongdoer is responsible (at 444). Coleman leaves open for further examination what types of wrongdoing are covered by his mixed conception of corrective justice. 98 Kant's doctrine of right does not cover nonfeasance: see The Idea of Private Law, supra note 85 at 97. 99 Stephen R. Perry, 'Trotected Interests and Undertakings in the Law of Negligence" (1992) 42 U.T.L.J. 247. 100 See LeBel J. in Whiten, supra notes 25 and 26 and accompanying quote. 101 See Izhak Englard, The Philosophy of Tort Law (Aldershot, Hants, England; Brookfield, Vt: Dartmouth Pub. Co., 1993) at 64-70, and Bruce Chapman, 'Tluralism in Tort and Accident Law Toward a Reasonable Accommodation" in Gerald J. Postema, ed., Philosophy and the Law of Torts (Cambridge: Cambridge University Press, 2001) at 276. 102 when discussing consequences and normative legal theory it is important to distinguish between the factual consequences of an act or omission and the consequences of the legal response. For example, in utilitarian theory the tightness or wrongness of certain behaviour may be judged according to its consequences (sometimes referred to as act utilitarianism). Similarly, the value of a particular law may be judged according to 29 look at some "general" functions of tort law, such as compensation and deterrence - the debate here is teleological but non-evaluative in a moral sense.103 3.3.1 Distributive Justice Put simply, distributive justice is concerned with the way assets and entitlements are shared among members of a society. As mentioned, Aristode's sketchy account of distributive justice is seemingly less directed toward private disputes than it is to "constitutional" arrangements. Distributive justice occurs "in distributions" of honour and money, whereas it is corrective justice which occurs "in transactions" between individuals.104 According to Weinrib, however, Aristode's classification is conceptual not empirical and neither form of justice has an exclusive mandate over one particular part of the empirical world. If, for example, a society decides to distribute the cost of accidents among participants in the relevant activity rather than have the primary causer restore equality "correctively", this simply reflects two different conceptions of the interaction in question.105 In modern times, debates over which is the appropriate approach frequently arise in the context of automobile insurance and workers' compensation programs. One of the most sigriificant recent treatises on justice, and distributive justice in particular, is . John Rawls' A Theory of Justice, first published in 1971 and revised in 1999.106 He expresses his general conception of justice as follows: All social values [or social primary goods] - liberty and opportunity, income and wealth, and the social bases of self-respect — are to be distributed equally unless an unequal distribution of any, or all, of these values is to everyone's advantage.107 Injustice, then, becomes "^equalities that are not for the benefit of all".108 Rawls' theory and the principles he derives are based on a modified form of "social contract" theory. Instead of its consequences (sometimes referred to as rule utilitarianism). For instance, lawmakers may adopt a certain rule, e.g., "stand by your word", because of a belief it will benefit society as a whole, and to the degree it succeeds in meeting that objective it is a good law. See generally Paul Edwards, ed., The Encyclopedia of Philosophy (New York: Macmillan, 1967) s.v. "utilitarianism" (vol. 8 at 206). 103 I draw no distinction between various terms such as function, goal, aim, end, purpose, social objective, etc. used in the context of this type of analysis. 104 Nicomachean Ethics, supra note 83 at V.2 (1131al). 105 See The Idea of Private Law, supra note 85 at 69-71. 106 John Rawls, A Theory of fustice (Cambridge, Massachusetts: Harvard University Press, 1971) and A Theory of Justice, rev'd ed. (Cambridge, Massachusetts: Harvard University Press, 1999). Rawls also developed his ideas on justice in another work, Political Liberalism (New York: Columbia University Press, 1993). 107 Ibid., A Theory of Justice (1999) at 54. 30 resorting to a fictional contract our forebears entered into (in the tradition of Hobbes, Locke and Rousseau), he imagines a suitable "original position" where a hypothetical committee of individuals would decide upon the best social theory. These individuals would frame a social structure under a "veil of ignorance", i.e., without knowing the details of their own positions. In this way, they would not be tempted to create principles which serve their own or others interests. This process yields what Rawls calls "justice as fairness". Rawls argues that two principles of social justice would be adopted together with two priority rules.109 The first principle is the principle of equal liberty under which each person is to have an equal right to basic liberties (e.g., the right to vote and to hold public office, freedom of speech and assembly, liberty of conscience and freedom of thought, various legal rights, such as freedom of the person, freedom from arbitrary arrest, and the right to hold personal property).110 The second principle concerns the distribution of wealth and income and other economic and social resources besides personal liberty. This principle allows for social and economic inequalities provided they benefit the least advantaged overall. This part of the second justice principle is referred to as the "difference principle". The first priority rule ranks liberty (the first principle) over economic and social resources (the second principle). Basic liberties may be restricted only for the sake of liberty, i.e., to strengthen the total system of liberty, but not for increasing the lot of the disadvantaged (for example). The second priority rule ranks the second principle of justice over efficiency,111 which means, in part, that maximizing the sum of advantages would not be just if the least advantaged did not also benefit. The two principles of justice and the priority' rules relate to institutions (by this Rawls means the basic structure of society, which includes such things as the system of government, markets 108 Ibid. 109 The final formulation of these two principles together with two priority rules appears in A Theory of justice (1999), ibid, at 266-67. The justice principles are formulated slightly differently in Political Liberalism. 110 ^4 Theory of justice (1999), ibid, at 53. The basic liberties, the subject of the first principle, are the highest order of social primary goods. Freedom of contract, according to Rawls, is not a basic liberty and is therefore not protected by the priority of the first principle (at 54). 111 When Rawls refers to "efficiency" he means Pareto optimality: ibid, at 58. Pareto optimality is described below in section 31 and systems of property).112 How does Rawls' theory apply to tort law? One commentator suggests that it does not require any tort system at alL given that the focus is on a constitutional order.113 It is not entirely clear, for instance, whether Rawls contemplates some kind of government obligation, based on his justice principles, to compensate victims of tortious behaviour. His theory may be too general for the specific concerns of tort law. It should be noted that Rawls recognized that separate principles apply to individuals and their actions (within the context of the overarching mstitutional principles). He outlines a principle of fairness together with certain natural duties.114 The principle of fairness requires a person to do his part as defined by the rules of an institution provided the instimtion is just (i.e., it satisfies the two principles of justice) and the person's participation is voluntary (voluntariness can be based on an express or tacit undertaking, or simply by accepting benefits). The natural duties include the duty to help others in need provided there is no excessive risk (Rawls refers to this as a duty of "mutual" aid), the duty not to harm or injure another, and the duty not to cause unnecessary suffering. Rawls' second principle deals with how major mstitutions ought to regulate the distribution of income and wealth,115 and an individual's duties are predicated on that principle. But if these instimtions (mcluding a society's economic system) do not operate according to this principle,116 it is wasteful exercise to model a tort system based on his theory without the possibility of the necessary underlying structural change. It is unlikely Rawls' theory of social justice will be adopted in its entirety anytime soon. There is a general consensus that current tort kw regimes pky a rektively small role in effecting distributive justice. Damage awards usually protect the pre-existing distribution of 112 A Theory of justice (1999), ibid, at 47-52. 113 See John B. Attanasio, "Aggregate Autonomy, the Difference Principle, and the Calabresian Approach to Products Liability" in David G. Owen, ed., Philosophical Foundations of Tort haw (Oxford: Oxford University Press, 1995) at 305-06. However, Attanasio does state that the primary good "self-respect" arguably supports a system of accident deterrence based on the Calabresian approach to products liability. 114 A Theory of justice (1999), supra note 106 at 93-101 and 293-343. Rawls does not develop the individual justice principles in much detail, implying that they are sketched in for the sake of completeness. 115 Mat 79. 116 It seems clear our capitalist, free market system does not promote equality, given that the principle of "survival of the fittest" is ingrained in it and produces, if not requires, both winners and losers. Rawls states that one of the natural duties of individuals is not to harm or injure others. While this may be generally accepted as a principle concerning physical harm, our market system sanctions economic harm provided it is 'legal". 32 wealth.117 However, some areas of tort law (in some jurisdictions) are influenced by distributional aims. For example, most States in the United States impose strict liability on manufacturers for injuries caused by product defects; 118 to the extent that the law in these jurisdictions reflects a "deep pockets" approach, a limited form of distributive justice is being dispensed. The same can be said of jurisdictions with no-fault workers' compensation schemes. And in negligence law generally, courts have recently begun to openly consider the distributional effects of recognizing (or not) a duty of care.119 But despite these influences, it is corrective justice that most clearly explains tort law today. 3.3.2 Law and Economics Given the importance of compensation as a remedy in tort law, it is not surprising that some of the theoretical research in this field is of an economic nature — it is even less surprising when the research relates specifically to economic negligence. In the last 40 years, particularly in the United States, the economic analysis of law has become one of the most dominant theoretical perspectives, not just in tort law, but in law generally.120 In the following discussion, I canvass some of the main tenets of the law and economics movement and its influence on the law of torts. The Enterprises of Law and Economics Professor David Friedman refers to three enterprises of law and economics: 1) to predict the economic consequences of a given law, 2) to explain the existence of rules we observe, and 3) using economic analysis to decide what the law should be.121 The first two enterprises are analytical in nature (some law and economics scholars refer to predictive and descriptive 117 Robert M. Solomon, R.W. Kostal & Mitchell Mclnnes, Cases <& Materials on The Law of Torts, 5th ed. (Toronto: Carswell, 2000) at 502. 118 Restatement (Third) of Torts: Products Liability §§ 1 -2 (1998). 119 See, for example, McFarlane v. Tayside Health Board (1999), [2000] 2 A.C. 59, [1999] 4 All E.R. 961 [McFarlane cited to A.C.]. McFarlane is discussed in more detail below in section 3.4. 120 Over 100 years ago, Justice Oliver Wendell Holmes predicted that the future study of law would belong to "the man of statistics and the master of economics" in "The Path of the Law" (1897) 10 Harv. L. Rev. 457 at 469. In the 1960s, economic analysis of law started in earnest with commentators on anti-trust law, and with the publication of seminal articles by Guido Calabresi, "Some Thoughts on Risk Distribution and the Law of Torts" (1961) 70 Yale L.J. 499, and Ronald H. Coase, "The Problem of Social Cost" (1960) 3 JL. & Econ. 1. With the first edition of Richard Posner's Economic Analysis of Law (Boston: little, Brown, 1973) economic analysis had arrived as a fully-fledged general theory of law. 121 David D. Friedman, Law's Order What Economics Has to Do With the Law and Why It Matters (Princeton: Princeton University Press, 2000) at 15-17. See also Jules L. Coleman, 'Efficienq', Exchange, and Auction: Philosophic Aspects of the Economic Approach to Law" (1980) 68 Cal. L. Rev. 221 at 221-22. 33 analysis as positive analysis);122 the third is prescriptive (and to the degree that the "oughts" and "shoulds" rest on ethical or moral judgments, it is also normative). Predicting the economic effects of laws is rarely contentious. It is hard to argue that understanding the consequences of a law, economic or otherwise, is not helpful for those studying or making law, especially when those consequences are less than obvious. Ideally, it will involve empirical study to verify the accuracy of the predictions: the law either increases wealth or it does not. Describing the law as a wealth-maximizing tool is more problematic.123 Posner admits that not all laws are concerned with economic results, but he argues that the common law (i.e., the law comprised of judge-made rules) is best explained as a system of wealth maximization. And while this goal might not have been clearly articulated in the past, it should not be surprising that judges were moving in this direction given that many common law doctrines date back to the nineteenth century when laisse^ffaire ideology was prevalent among the educated classes.124 Prescriptive and normative analysis is the most controversial aspect of law and economics theory. Following this enterprise, laws that do not increase wealth are considered bad and the prescription is change so that they do. Wealth maximization must be accepted not only as a laudable social objective but also as the overtiding social objective. All three enterprises, predicting, explaining and prescribing, rely on a number of basic assumptions about human behaviour. Prescriptive analysis, in particular, also depends on concepts of efficiency. A state of affairs or a proposed change is efficient if it promotes an "allocation of resources in which value is maximized".125 Policy-makers and judges who subscribe to law and economics theory need to be aware of the different conceptions of efficiency in order to determine if and how the objective of wealth maximization will be achieved by their decisions. Core Assumptions The economic analysis of law proceeds from the assumption that individuals are rational maximizers motivated by self-interest (not to be confused with selfishness) and the assumption that people respond to incentives. From this flow three principles: 1) the law of demand, 122 See, for example, Michael J. Trebilcock, "Law and Economics" (1993) 16 Dal. L.J. 360 at 362. 123 See Richard A. Posner, "Wealth Maximization and Tort Law: A Philosophical Inquiry" in David G. Owen, ed., Philosophical Foundations of Tort Law (Oxford: Oxford University Press, 1995) at 100-101. 124 Richard A. Posner, Economic Analysis of Law, 5th ed. (New York: Aspen Law & Business, 1998) at § 2.2. 125 Ibid, at § 1.2'. 34 which posits an inverse relation between price and quantity demanded, 2) people seek to increase their "wealth" by maximizing the difference between costs and revenues, and 3) in a free market (i.e., one perntttting voluntary exchange), resources are drawn to their most valuable uses.126 An individual maximizes his wealth when he allocates his resources such that they have the most value to him. If he can purchase an asset for less than he would be prepared to pay, or sell an asset for more he would be prepared to take, in both cases, he increases his wealth by the difference. Society maximizes its wealth when all its resources are distributed such that the aggregate individual valuations cannot be increased. Professor Ronald Dworkin is of the view that there are practical difficulties with the concept of wealth maxitnization, aside from objections that it is a normative standard. He notes in particular the problems of cyclicity and path-dependency. Cyclicity arises because of the "grass is greener" phenomenon. The same goods may be valued more in your neighbour's hands than in your own. This could theoretically result in the same goods being transferred back and forth between individuals, each time resulting in an increase of social wealth. Such a possibility he argues is "disagreeable" in a standard of social improvement. The second problem, path-dependency, is likely more common. For instance, a person may acquire a "good" fortuitously (e.g., by accident, lottery or even inheritance) and be unwilling to sell it unless he were paid a much higher price for it than he would be prepared to pay for it ordinarily. If a significant number of people and goods are involved in this type of situation then the final distribution achieving wealth maximization will be dependent on the order of the intermediate transfers. Most kw and economics scholars are not concerned with these possibilities, however, either because assumptions of rationality exclude them or because the concern is primarily with commerckl enterprises where such arbitrariness is less likely.127 Do individuals respond to legal rules, whether in tort, contract, or other areas by evaluating costs and benefits as economists predict? Are legal costs and benefits treated the same way as other costs and benefits? Determining the accuracy of the assumptions and principles upon which the economic analysis of kw is based requires empirical testing. Professor Michael 126 Ibid. c. 1. 127 See Ronald M. Dworkin, "Is Wealth a Value" (1980) 9 J. Legal Stud. 191 at 192. 35 Trebilcock believes that law and economics theory will "ultimately be judged by the empirical vahdity of its propositions."128 Wealth Maximization as a Norm The idea of wealth maximization, which is at the centre of law and economics theory, is considered a moral precept for many jurists.129 The law and economics movement adopted this concept partly because of the failure of utiHtarianism to provide a solution to the problem of inter-personal utility comparisons. How is one person's happiness to be measured in relation to another's? It is necessary to have some fixed standard of utility in order to measure whether an action or change in policy, which improves the position of some and worsens the position of others, increases utility overall. Wealth maximization replaces the vague notion of utility. The fixed measure is price. Different individuals may value "goods" differently, but the unit of valuation is fixed.130 While law and economics theory may have addressed the measurement problem by substituting wealth for happiness (aside from the practical difficulties just noted), it is subject to more substantive objections. For instance, like utilitarianism it fails to deal with distributive concerns. A move from distribution 1 to distribution 2 is judged by whether an increase in utility or wealth has occurred. However, the prior and resulting distributions are not evaluated according to any standard of fairness.131 Another criticism relates to consequentialism or "outcome morality" generally: A person may be justified in violating a principle of right action simply because an overall benefit occurs.132 There is also a problem of incompleteness, in that this theory fails to account for values that cannot be quantified in financial terms. 128 See Trebilcock, supra note 122 at 363. 129 Guido Calabresi and Richard Posner are two of the most well-known proponents of this view. For a thorough challenge to the normative content of wealth maximization, see Dworkin, "Is Wealth a Value", supra note 127. 130 This assumes that each person places the same value on a dollar (or other monetary unit), an assumption that some argue is clearly false: see Uqyd's Introduction to jurisprudence, supra note 27 at 559. 131 See Trebilcock, supra note 122 at 365-66, and Anthony T. Kronman, "Wealth Maximization as a Normative Principle" (1980) 9 J. Legal Stud. 227 at 242 who concludes that the law "should be used to mitigate the effects of the natural lottery; for the law to intensify them is perverse." 132 See Jules L. Coleman, "Efficiency, Utility, and Wealth Maximization" (1980) 8 Hofstra L. Rev. 509 at 511. The force of this criticism, of course, depends on how one defines right action and whether one accepts a deontological approach to duty and responsibility. See generally Ronald M. Dworkin, Taking Rights Seriously (Cambridge, Massachusetts: Harvard University Press, 1977). 36 A more basic criticism of wealth maximization as a moral objective is that it is unclear why wealth should be considered a worthy social goal. Dworkin explains that there are two ways of looking at wealth as a value. First, wealth may be seen as a "component of social value", i.e., something which by itself makes society better off. Second, it may be thought of as an "instrument" of value, i.e., an improvement in social wealth is not desirable for its own sake, but for other improvements that wealth can produce that are valuable in themselves.133 He rejects both the component-of-value and the instrumentaUst arguments: the former because money has no mtrinsic value, unless one is a "fetishist of little green paper",134 and the latter largely because of the difficulty in demonstrating a clear connection between wealth and various independent conceptions of value.135 Efficiency andWealth Maximization In normative economic analysis, wealth maximization is accepted as an ideal. An efficiency determination allows an analyst to establish how a change affects wealth.136 It should be noted that wealth maximization and efficiency are not the same thing. Efficiency standards provide a means of comparing states of affairs and can be used to compare clifferent "characteristics", whether they concern wealth, utility or some other ideal.137 The two principal efficiency concepts in law and economics analysis are the Pareto criteria138 and Kaldor-Hicks efficiency.139 Pareto efficiency (or Pareto optimality) describes a situation where it is impossible to make change without making at least one person believe he is worse off.140 Others may believe they will benefit by change, but the fact that one person will believe he is worse off means the situation is Pareto-optimal. Pareto superiority refers to a change where at least one person will believe he is better off, but no one will believe he is worse off, 133 Dworkin, "Is Wealth a Value", supra note 127 at 194-95. 134 at 201. 135 Ibid, at 205-19. 136 See Trebilcock, supra note 122 at 363. 137 See Coleman, "Effkienq', Utility, and Wealth Maximization", supra note 132 at 521. 138 The Pareto criteria are named after the person who identified them, Vilfredo Pareto, an Italian economist writing at the turn of the twentieth century. 139 Kaldor-Hicks efficiency is based on the work of two British economists, Nicholas Kaldor and John Hicks. See, for example, Nicholas Kaldor, "Welfare Propositions of Economics and Interpersonal Comparisons of Utility" (1939) 49 Econ. J, 549, and J.R. Hicks, "The Foundations of Welfare Economics" (1939) 49 Econ. J. 696 and "The Valuation of Social Income" (1940) 7 Economica 105. 14(1 Robert Cooter & Thomas Ulan, Law and Economics, 3rd ed. (Reading, Mass.: Addison Wesley Longman, 2000) at 12. 37 i.e., there are no losers. Where such a change occurs the resulting position is Pareto-superior to the prior one.141 The two Pareto criteria are related in that a Pareto-optirnal situation is one where no further changes are possible that are Pareto-superior.142 Pareto-superior changes are most easily imagined where they involve simple small-scale voluntary transactions (e.g., a contractual exchange between two persons) with no negative impacts on third parties. But with larger-scale transactions, distributions and changes it is likely that at least one person will consider himself adversely affected and a Pareto-superior move will not be possible. This is problematic. As Dworkin writes: It would be absurd to say that judges should make no decision save those that move society from a Pareto-inefficient state to a Pareto-efficient state. That constraint is too strong, because there are few Pareto-inefficient states; but it is also too weak because, if a Pareto-inefficient situation does exist, any number of different changes would reach a Pareto-efficient situation and the constraint would not choose among these.143 Dworkin's last point is particularly relevant if a judge is confronted with a choice of rules to govern a particular form of liability, each resulting in Pareto optimality. The judge would have no economic criterion for choosing one rule over another. And flipping a coin is an especially arbitrary solution when it is recognized that different changes can result in different states of Pareto optimality, i.e., states with different allocations of resources. Given that different Pareto-optimal distributions are Pareto non-comparable, a reasoned choice between the different distributions would have to be made on non-efficiency grounds.144 Paretian standards, then, are somewhat idealistic and impractical in the context of legal changes which are generally widespread in their effect. Most social policies and legal rules produce both winners and losers.145 Kaldor-Hicks efficiency addresses the impracticality of the Pareto criteria. Accorcling to this test social change will be efficient provided that there are sufficient gains so that the winners could, hypothetically, compensate the losers for their losses making them indifferent to the change, and still have gains left over for themselves.146 Social policies that produce winners 141 Note that establishing "optimality" and "superiority" depends on subjective assessments of good, not objective ones: see Lloyd's Introduction to jurisprudence, supra note 27 at 558. 142 Coleman, "Efficienq', Utility, and Wealth Maximization", supra note 132 at 513. 143 Dworkin, "Is Wealth a Value", supra note 127 at 193. 144 See Coleman, "Efficiency, Utility, and Wealth Maximization", supra note 132 at 513. 145 See Lloyd's Introduction to jurisprudence, supra note 27 at 558. 146 See Trebilcock, supra note 122 at 364. 38 and losers become justifiable. And there is no requirement under Kaldor-Hicks that compensation in fact be paid to the losers. This is what custinguishes Kaldor-Hicks efficiency from Pareto superiority; if the compensation were actually paid to the losers the move would be Pareto-superior.147 There are at least two reasons for not requiring compensation under Kaldor-Hicks: 1) some losers deserve to lose (e.g., where the law breaks up an inefficient monopoly) and 2) it may be costly to compensate losers (the Kaldor-Hicks test assumes compensation will be costless but there may be significant transaction costs).148 However, other than the "greater good" argument, there does not seem to be any persuasive conceptual reason why losers should be content in all cases to be without a right of compensation. One of the main criticisms of the Kaldor-Hicks approach is its sacrifice of voluntarism. Unlike Pareto efficiency, a solution is "coercively imposed after some third-party determination of costs and benefits".149 According to Trebilcock, "[n]eo-classical economists in general attach strong normative value to regimes of private exchange and private ordering..."150 In private dealings, there is in effect a presumption that the exchange will benefit the parties involved, and a distrust of an outside decision preventing or inhibiting their arrangement. However, limits to consent are recognized even in private dealing, and the presumption would be rebuttable by reference to forms of market failure (e.g., failing to consider externalities) or transaction-specific factors, such as contracting or information failures.151 These latter factors, it should be noted, touch on the true voluntariness of the transaction. In the context of broad-scale initiatives (e.g., consumer protection schemes, where Kaldor-Hicks is more relevant), the lack of voluntariness is perhaps less objectionable. Such interferences with the power of choice are an accepted part of social welfare economies which have abandoned unqualified laisse^fairv ideology.152 147 See Uqyd's Introduction to jurisprudence, supra note 27 at 558. 148 Ibid. 149 C.G. Veljanovski, The New Law-and-Economics: A 'Research Review (Oxford: Centre for Socio-Legal Studies, 1982) at 40. 150 Trebilcock, supra note 122 at 364. 151 Ibid. 152 Posner is not too concerned about the lack of voluntariness under Kaldor-Hicks. An alternative approach, he says, "is to try to guess whether, if a voluntary transaction had been feasible, it would have occurred". That is, using all available data and assuming transaction costs are zero, would the parties have structured the transaction so that it was efficient. See Posner, Economic Analysis of Law, supra note 124 at § 1.2. This seems 39 Another somewhat related criticism relates to the competence or capacity of "collective decision makers e.g. legislatures, regulators, bureaucrats or courts, to adopt policies or laws that will unambiguously increase net social welfare".153 Are most judges, for example, competent to analyze the complex rnixes of costs and benefits relevant to efficiency fmdings in most cases, i.e., those without the simplest factual and legal matrices? Posner believes they can; money is a measurable standard unlike utility.154 Presumably, reliance on expert witnesses would be expected to assist the court. The effect of legal change on efficiency must not be overrated, however. In outlining his well-known Coase Theorem, Professor Coase argued that if certain conditions are satisfied the affected parties will settle upon an efficient arrangement regardless of the legal position.155 Specifically, he argued that where the activity of one party harms another it does not matter from an efficiency standpoint who has the legal entitlement (the causer or the party harmed) provided transaction costs are zero. Implied in the requirement of zero transaction costs is the existence of a free market which will allow the parties to negotiate an efficient solution if necessary. Coase used a number of scenarios to illustrate his point, but his analysis centred on a conflict between adjoining landowners, a rancher and a farmer.156 In the absence of each other's business, they would increase production (more cows or more crops) until marginal revenue equalled marginal private cost to maximize their wealth. With conflicting uses, however, an externality problem arises. Assume that the boundaries are clear but that there is no fence. As the rancher increases his herd, some cows wander onto the farmer's land and damage his crops grown on part of his land. Two possible legal rules are: 1) the farmer is responsible for fencing his own property and must accept any crop damage if he does not (this somewhat artificial, however, because in the majority of cases the real question would be whether a particular business would voluntarily assume responsibility for certain externalities. 153 Trebilcock, supra note 122 at 364. 154 See Richard A. Posner, "The Value of Wealth: A Comment on Dworkin and Kronman" (1980) 9 J. Legal Stud. 243, for example. 155 See Coase, "The Problem of Social Cost", supra note 120. Professor Coase won the Nobel Prize in Economic Science in 1991 largely because of his theorem. 156 He also referred to the famous English case involving a confectioner and a doctor whose businesses were in adjoining buildings, and where a similar analysis would apply: Sturges v. Bridgman (1879), 11 Ch. D. 852 (C.A.). In that case, the noise and vibrations from a confectioner's machines interfered with a doctor's business. The Court of Appeal case analyzed the case on the basis of nuisance principles not economic efficiency. But as Coase saw it, the problem "was essentially whether it was worth while, as a result of restricting the methods of production which could be used by the confectioner, to secure more doctoring at the cost of a reduced supply of confectionery products": ibid, at 2. 40 could be called a "self-reliance rule") and 2) the rancher is responsible for damage resulting from cattle trespass (a "causation rule"). Traditional legal analysis centres on causation and fairness and the common law has in fact adopted a cattle trespass rule.157 Coase believes the problem should be analyzed in terms of efficiency. Suppose the trespassing cows would cost the farmer $100 per year in crop damage if he did not fence his crops, and that the cost of bunding and mamtaining a fence around the crops would be $50 per year. The yearly cost to the rancher to build a fence on his ranch to keep the cattle in would be $75. If the self-reliance rule applies the farmer will fence his crops at a cost of $50 for a savings of $50 (instead of absorbing a $100 loss he builds the fence for $50). If the causation rule applies, the rancher could build a fence on his property for $75 for a savings of $25 (instead of paying $100 in damages he only pays $75). It appears the first rule is more efficient. But does it make a difference? If the causation rule applies and the parties are rational maximizers, it makes more sense for the rancher to pay $50 to build a fence around the crops and give a portion of the $25 savings to the farmer as an incentive for him to agree to this.158 Thus, regardless of which rule applies the most efficient solution, a fence around the crops, is reached. A few points need to be mentioned about this analysis.159 First, while the total wealth maximized is the same regardless of the applicable legal rule, the distribution of the wealth is different depending on who is responsible. If the self-reliance rule applies the farmer saves $50. If the causation rule applies and assuming they split the $25 savings to the rancher because the fence is built around the crops, the rancher saves $37.50 (instead of paying $100 damages he only pays $62.50) and the farmer profits an additional $12.50 — the total savings and additional profit is $50. Or, another way of looking at it, if the rancher is not responsible for the externality (the damage to the crops) his cost/benefit balance remains the same and the farmer loses $50, but if the rancher is responsible he loses $62.50 and the farmer gains an additional $12.50: two very different results on an individual/corporate level. Second, and related to the first point, because different legal rules will produce different distributions, the 157 The common law rule is based on strict liability, although in some jurisdictions it has been modified by legislation (in British Columbia, for example, see Livestock Act, R.S.B.C. 1996, c. 270, s. 11, which creates a defence of "reasonable care"). 158 These numbers are based on the discussion of the Coase Theorem in Cooter & Ulan, supra note 140 at 82-84, somewhat simplifying the variables in Coase's article (supra note 120). 159 The Coase Theorem has generated a copious and detailed literature. It is my intention here just to highlight some of the key corollaries and qualifications. 41 initial legal entitlement will affect the way the parties are able to spend their money which in turn could affect demand for and the price of goods in the future, even if only slighdy (this assumes the parties do not have identical spending habits).160 TTiird, transaction costs are never zero. The Coase Theorem treats all obstacles to bargaining (including bargaining costs, emotions, private information, and strategy) as transaction costs.161 Generally, transaction costs are lower in the context of private dealing (e.g., negotiating a private contract) and higher in the context of activities which more frequently give rise to tort claims (e.g., driving a car or distributing a consumer product, where negotiating a contract with every other driver or every potential consumer would be prohibitively expensive).162 In the simple example of the rancher and the farmer, if the causation rule applies and the transaction costs are less than the difference between the two levels of efficiency (i.e., less than $25, the difference in savings between the two fence options) then it still pays for the rancher to build the fence around the crops. After absorbing the transaction costs there are still savings left to split with the farmer. However, if the transaction costs exceed $25 then there is no incentive to bargain. At this level, the court should adopt the self-reliance rule because it is the more efficient one. By doing this, however, the court completely ignores the fact that one party must take a loss because the party who caused it stands to lose more if he is held responsible. Professor Weinrib refers to this as the "causal nihilism" of the Coase Theorem.163 But not all situations with high transaction costs work out this way. Manufacturers are the most efficient reducers of accident costs with respect to defective products and a strict liability approach has been adopted generally in United States largely because of it. Despite these and other "frailties", the Coase Theorem highlights the limitations of legal intervention in certain cases and its effectiveness in others in bringing about an "efficient" resolution to a problem. Efficiency and Tort Law Much of the law and economics scholarship in the United States on tort law deals with modelling liability rules to minimize both accident costs and accident avoidance costs. Three 160 See Posner, Economic Analysis of Law, supra note 124 at § 3.6. 161 Cooter & Ulan, supra note 140 at 290. 162 In most cases transaction costs rise with the number of parties involved. See Posner, Economic Analysis of Law, supra note 124 at § 3.6. 163 Weinrib, "The Special Morality of Tort Law", supra note 92 at 404. 42 particular areas have attracted the most attention: products liability, medical malpractice and automobile insurance. Besides the debate over the appropriate liability rules (strict liability or negligence liability, for example), the cornmentary also addresses questions relating to the defences which should be available (contributory negligence, consent, etc.) and the measurement of damages (particulady in the area of non-pecuniary loss).164 The earliest recognition in clear numerical terms of the role of efficiency in tort case law was by Judge Learned Hand in United States v. Carroll Towing Co.165 It was a negligence case and the main question was the extent of the duty of the owner of a moored vessel to prevent the vessel from breaking loose and causing damage to other vessels. Judge Learned Hand held that the duty of the owner "to provide against resulting injuries is a function of three variables: (1) The probability that she will break away; (2) the gravity of the resulting injury, if she does; (3) the burden of adequate precautions." He continued by setting out the so-called Hand Formula, where probability was called P, the injury L and the burden B. liability', he said, depended on whether B is less than P multiplied by L, or, in algebraic terms, whether B<PL.166 In other words, if the cost of preventing the accident is less than the cost of the accident itself, failing to take care to prevent the accident is negligent (or, in the language of law and economics, inefficient). As Posner explains, the Hand Formula is good as far as it goes, but must be modified to work as a formula for optimal accident avoidance. This becomes apparent when it is recognized that P varies with the precautions taken, B. He gives the example of a driver who by slowing down could avoid having an accident. Posner's starts with PL equalling $10 (assume P is .001 and L is $10,000) and then observes the effect of varying B: Suppose that our PL of $10 would be totally eliminated by the driver's reducing his speed by 25 m.p.h. at a cost to him of $9. But suppose further that PL could be reduced to $1 by the driver's reducing his speed by only 5 m.p.h., at a cost to him of only $2. This implies that to get PL down 164 See Trebilcock, supra note 122 at 370. 165 159 F.2d 169 (2d Cir. 1947). Posner points out that "the method it capsulizes" was not new, he cites two earlier cases, one from England and one from the US: Blyth v. Birmingham Waterworks Co. (1856), 156 E.R. 1047, 11 Ex. 781 (the defendant water company was found not negligent in failing to bury its pipes deeper at great expense to prevent the low probability of pipes freezing and bursting, and causing damage to plaintiff s house - per Baron Alderson) and Adams v. Bullock, 227 N.Y. 208, 125 N.E. 93 (CA. 1919) (the defendant trolley company was found not negligent in failing to take expensive precautions to prevent electric shock given the low probability of accident; the plaintiff boy had dangled an 8-foot wire over a bridge - per Cardozo, J.). See Posner, Economic Analysis of Law, supra note 124 at § 6.1. 166 159 F.2d 169 at 173 (2d Cir. 1947). 43 from $1 to zero costs the driver $7 ($9-$2), for a net social loss of $6. Clearly we want him to reduce his speed just by 5 m.p.h., which yields a net social gain of $7. This example shows that expected accident costs and accident prevention costs must be compared at the margin, by measuring the costs and benefits of small increments in safety and stopping investing in more safety at the point where another dollar spent would yield a dollar or less in added safety. Fortunately the common law method facilitates a marginal approach, simply because it will usually be difficult for courts to get information on other than small changes in the safety precautions taken by the injurer.167 Posner illustrates this with a figure:168 Figure 3.3-1 The Marginal Hand Formula $ B ' • Units of Care c* Explanation. Fig. 3.3-1 shows that the risk (PL) is not static, but related to the amount of care exercised (B), which seems obvious, but which is not reflected in the original Hand Formula. The vertical axis represents costs in dollar terms, and the horizontal axis units of care. As more care is exercised (curve B), the probability of injury (P) diminishes and with it the overall risk (curve PL). Curve B rises on the assumption that units of care are scarce and the price increases with the amount purchased. Curve PL declines on the assumption that as more care 167 Posner, Economic Analysis of Law, supra note 124 at § 6.1. In a footnote, Posner describes the math involved: The marginal Hand Formula is easily derived with a bit of calculus. The problem is to find the optimal level of care (c*) i.e., the level that will minimize the social costs of accidents, PL, plus the costs of accident prevention, B. Both P and B are functions of the potential injurer's care, c (we are assuming that potential victims can do nothing to prevent the accidents - their optimal care is zero). Mathematically, the problem is to minimize A, the total social costs of accidents, with respect to c, where A(c) (total accident costs as a function of amount of care) = P(c)L + B(c), both P and B being functions of c also. Provided that certain fairly natural conditions are satisfied, minimization requires taking the first derivative of A with respect to c and setting the resulting expression equal to zero: P,L + Br = 0, or Bc = -PL. In words, care is optimized when a small change in B, the expenditures on care, reduces (hence the negative sign) expected accident costs by the same amount. This is the point r*in [Fig. 3.3-1 above]. 168 This figure is a reproduction of Fig. 6.1 in Posner, Economic Analysis of Law, ibid. See also Cooter & Ulan, supra note 140 at 314-16 for an explanation of the need for marginal values of B and P for the Hand Formula to be more accurate. 44 is taken there is a cbiiiinishing effect in reducing risk. The point of intersection of the two curves represents the optimal level of care. To the left of c*, the defendant is negligent. To the right, there is an inefficient expenditure of resources, because for each additional dollar of care spent there is not an equivalent or greater reduction in risk. There is another sense in which the Hand Formula must be qualified. In the context of accident avoidance, it assumes risk neutrality. This is a workable assumption, because of the relatively well-established market for insurance against personal injuries (and damage to property). But in the commercial context, this assumption breaks down. Business actors are generally assumed to be risk averse due in large part to the unavailability of affordable insurance against business losses.169 Contract law and disclaimers of liability can play an important role in reducing risk (PL) in the commercial setting (particularly where the parties are able to deal directly with each other). Where contract law is an effective means of controlling risk, it is arguably a preferable way to reduce costs than a market-wide application of the Hand Formula which usually interferes with private ordering.170 It is unlikely Judge Learned Hand intended to put forward a comprehensive economic approach to tort law; he does not refer to wealth maximization as a normative standard, and Posner admits as much.171 More probably Judge Hand was simply holding that in cases of property damage economic considerations affect the level of care required, i.e., where a less expensive solution to a more expensive problem exists, a reasonable person would take the precaution.172 While Posner has no problem applying the economic approach generally, other writers see financial analysis as much more limited. As Professor John Fleming noted: Negligence is not just a matter of calculating the point at which the cost of injury to victims (that is the damages payable) exceeds that of providing safety precautions. The reasonable man is by no 169 See discussion of the Norsk case, infra note 178 and accompanying text. 170 Posner, Economic Analysis of Law, supra note 124 at § 6.1. See also Trebilcock, supra note 122 at 368-69, where he makes the point that contract law is efficient in the sense that it discourages carelessness in the exchange process. 171 In Richard A. Posner, "A Theory of Negligence" (1972) 1 J. Legal Stud. 29 at 32, where he discusses Learned Hand's contribution and refers to Hand "unwittingly" adumbrating an economic meaning of negligence. 172 For the implicit use of the Hand Formula in this context in a Canadian case, see Vaughn v. Halifax-Dartmouth Bridge Commission (1961), 29 D.L.R. (2d) 523, 46 M.P.R. 14 (N.S.S.C.) per MacDonald J. 45 means a caricature cold blooded calculating Economic Man...[C]ourts remain sceptical as to their ability, let alone that of juries, to pursue economic analyses.173 With respect to risks involving personal safety or health, Commonwealth authority, particularly, is loath to recognize an economic justification.174 To the extent that utility is relevant, it is usually confined to cases involving public agencies, where the "social utility" of the defendant's actions (in the sense of health or safety benefits generally as opposed to direct financial gain) may be balanced against the risk of injury in the particular case.175 Coleman denies that the Hand Formula is an "efficiency" calculation at all. He argues that just because an economic argument is relevant to the determination of fault does not mean that "liability based on fault is justified on efficiency grounds, or that in awarding compensation to the plaintiff in a particular negligence case the judge is following an economic theory of adjudication".176 In other words, the Hand Formula was not conceived as a tool for designing liability rules based on which party can prevent losses most efficiently, but rather to determine the care required of the party with a pre-existing duty possibly justifiable on non-efficiency grounds. In recent times, the idea of market deterrence has entered the efficiency debate. Deterrence is a general function of tort law, but economic theorists have conscripted this idea to supplement general efficiency analysis. There are two ways that market deterrence can achieve efficiency: 1) by internalizing "externalities" to the activities that generate them, and 2) by allocating these costs to the parties who can reduce or avoid these costs for the least amount (the "least-cost 173 John G. Fleming, The haw ofTorts, 9th ed. (Sydney: LBC Information Services, 1998) at 132. 174 In the well-known case, Bolton v. Stone, [1951] A.C. 850 at 867, [1951] 1 All E.R. 1078 (H.L.), Lord Reid, writing one of the five concurring judgments, remarked upon the relevance of cost in a personal injur}' claim (the plaintiff was struck by a cricket ball that had been hit out of the park). He held that the probability of injury in these circumstances was so low that the club was not negligent, but noted that "it would not be right to take into account the difficulty of remedial measures". See also haw Estate v. Simice (1994), 21 C.C.L.T. (2d) 228 (B.C.S.C), affd (1995), [1996] 4 W.W.R. 672, 27 C.CL.T. (2d) 127 (C.A.), a medical malpractice suit, where Spencer J. diminished the importance of the financial cost of a CT scan in the negligence calculus given the potential severity of harm. 175 See Watt v. Hertfordshire County Council, [1954] 1 W.L.R. 835, [1954] 2 All E.R. 368 (C.A.), where a fireman sued the municipal council that employed HIM after he was injured on an emergency call. The Court found that the defendant was not negligent in failing to take greater precautions for his safety given the social utility of the defendant's activity. Denning L.J., writing one of three concurring opinions, expressly held that a commercial enterprise would not be so justified. See also Priestman v. Colangelo, [1959] S.C.R. 615, 19 D.L.R. (2d) 1, involving two pedestrians killed in a police chase where the claim against the police was dismissed. The social utility justification for emergency vehicle accidents may be less effective today in light of changing social attitudes, and policies and legislation which place limits on dangerous driving by police and ambulance drivers. 46 avoiders"). For instance, forcing motorists to carry liability insurance, as opposed to having insurance paid out of general revenues, will internalize accident costs to the activity and deter some people from driving because they can't afford insurance. This will produce a more efficient level of accidents than if accident costs were not internalized. After mtemalizing these costs, tort law can then fashion rules that allocate them to the least-cost avoiders. If, for example, car manufacturers are the least-cost avoiders of accidents caused by defective equipment, i.e., they can prevent more of such accidents at lower cost, then tort law should impose liability on them.177 As mentioned, the strict liability regime concerning manufacturing defects which is prevalent in the United States reflects this reasoning. Commonwealth courts have been less influenced by efficiency concerns in choosing liability rules, but they have considered them on occasion. In Canadian National Railway v. Norsk Pacific Steamship Co.,™ the Supreme Court of Canada had to decide whether to recognize a duty of care in a contractual relational economic loss case.179 Seven judges heard the appeal. McLachlin J., as she then was, wrote for three of the four judges in the majority. She outlined three economic arguments for limiting economic negligence claims: the insurance argument, the loss spreading justification, and the "contractual allocation of risk" argument.180 These arguments appeared under the heading "Pragmatic Considerations" indicating that she did not believe efficiency and wealth maximization were morally imbued concepts. The insurance argument says that the plaintiff is better able to predict economic loss and obtain cheap insurance. She noted two problems with this argument: one, that the lack of incentives for defendants to take care may increase losses so as to eventually cancel out any initial cost advantage plaintiffs might have in obtaining insurance, and two, it was not clear that plaintiffs were the least-cost avoiders (while some forms of business interruption insurance are available, there is no general loss of profits insurance - self-insurance will often be the only option).181 176 Coleman, "Efficiency, Utility, and Wealth Maximization", supra note 132 at 550. 177 See Solomon, Kostal & Mclnnes, supra note 117 at 498-99. 178 [1992] 1 S.C.R. 1021, 91 D.L.R. (4th) 289 [Norsk cited to S.C.R.]. 179 A contractual relational economic loss case is one where the claimant has a contractual relationship with a property owner and suffers economic loss as a result of damage to the property by a third part}'. This and other categories of economic negligence are described in more detail in Chapter 4. 180 Norsk, supra note 178 at 1155-60. 181 McLachlin J. quoted William Bishop, 'Economic Loss in Tort" (1982) 2 Oxford J. Legal Stud. 1 at 2. 47 The loss spreading argument is that it is better to spread relatively small losses among many victims than to force an individual tortfeasor to pay the full loss. There are many problems with this as an efficiency argument. As with the insurance argument, the lack of incentives on defendants may increase losses. Also, victims' losses will not always be small, and in many cases there will only be one victim or just a few.182 This is really a fairness argument not an efficiency argument. The third argument relates more specifically to contractual relational economic loss claims than economic loss claims generally. It posits that the property owner is in the best position to obtain insurance and sue, and that the contractual user of the property can arrange for compensation for its losses from the property owner. This has the effect of internalizing costs by not requiring the contractual user to obtain separate insurance in respect of the property. In McLachlin J.'s opinion, there were problems with this argument too, most notably that it would not always be possible to negotiate an mdemnification agreement with the property owner (for instance, in the Norsk case, the property owner controlled an indispensable bridge and could demand an exorbitant amount in exchange for an mdernnification agreement). The majority in Norsk rejected these economic arguments as proof that an inefficient allocation of resources would result from imposing a duty of care in the case before them. However, concerns about efficiency may have influenced later decisions, such as Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd.,m where the Court placed clear limits on relational claims. La Forest J. wrote for the three judges in dissent in Norsk. He preferred a general exclusionary rule with limited exceptions in this context. His judgment, which has been described as a "veritable tour de force",™ addressed some of the concerns with the economic arguments raised by McLaclilin J. For instance, with respect to the possibility of increased losses if no duty were recognized, La Forest J. responded by pointing out that liability to the property owner would deter would-be defendants. This also counters the same concern in relation to the loss spreading argument. La Forest J. also doubted that it would be difficult for plaintiffs to obtain 182 McLachlin J. again quoted Bishop, ibid. 183 [1997] 3 S.C.R. 1210,153 D.L.R. (4th) 385 [Bow Valley cited to S.C.R] 184 B.S. Markesinis & S.F. Deakin, Tort Law, 4th ed. (Oxford: Oxford University Press, 1999) at 34. 48 insurance in the typical relational economic loss case because the type of loss would be of the business interruption variety which is insurable. However, his conclusion here was tentative because of the lack of evidence on point. He noted that it was important for lawyers "to inform themselves about fundamental matters of insurability in new tort cases and to see to it that courts are also informed".185 Aside from general insurability, La Forest J. was of the view that the plaintiff in this case, a railway, was "ideally situated to self-insure".186 Despite the opinions in Norsk, which are exceptional, Canadian and other Commonwealth courts do not regulady engage in efficiency analyses when deciding "choice of rules" cases.187 Overall, one has to conclude that in the area of tort law (and negligence law in particular) wealth maximization and efficiency have not been adopted as controlling objectives by the courts at least in Commonwealth jurisdictions.188 3.3.3 General Functions of Tort Law As mentioned, there is a certain artificiality in separating normative objectives, such as distributive justice and wealth maximization, from non-normative ones, such as compensation and deterrence, which I refer to as "general" functions.189 I have mamtained this distinction, however, because it reflects a fundamental division between the two sets of objectives. 185 Norsk, supra note 178 at 1124. Markesinis & Deakin, ibid, at 35, echoed La Forest J. comment bemoaning the lack of empirical interdisciplinary work to assist the courts. See Bruce Feldthusen & John Palmer, "Economic Loss and the Supreme Court of Canada: An Economic Critique of Norsk Steamship and Bird Construction" (1995) 74 Can. Bar Rev. 427 at 444, where the authors state that such insurance is available — their overall conclusion was that the majority position is inefficient, and that economic analysis supports the traditional prohibition against recovery in relational economic loss cases. 186 Norsk, ibid. Feldthusen & Palmer, ibid., believe that the plaintiff railway in Norsk probably self-insured because it was more efficient than obtaining private coverage for such a large enterprise (at 444). On this point, see also Norman Siebrasse, "Economic Analysis of Economic Loss in the Supreme Court of Canada: Fault, Deterrence, and Channelling of Losses in CNR v. Norsk Pacific Steamship Co." (1994) 20 Queen's L.J. 1 at 34. 187 See comment to this effect in Markesinis & Deakin, supra note 184 at 35 concerning English judges. 188 This is largely the case in the United States too, although to the extent that most states have adopted a strict liability regime in the field of products liability economic analysis plays a role. With judges like Posner and Calabresi liability rules may become increasing influenced by economic considerations. It should also be noted that there is more of an inclination in that country to apply the Hand Formula in the standard of care analysis: see the definition of negligence in the Restatement (Third) of Torts: Liability for Physical Harm (Tentative Draft) § 3 (2002), and Stephen G. Gilles, "The Invisible Hand Formula" (1994) 80 Va. L. Rev. 1015 and "On Determining Negligence: Hand Formula Balancing, the Reasonable Person Standard, and the Jury" (2001) 54 Vand. L. Rev. 813. 189 For one thing, not everyone agrees which goals are normative and which are not, as with wealth maximization. Further, some objectives have a dual nature, such as deterrence (e.g., market deterrence as part of a normatively constructed economic theory and ordinary deterrence as a social objective without moral overtones). Another problem is that not all writers even make the distinction between deontological and 49 More than fifty years ago Gknville Williams identified four general aims of tort law: appeasement, justice, deterrence, and compensation.190 Mr. Justice Linden has suggested some additional goals, including education, market deterrence, and acting as ombudsman (i.e., as a vehicle for challenging the conduct of powerful defendants).191 In a report to the American Bar Association, a special committee outlined another role that tort law plays: It acts as a grievance mechanism preventing overt conflict that could break through the crust of civilization if injured victims believed society was not responding to their complaints.192 In the taxonomy I have adopted, all of these are general functions except Williams' justice and Linden's market deterrence.193 Compensation is frequentiy cited as the most important function of tort law, particularly in negligence.194 For most claimants, there would be Uttle disagreement on this point. In one sense, compensation is a means of effecting reparatory justice — this was described above in the discussion of corrective justice. It is relatively successful here. In a more general sense, however, if one advocates that tort law should act as an accident compensation mechanism, it is not particularly effective. The current requirements of cause and fault stand in the way of its success as a universal tool for accident compensation. Insurance and government programs fill in the large gaps left by tort law in its compensatory role in this general sense.195 Ordinary deterrence (as distinguished from market deterrence) is the next most cited objective for having tort liability. Tort law serves as a specific deterrent, i.e., in relation to future instrumentalist theories, lumping corrective justice together with deterrence, for instance, in describing the "functions" or "goals" of tort law see, for example, Glanville Williams, "The Aims of the Law of Tort" (1951) 4 Curr. Legal Probs. 137, and Lewis N. Klar, Tort haw, 2nd ed. (Scarborough: Carswell, 1996) c. 1. On one level, it is just a question of semantics, for one certainly can argue that it is a function of tort law to enforce a deontological theory of justice. As explained in the introduction to this chapter, I confine the discussion in this section on instrumentalist theory to objectives which extend beyond the particular relationship between injurer and injured. 190 Williams, ibid. Williams was of the opinion that in serving so many masters tort law was a good servant to none. 191 See Allen M. Linden, Canadian Tort haw, 7th ed. (Toronto: Butterworths, 2001) c. 1. See also, Klar, supra note 2 c. 1. 192 See United States, Report to the American Bar Association by a Special Committee on the Tort Liability System, Towards a Jurisprudence of Injury: the Continuing Creation of a System of Substantive Justice in American Tort haw (Chicago: American Bar Association, 1984) at 3-18. For a discussion of this report, see Klar, ibid, at 17-18. 193 I have not included the various policy considerations that arise in the context of duty of care analysis, such as the concern about indeterminate liability, because they are specific to negligence and are not general functions of tort law. Some of them are instrumentalist in nature, however. See sections 3.4 and 3.5. 194 Solomon, Kostal & Mclnnes, supra note 117 at 500. 195 See Linden, supra note 191 at 4-7. 50 conduct of the particular defendant, and as a general deterrent, deterring the public from engaging in the impugned conduct in the future. Its effectiveness in achieving this objective has limits, particularly in negligence where the conduct in not premeditated. For instance, the reactions of a motor vehicle driver just before an accident typically will not be influenced by the possibility of tort liability. It is in the area of "planned decision-making in business" that potential civil liability likely has its greatest impact.196 The other functions, appeasement (Linden calls this the psychological function197), education, acting as ombudsman and a grievance mechanism are among those less frequently or openly cited by the courts. As Linden puts it: Not all the purposes of tort law are expressed openly in the case law. On the contrary, some of them are unrecognized or dimly perceived, or even vehemenuy denied. Some are achieved only indirectiy and some not at all.198 None of the social objectives underlying tort law, however one catalogues them, has by itself provided a complete explanation of the various liability rules, and throughout different stages in the development of the law different functions have played more or less prominent roles.199 3.4 NEGLIGENCE AND DUTY OF CARE 3.4.1 Proximity and Policy — An Overview It is now generally accepted that there are five elements in the modern negligence cause of action: duty of care, breach of the standard of care, factual causation, proximate causation, and damages.200 Subject to a few exceptions, the onus is on the plaintiff to prove these five elements. The first element determines the existence of an obligation to exercise care — it is the focus of this thesis. Breach of the standard of care is the most litigated of the elements — it 196 Solomon, Kostal & Mclnnes, supra note 117 at 498. 197 See Linden, supra note 191 at 16-19. Related to this is retribution or vengeance, which some authors and judges say is not an objective of tort law. Others such as Linden acknowledge that though unexpressed tort law is used for vengeance. 198 Ibid, at 2. 199 Markesinis & Deakin, supra note 184 at 36. 200 See Linden, supra note 191 at 102-03. Linden in fact lists a sixth "element": the absence of one of the defences. Because the onus of proof rests with the defendant to prove the defences, technically, their absence is not an element. If the defendant is silent on the defences, the plaintiff will succeed if he pleads and proves the five elements noted. It should also be pointed out that some authors and judges combine some of these elements in their analysis. It is not uncommon, for instance, for factual and proximate causation to be combined as a single element, "proximate cause": see Fleming, supra note 173, for example. Sometimes, the first and second 51 involves measiiring the defendant's conduct against an objective standard of behaviour. To prove cause-in-fact, the plaintiff must show that the defendant's conduct brought about the loss. Proximate causation concerns the extent of the loss (the law only holds a defendant responsible in negligence if there is a reasonable connection between the impugned behaviour and the loss), and the final element requires proof of loss (negligence is not actionable per se -the plaintiff must suffer damages). "Proximity" is a general concept relevant to the establishment of the first element, duty of care. In the law's evolution, it is a relatively recent addition to the panoply of rules, but the idea of proximity or "neighbourhood" has been around for a few hundred years. As Professor John Baker writes: |T]he problem for the substantive law was to settle the cases in which the law imposed a duty to take care in the absence of an undertaking or custom. We have seen that the law sometimes imposed duties independentiy of any prior relationship between the parties. Yet duties of care cannot be imposed on everyone in every situation. At the beginning of the eighteenth century no one, it seems, could see any pattern emerging; the kinds of cases were 'almost infinite, daily increasing, and continually receiving new forms'. By the middle of the century, however, a general answer had been formulated in an influential treatise, printed in 1768 from a manuscript supposedly written by Lord Bathurst (1714-94) in the 1750s, which became a standard practitioners' manual in its subsequent editions by Buller and Onslow. The author suggested for the first time a principle which is now familiar to every English law student: "Every man ought to take reasonable care that he does not injure his neighbour; therefore, wherever a man receives hurt through the default of another, though the same were not wilful, yet if it be occasioned by negligence or folly the law gives him an action to recover damages for the injury so sustained.. .However, it is proper in such cases to prove that the injury was such as would probably follow from the act done.'201 [footnotes omitted] Lord Atkin, whose famous judgment in Donoghue outlined the concept of proximity, was aware of this search for a common thread in the categories of negligence. He had been thinking about how to formulate a umfying principle, and about the relationship between law, morality and Christian precepts. Some six weeks before the House of Lords decision in Donoghue, Lord Atkin gave a lecture at King's College in London in which he said: It is quite true that law and morality do not cover identical fields. No doubt morality extends beyond the more limited range in which you can lay down the definite prohibitions of the law; but, apart from that, the British law has always necessarily ingrained in it moral teaching in this sense: that it lays down standards of honesty and plain dealing between man and man.. .He is not to injure his neighbour by acts of negligence; and that certainly covers a very large field of the law. I elements are combined, and even more rarely now, the last three elements are combined under the single compendious element, "damages". 201 From J.H. Baker, An Introduction to English Legal History, 4th ed. (London: Butterworths, 2002) at 414. 52 doubt whether the whole of the law of tort could not be comprised in the golden maxim to do unto your neighbour as you would that he should do unto you.202 In Donoghue, Lord Atkin set out his neighbour principle as follows: fT|n English law there must be, and is, some general conception of relations giving rise to a duty of care, of which the particular cases found in the books are but instances. The liability for negligence, whether you style it such or treat it as in other systems as a species of "culpa," is no doubt based upon a general public sentiment of moral wrongdoing for which the offender must pay. But acts or omissions which any moral code would censure cannot in a practical world be treated so as to give a right to every person injured by them to demand relief. In this way rules of law arise which limit the range of complainants and the extent of their remedy. The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer's question, Who is my neighbour? receives a restricted reply. 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™ [emphasis added] Proximity exists where the plaintiff is "closely and direcdy affected" by the defendant's acts or omissions. Proximity as Lord Atkin conceived it was not confined to physical closeness, and it was clear he intended it to encompass much more than just spatial connection.204 However, the use of the proximity' concept as a tool for recognizing new duties of care encountered difficulties initially. It was rejected as a controlling concept in Hedley Byrne, for instance. But in Home Office Appellants v. Dorset Yacht Co. Ltd.,205 there was a breakthrough. The House of Lords had to deteimine the liability of a public authority for damage caused by some absconding "Borstal" boys under supervision of Borstal officers. Lord Reid, in the majority', referring to the neighbour principle, wrote: fT]he well-known passage in Lord Atkin's speech should I think be regarded as a statement of principle. It is not to be treated as if it were a statutory definition. It will require qualification in new circumstances. But I think that the time has come when we can and should say that it ought to apply unless there is some justification or valid explanation for its exclusion.206 Finally, in Anns, the House of Lords set out a clearer framework of analysis. The decision involved the kability of a borough council for negligently passing the inspection of some 202 This account is from Geoffrey Lewis, Lord Atkin (London: Butterworths, 1983) at 57-58 citing "Law as an Education Subject" (1932) Journal of the Society of Public Teachers of Law 30, and the video, The Paisley Snail: Donoghue v. Stevenson (Vancouver: Law Courts Education Society of British Columbia, 1996). 203 See Donoghue, supra note 13 at 579-80. 204 Ibid, at 581. See also W.V.H. Rogers, Winfield and Jolowic^ on Tort, 15th ed. (London: Sweet & Maxwell, 1998) at 99. 205 [1970] A.C. 1004, [1970] 2 All E.R. 294 [Dorset Yacht cited to A.C] 206 Ibid, at 1027. 53 residential dwellings. Lord Wilberforce, for the majority, outlined his well-known two-stage test for determining when a duty of care would arise: Through the trilogy of cases in this House, Donoghue v Stevenson, Hedley Byrne <& Co Lid v Heller & Partners Ltd and Home Office v Dorset Yacht Co Ltd, the position has now been reached that in order to establish that a duty of care arises in a particular situation, it is not necessary to bring the facts of that situation within those of previous situations in which a duty of care has been held to exist. Rather the question has to be approached in two stages. First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter, in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise.. .207 It seems likely that Lord Wilberforce intended a simple test for proximity, or neighbourhood, based on the reasonable foreseeability of injury to the plaintiff. He made the assumption that proximity was established on the facts before him208, and spent most of his analysis considering the second question. The first question, then, appeared relatively straightforward, but the language left some room for interpretation. Would proximity invariably be established by satisfying the reasonable foreseeability test? The reference was to proximity "such that" injury would be reasonably foreseeable. Some courts interpreted this to mean that estabUshing proximity might require the consideration of other factors besides foreseeability.209 From a purely analytical point of view, it did not seem to matter much whether other considerations were brought into the first stage, because the second stage was designed as a limiting mechanism to guard against aggressive expansion of negligence liability210 — policy could certainly be considered at the second stage.211 207 Supra note 22 at 751-52. 208 Ibid, at 753-54. 209 For example, in Peabody Donation Fund v. Sir Lindsay Parkinson & Co., [1985] 1 A.C. 210, [1984] 3 All E.R. 529 (H.L.) [Peabody cited to A.C], Lord Keith held at 241 that proximity depended on more than just foreseeability and that the plaintiff had to establish why it would be "just and reasonable" for the defendant to owe a duty of care. 210 Besides setting out a general approach of negligence, including the power to limit liability at stage two, it must be remembered that Anns was a public authorities case. It also outlined a specific approach to stage two with respect to claims against public authorities. The Court was concerned about interfering with political discretion, and therefore held that liability would be limited where the complaint related to the exercise of statutory discretion or policy. The complainant had to show that the impugned conduct was "operational" in nature. This aspect of the decision is discussed in more detail in Chapter 4 in section 4.3.1. 211 With respect to the burden of proof, the plaintiff clearly has the burden at the first stage to prove a prima facie duty of care. In Anns, Lord Wilberforce held that the plaintiff also had the burden at the second stage: see supra note 22 at 755 (i.e., with respect to the policy/operational distinction). However, as Professor Klar 54 The two-stage approach provided the courts with a powerful new tool in the recognition of new duties of care, and was not confined to municipal inspection cases. It was broad and flexible and could be applied to all sorts of situations: cases involving acts, omissions, words, private parties, public authorities, commercial or non-commercial disputes, physical loss or economic loss.212 However, this power of expansion, even with the ability to control unruly growth at the second stage, did not sit well with the courts in every jurisdiction. While Anns continues to be followed in this country, it has been rejected in the United Kingdom and Australia.213 Whether Anns is followed or not, it is now clear that the duty issue is essentially one of policy.214 However, in jurisdictions which still follow Anns, such as Canada, the question arises as to how policy relates to each stage. Since the two-stage approach in Anns was adopted in Nielsen v. Kamloops (City),215 the Supreme Court of Canada has consistendy followed and refined it.216 Until recently, Canadian courts analyzed policy primarily at stage two. Stage one dealt with whether a prima facie duty of care was owed based on a relationship of proximity. This turned on foreseeability of loss, usually sufficient by itself in physical loss cases, and, in economic loss cases, other policy-based tests such as reliance. In Bow Valley, McLachlin J., for the Court on this point, stated: points out, to the degree that policy is important at the second stage, the burden of "persuasion" is shifted to the defendant to show why the prima facie duty of care should not be recognized or at least be limited: Klar, supra note 2 at 143. While the legal burden may technically remain with the plaintiff at stage two, the nature of the debate requires the defendant of respond. 212 Klar, ibid, at 142-43. 213 See Murphy v. Brentwood District Council, [1991] 1 A.C. 398, [1990] 2 All E.R. 908 (H.L.) [Murphy] and Sutherland Shire Council v. Heyman (1985), 60 A.L.R. 1, 157 CL.R. 424 (H.C.) [Sutherland cited to CL.R.]. At least one writer in Australia, concerned about the lack of a cohesive framework for analyzing the duty question in that country, advocates a return to Anns following the Canadian approach: see Adrian Baron, "The 'Mystery' of Negligence and Economic Loss: When is a Duty of Care Owed?" (2000) 19 Austl. Bar Rev. 167 at 191-98. 214 See Linden, supra note 191 at 271, where he states, "It has now been officially recognized that [the creation of new duties] is a question of public policy which the courts in each jurisdiction will have to decide for themselves in the novel circumstances of the cases that come before them." The word "policy" in this context requires some explanation. It is most often used by itself, but not uncommonly it appears with descriptors such as "public", "social" or "underlying". Occasionally other words and phrases are used including, "theoretical basis", "rationale", "value", and "social purpose". I make no distinction between these various formulations. 215 [1984] 2 S.CR. 2,10 D.L.R. (4th) 641. 216 In Canada and New Zealand, it provides a general framework of analysis for all duties of care in negligence. Some commentators believe it is a Procrustean bed, a straightjacket and Ralph Waldo Emerson's "foolish consistenq'", all wrapped up in one. At the same time, it must be acknowledged that it brings a formal coherence to a difficult area of the law, while at the same time allowing a controlled measure of flexibility. 55 [T]he existence of a relationship of "neighbourhood" or "proximity" distinguishes those circumstances in which the defendant owes a prima fade duty of care to the plaintiff from those where no such duty exists. The term "proximity" is a label expressing the fact of a relationship of neighbourhood sufficient to attract a prima fade legal duty. Whether the duty arises depends on the nature of the case and its facts. Policy concerns are best dealt with under the second branch of the test. Criteria that in other cases have been used to define the legal test for the duty of care can now be recognized as policy-based ways by which to curtail ^determinate or inappropriate recovery.217 [emphasis added] However, in the recent cases of Cooper v. HobarP™ and Edwards v. Law Society of Upper Canada,™ the Supreme Court of Canada has indicated that broad considerations of policy based on justice and fairness ought to be considered as part of the stage one deterrnination of proximity and the prima facie duty of care. In Edwards, McLachlin C.J.C. and Major J., writing for the Court, said: 9 At the first stage of the Anns test, the question is whether the circumstances disclose reasonably foreseeable harm and proximity sufficient to establish a prima fade duty of care. The focus at this stage is on factors arising from the relationship between the plaintiff and the defendant, including broad considerations of policy. The starting point for this analysis is to determine whether there are analogous categories of cases in which proximity has previously been recognized. If no such cases exist, the question then becomes whether a new duty of care should be recognized in the circumstances. Mere foreseeability is not enough to establish a prima fade duty of care. The plaintiff must also show proximity — that the defendant was in a close and direct relationship to him or her such that it is just to impose a duty of care in the circumstances.220 And in Cooper, McLacMn C.J.C. and Major J., again writing for the Court, stated: 34 Defining the relationship may involve looking at expectations, representations, reliance, and the property or other interests involved. Essentially, these are factors that allow us to evaluate the closeness of the relationship between the plaintiff and the defendant and to determine whether it is just and fair having regard to that relationship to impose a duty of care in law upon the defendant.221 In practical terms, this greater emphasis on policy at stage one means the plaintiff will likely have a more onerous burden estabUshing the prima facie duty of-care outside the established categories. Whether or not this new approach will affect the existing categories of economic negligence in future will depend on whether the Court attaches separate and additional meaning to the "just and fair" requirement over and above the policy-based tests like reliance that already exist. 217 3#j/>;anotel83atl244. 218 [2001] 3 S.C.R. 537,206 D.L.R. (4th) 193,2001 SCC 79 [Cooper]. 219 [2001] 3 S.C.R. 562, 206 D.L.R. (4th) 211, 2001 SCC 80 [Edwards]. 220 Ibid, at para. 9. 221 Supra note 218 at para. 34. 56 In Cooper and Edwards, the Court held that the second stage of Anns involves the consideration of residual policy matters. In Cooper, they put it this way: 37 This brings us to the second stage of the Anns test... [RJesidual policy considerations fall to be considered here. These are not concerned with the relationship between the parties, but with the effect of recognizing a duty of care on other legal obligations, the legal system and society more generally. Does the law already provide a remedy? Would recognition of the duty of care create the spectre of unlimited liability to an unlimited class? Are there other reasons of broad policy that suggest that the duty of care should not be recognized?.. .222 The Court went on to provide examples of residual policy matters that would arise at stage two, including the economic arguments described in Norsk and the indeterminacy concern and related factors discussed in ELercules.222 Apart from these types of examples, the second stage of Anns will generally be confined to cases where the duty asserted is a new category of negligence.224 It is clear that foreseeability is not enough to establish a prima facie duty of care.225 Proximity must also be proven.226 In Cooper and Edwards, the Supreme Court of Canada held that proximity characterized the "type" of relationship where a duty of care might arise. The starting point when considering whether a new duty should be recognized is whether it is analogous to an existing category. The reason cited for this was certainty7. Beyond that, diverse factors would help the court determine whether the plamtiff was "closely and directly affected" by the defendant's conduct and whether it was "just and fair" to impose a duty on the defendant. These factors would depend on the circumstances of the case and the Court 222 Ibid, at para. 37. 223 Ibid, at paras. 37-38. 224 Ibid, at para. 39. 225 Reasonable foreseeability by itself is considered too encompassing. As one Australian judge remarked, tongue-in-cheek, "If foreseeability of injury were the exhaustive criterion of a duty to act to prevent injury occurring, the "neighbour" of the law would include not only the Biblical Samaritan but also the Priest and Levite who passed by the injured man." See Brennan J. in Sutherland, supra note 213 at 478 (H.C). Both injury and object, the injured, must be foreseeable. However, there are surprisingly few cases where the foreseeability of "unexpected" plaintiffs has been considered. See, for example, the famous American decision of Palsgraf v. Long Island Railroad Co., 284 N.Y. 339 (CA. 1928), decided a few years before Donoghue, and the English decision, Haley v. London Electricity Board (1964), [1965] A.C. 778, [1964] 3 All E.R. 185 (H.L.). See also linden, supra note 191 at 274-76 and Margaret Brazier & John Murphy, Street on Torts, 10th ed. (London: Butterworths, 1999) at 180-81. The two types of foreseeability are usually combined in one test: "reasonable foreseeability of injury to the plaintiff'. 226 In Canada, whether foreseeability is now theoretically distinct from proximity or is an aspect of it is not entirely clear. The language in Cooper (supra note 218 at paras. 30-31) supports both views. Following either interpretation, what the Court is saying is that proximity is a much broader concept than just foreseeability. 57 was not prepared to comprehensively catalogue them.227 The emphasis on existing categories signals a return to an earlier time when the courts were more hesitant to recognize new duties. With Cooper and Edwards, the general approach to the recognition of new duties of care in Canada bears some semblance of the English approach since Murphy,22* in that there is a new emphasis on restraint.229 And even if a prima facie duty of care is established, second stage considerations may operate to limit the duty. Perhaps unwittingly, the Supreme Court of Canada has brought the two main approaches which dominate general tort law theory into the Anns framework of analysis in negligence, each being given its own stage. By focusing on "justice and fairness" at the first stage, the Court may have had in mind a deontological conception of duty and proximity. However, it is not entirely clear how confined the investigation is expected to be at this stage. The Supreme Court of Canada does refer to "broad considerations of policy", and possibly anticipates the power to consider implications in recognizing a duty not just for the parties themselves, but also for similarly situated parties in the type of relationship involved. And depending on the size of the classes to which the parties belong, the decision on duty could have far-reaching social consequences. However, the more the emphasis is on broader implications the less the 227 Ibid, paras. 31-35 and Edwards, supra note 219 at paras. 8-10. 228 Supra note. 213. 229 However, the exact position in the United Kingdom is difficult to discern. In the words of one English writer, "[t]he concept of duty has in recent years shown signs of becoming an arcane mystery". See W.V.H. Rogers, Winfield and Jo/owic^ on Tort, 15th ed. (London: Sweet & Maxwell, 1998) at 91. Since Anns was abolished, three possibly four steps make up the duty inquiry (96-108). Besides foreseeability and the still hard-to-define idea of proximity, the courts must address the "fair, just and reasonable" test. Some courts now even recognize a fourth stage of analysis under the heading of "public policy", although as Rogers mentions, it is hard to see what separates "fair, just and reasonable" from "public poliqr" - the weight of authority does not make this distinction (107-08). Since Rogers' text was published a possible fifth, and as yet unnamed, step has emerged based on some kind of inherent concept of liability. In MacFariane, supra note 119, a "wrongful birth" case, Lord Steyn reached his decision whether or not to recognize a duty of care by balancing the demands of corrective justice against those of distributive justice. He did not rely on foreseeability or proximity. He also expressly found that he was not basing his decision on the "quicksands" public policy (MacFariane, at 83 — another judge, Lord Clyde, referred to the likeness of public policy to an "unruly horse", at 99), and only reluctandy allowed that the "fair, just and reasonable" test was relevant, suggesting he had some other level of inquiry in mind. This other conception of liability is apparently relevant to the Hedley Byrne liability as well. The MacFariane case was actually argued on the basis of Hedley Byrne and voluntary assumption of responsibility. However, Lord Steyn held that it did not matter whether the argument was based on traditional negligence principles or assumption of responsibility; either way his reasoning would be the same. This is unnecessarily "arcane". Following the Canadian approach, corrective justice concerns could be dealt with under the first stage of Anns, and distributional concerns involving society generally, under stage two. And it is all poliq'. See Rawlins J. in Y. (M.) v. Boutros (2002), 313 A.R. 1, [2002] 6 W.W.R. 463, 2002 ABQB 362 at para. 148 [Boutros], who made the point that the decision in MacFariane could be seen as rooted in public policy. MacFariane is discussed in more detail below at 3.4.3. 58 focus is on "proximity'' in the particular relationship. In Cooper, the examples the Court gave of second stage policies, such as concerns about mdeterminate liability and economic efficiency, extend beyond the specific relationship involved.230 One might assume therefore that the Supreme Court of Canada intends the investigation at stage one to be specific to the relationship between the parties involved despite the reference to "broad" policy considerations. If this assumption is correct, one analytical "flaw" in Cooper and Edwards is the reference to certainty and the categories approach in relation to proximity. Analogizing to existing relationships for reasons of certainty should not influence the decision whether or not a relationship of proximity exists in a particular case — this type of analysis belongs at stage two. Further clarification is needed on this point and the stage one analysis generally. Despite the ambiguity as to the scope of the inquiry at stage one, at the second stage the focus clearly shifts to general mstrumentalist considerations, that is, to "the effect of recognizing a duty of care on other legal obligations, the legal system and society more generally".231 As Professor Hepple has observed, negligence law today is engaged in a "search for coherence".232 It embodies two confhcting philosophies, one based on "individual responsibility" and the obligation a person at fault has to repair damage she causes (essentially corrective justice), and the other based on "social responsibility" which requires the spreading of losses so as to maximize social welfare (a form of distributive justice). I would add to this conception of social responsibility the need to consider other instrumentaUst goals such as deterrence and certainty in the law. The search for coherence therefore involves finding the point of balance between individual responsibility and instrumentaUst concerns, which sometimes support but more often weigh against a finding of nability. In the following subsections of this section, I look at how these ideas inform the duty question in Canada. I look first at proximity and "justice and fairness", which the courts now consider to be the key elements in the recognition of a prima facie duty of care. Next, I consider the mstrumentalist policies, which are more clearly Anns stage two considerations. I have 230 Although, as described below in section, indeterminate liability has a dual aspect — it is specific to the relationship and concerned with implications beyond the parties. 231 See Cooper, para. 37 {supra note 222 and accompanying quote). 232 See Bob Hepple, "The Search for Coherence" (1997) 50 Curr. Legal Probs. 69. Hepple distinguishes between formal coherence, meaning the internal consistency of rules, and functional coherence, meaning consistency of purpose. He believes both are lacking in negligence law. 59 separated these mstxumentalist policies into two groups, those which support the recognition of a duty of care, and those which do not, i.e., counter policies. The counter policies are further divided into those relating to general negligence and those specific to economic negligence. One final point should be noted. Policy questions can also arise when considering other elements of the negligence cause of action, such as when detertrrining the appropriate standard of care.233 However, as Linden points out, broader policy considerations generally influence the duty question in that it is concerned with the "extension or the limits of the law of negligence".234 Policies which relate to elements other than duty are not discussed here. 3.4.2 Closeness, Directness, Justice and Fairness The linkage between Lord Atkin's "closely and direcdy affected" test of proximity and "justice and fairness"235 creates some interpretive problems. Justice and fairness is a vague test,236 arguably even more so than Lord Atkin's test.237 Does it expand the conception of duty, limit 233 See Ryan v. Victoria (City), [1999] 1 S.C.R. 201 at 221,168 D.L.R. (4th) 513, per Major J. 234 Linden, supra note 191 at 274, quoting J.C. Smith in "Clarification of Duty-Remoteness Problems Through a New Physiology of Negligence: Economic Loss, At Test Case" (1974) U.B.C.L. Rev. 213 at 220. 235 In Cooper, para. 34 (see supra note 221 and accompanying quote), and 'Edwards, para. 9 (see supra note 220 and accompanying quote), the Supreme Court of Canada referred to need to establish a close and direct relationship such that it is just and fair to impose a duty. Justice and fairness is therefore required in addition to closeness and directness (basic proximity) to establish a prima facie duty of care. 236 There are variations of this phrase, such as "justice, fairness and reasonableness", and the adjectival equivalents, "just and fair" and "just, fair and reasonable". The English courts seem to prefer "fair" before "just", referring to "fair, just and reasonable", etc: see for example, McFarlane, supra note 119. No particular distinction is made between these expressions. Nor is any made between the individual words. Referring to the "fair, just and reasonable" formulation, the author of Winfield and Jolowic^ on Tort, supra note 229 at 101, notes that the words are not subjected to a "minute disjunctive analysis", and that [a]ll three words convey the same idea of 'judicial policy' in slighdy different ways." These expressions have been used in connection with the duty analysis in England since the 1980s (see Peabody, supra note 209), but their connection to duty and proximity specifically in Canada is more recent (see Cooper and Edwards, supra notes 218 and 219). In Hercules, supra note 6 at 190-91, the Court used the phrase "simple justice" in connection with proximity, and "basic fairness" in connection with policies extrinsic to the specific relationship which serve to limit liability (under the second stage of Anns). Presumably, in light of Cooper and Edwards, this distinction in terminology from Hercules will no longer be followed. 237 Lord Atkin's test also suffers from ambiguity. For instance, the meaning of being "directly" affected is not clear. The directness test has been applied in various contexts, causation, remoteness and here in duty, and has proven difficult in all of them. As a test for causation, it applies more often in claims based on the intentional torts, which were derived from the old Trespass writ. In negligence, the "but for" and "material contribution" tests are main ones today: see Athey v. Leonati, [1996] 3 S.C.R. 458, 140 D.L.R. (4th) 235. In Commonwealth jurisdictions, the directness test for remoteness as applied in Polemis and Furness, Withy <& Co Lid, Re, [1921] 3 K.B. 560, 8 LI. L. Rep. 351 (CA.) [Re Polemis], has been replaced by tests based on reasonable foreseeability: see Overseas Tankship (U.K.) Ud. v. Morts Dock & Engineering Co., The Wagon Mound (No. 1), [1961] A.C. 388, [1961] 1 All E.R. 404 and Overseas Tankship (U.K) Ltd. v. Miller Steamship Co. Pty. Ltd., The Wagon Mound (No. 2), [1967] 1 A.C. 617, [1966] 2 All E.R. 709. Lord Atkin was obviously not intending to confine his proximity principle to 60 it, or do both depending on the ckcumstances? In England, where the test originated, it is sometimes considered independent of the proximity determination and is used to limit duty of care.238 Because Anns is not followed there, all manner of policies are considered under its banner.239 In Canada, as a result of Cooper and Edwards, justice and fairness is clearly part of the proximity determination. As noted in section 3.4.1, there is some ambiguity as to how expansive the investigation is to be at stage one of Anns, but the assumption is that the Canadian courts will confine it to the relationship between the specific parties. The broad policy considerations at this stage, I would argue, should be confined to those which relate to the mtrinsic nature of individual responsibility, duty or obligation without reference to instrumentaHst concerns. The question to ask is whether, as a society, we want one person to be another's keeper in the particular context considering the nature of the activity and the loss. Considerations which reach beyond the parties, although such considerations may be labelled justice or fairness issues, more clearly relate to the second stage oi Anns. They are discussed below under the headings of supporting and counter policies. Negligence liabiUty, which is based on proximity, and corrective justice are both founded on relationship, causation and fault.240 The question at this stage of the analysis is what defines the relationship? A large part of it relates to the nature of the loss. Lord Atkin was primarily concerned with conduct that could lead to physical loss. Engage in conduct that could injure others and you will be in a relationship with them. We now know that mere foreseeability is not enough, and that closeness, directness, justice and fairness are also required. In most cases involving foreseeable physical loss, the circumstances will be such that the addition requirements are also satisfied. As Lord Oliver said in Murphy, "The infliction of physical injury to the person or property of another universally requires to be justified."241 Cases involving pure economic loss are more troubling. The literal meaning of the words "closely and directly affected" can certainly be applied to cases of financial loss, e.g., where a financial direct injury in the confined sense of the intentional torts or the Re Polemif causation test. In fact, there is a certain indirectness about a manufacturer's relationship to ultimate users (including non-paying ones as in Donoghue) — it is the consumer's own act of using the product which most immediately causes the injur)'. 238 See Winfield and Jolowic^ on Tort, supra note 229. 239 In England, the "fair, just and reasonable" determination in part serves the same function that the second stage of Anns used to. 240 As discussed in section 3.2, there are competing views as to what amounts to corrective justice — this is one of prevalent views. 241 J^ra note 213 at 487. 61 manager loses all his client's money on bad investments. However, since Murphy, the predilection in the United Kingdom has been to deny financial loss claims on the grounds of justice and fairness. This is likely in accordance with Lord Atkin's conception of moral responsibility. Where such claims have been allowed it has generally been on the basis of voluntary assumption of responsibility and the Hedley Byrne principle. In Canada, there has been greater willingness to impose prima facie duties of care in financial loss cases, i.e., to accept that closeness, directness, justice and fairness will support a relationship in such circumstances. In Cooper the Court held that factors relevant to whether or not a relationship of proximity exists include the "expectations, representations, reliance and the property or other interests" of the parties.242 These are factors which will frequently be present in economic negligence cases. One factor that is likely not relevant to proximity is the relative wealth of the parties. In Jacobi v. Griffiths2^ the Supreme Court of Canada had to decide whether a non-profit employer was vicariously liable for an employee's sexual assaults. Binnie J., for the majority, held that in the circumstances of that case the employer was not liable. Binnie J. remarked that "[t]he attribution of vicarious liability is not so much a 'deduction from legalistic premises' as it is a matter of policy", and that "[m]uch as the Court may wish to take advantage of the deeper pockets of the respondent to see the appellants compensated, we have no jurisdiction ex aequo et bono to practise distributive justice."244 A similar conclusion would probably be reached in the context of a proximity determination. "Justice and fairness" appears to be both a limiting and an expanding concept, depending on the circumstances. The proximity concept was originally based on the rather wide notion of foreseeability. The "closely and directly affected" part of the test was later separated from foreseeability to limit the scope of proximity'. In Canada, the practical effect of the recent addition of "justice and fairness" to the mix is still unknown. We know that, so far, negligence liabiHty has expanded well beyond its former limits.245 But we also know that the Supreme Court of Canada has indicated that restraint is now in order, and that incremental change 242 Cooper, para. 34 (see supra note 221 and accompanying quote). 243 p999] 2 S.CR. 570,174 D.L.R. (4th) 71 \Jacok]. 244 Ibid, at para. 29. 62 based on analogous categories is the starting place in deciding whether or not to recognize a new duty. 3.4.3 Policies Supporting the Imposition of a Duty of Care Certain policies which are extrinsic to the specific relationship of the parties can, in certain circumstances, support the imposition of a duty of care. They include broad conceptions of distributive justice, and non-normative objectives such as deterrence. As mentioned in section 3.4.2, the limited relationship-specific form of distributive justice which looks to the relative wealth of the parties was rejected in Jacobi as a relevant consideration in determining vicarious liability. Broader conceptions of distributive justice which extend beyond the individual parties are more commonly argued. They are usually based on the deep pockets of defendants as a class (and their ability to spread liability costs) or society generally.246 The Rawlsian theory of distributive justice based on equality of entitlements has not been accepted as a relevant objective in the duty debate. Recently, in McFarlane,241 the House of Lords had to consider whether the parents of a healthy but unwanted child had a wrongful birth claim against a health board. The husband had had a vasectomy and was advised by the surgeon afterwards that the husband had been rendered infertile when in fact he had not. Relying on this advice, the couple ceased taking contraceptive precautions and the wife became pregnant. Part of their claim was for the cost of bringing up the child. Lord Steyn, in the majority, stated that: It is possible to view the case simply from the perspective of corrective justice. It requires somebody who has harmed another without justification to mdernnify the other. On this approach the parents' claim for the cost of bringing up [their child] must succeed. But one may also approach 245 For example, applying the proximity concept to negligent misrepresentation liability (as in Hercules). 246 In a bold British Columbia decision of short-lived influence, Inland Feeders Lid. v. Virdi, [1980] 5 W.W.R. 346, 12 C.C.L.T. 177 (B.C.S.C.), the Supreme Court allowed a claim by a developer against a municipality for its misinterpretation of a by-law based in part on distributional concerns. The developer relied on the municipality's assurances and suffered economic loss. It should be noted that this was not duty of care case. There was no negligence. Neither was it a case of unjust enrichment or estoppel. The Court allowed the plaintiffs claim for damages based on "innocent" misrepresentation citing, among other reasons, the need to be able to rely on assurances by municipal governments, and that it was preferable that this type of loss be bome by the community as a whole. For a comment on this case, see John Irvine, Inland Feeders Lid. v. Virdi: Annotation (1980), 12 C.C.L.T. 179. On appeal, however, the decision was overturned. The Court of Appeal refused to recognize a new cause of action and was not persuaded by the underlying social reasons of the trial judge: see Virdi v. Inland Feeders Ud. (1981), [1982] 1 W.W.R. 551,18 C.CL.T. 292 (C.A.). 247 Supra note 119. See also discussion, supra note 229. 63 the case from the vantage point of distributive justice. It requires a focus on the just distribution of burdens and losses among members of a society.248 And later: The truth is that tort law is a mosaic in which the principles of corrective justice and distributive justice are interwoven. And in situations of uncertainty and difficulty a choice sometimes has to be made between the two approaches.249 In the end, however, Lord Steyn concluded that on the facts of this case the principles of distributive justice, and the "fair, just and reasonable" requirement (if it were necessary to decide this point), did not allow the claim. One of the problems with this kind of deep pockets analysis is how do you determine whose deep pockets and when. In MacFarlane, Lord Steyn said the answer could be reached by asking commuters or travellers on the Underground.250 He believed they would resoundingly say no to the question whether or not, in these circumstances, the costs of bringing up a healthy but unwanted child should be born by the medical community as opposed to the parents. Some Canadian decisions have, since MacFarlane, echoed Lord Steyn's view that distributive justice is a relevant concern in determining the existence of duty, but have similarly found on the facts that no duty was owed.251 As one author has concluded, distributive justice plays a supplementary role only, and that "[cjourts do not use the law of tort to correct distributive imbalances, though they may sometimes appeal to considerations of distributive justice to fortify conclusions reached by other routes."252 As described above, tort law serves a number of general functions.253 The same observations with respect to compensation, deterrence, appeasement, etc. apply generally in the context of the duty analysis. Of these functions, deterrence is a frequently cited justification for imposing a duty. In Stewart v. Pettie, a case involving the liability of a commercial host for alcohol-related injuries, Major J. for the Court described the role of deterrence in negligence: 248 Ibid, at 82. 249 Ibid, at 83. 250 Ibid, at 82. These people are apparently the new representatives of the reasonable person, replacing the "man on the Clapham Omnibus". Here, however, they are employed to determine the duty question not just the standard of care. 251 See Boutros, supra note 229, and Mummery v. Olsson, [2001] O.J. No. 226 (Ont. Sup. Ct), online: QL (OJ). These cases also involved "wrongful birth" claims. 252 See Lloyd's Introduction to jurisprudence, supra note 27 at 564. 253 See above 3.3.3. 64 One of the primary purposes of negligence law is to enforce reasonable standards of conduct so as to prevent the creation of reasonably foreseeable risks. In this way, tort law serves as a disincentive to risk-creating behaviour.254 The same point was made in Winnipeg Condominium Corp. No. 36 v. Bird Construction Co., an economic loss case, by La Forest J. delivering the unanimous judgment: Allowing recovery against contractors in tort for the cost of repair of dangerous defects thus serves an important preventative function by encouraging socially responsible behaviour.255 Professor Weinrib argued that the policy analysis at stage two of Anns refers only to policy considerations that negative liability', but Mr. Justice Major of the Supreme Court of Canada has countered in a recent paper that this is too narrow a view, considering the relevance of deterrence as a policy that supports the imposition of duty 256 Connected to the role of deterrence is the need to afford some measure of protection to members of society. As Lord Pearce said in Hedley Byrne: How wide the sphere of the duty of care in negligence is to be laid depends ultimately upon the courts' assessment of the demands of society for protection from the carelessness of others.257 As with distributive justice, however, deterrence and other general functions tend to play a secondary role, helping to justify a conclusion already reached on the proximity issue. 3.4.4 Counter Policies and General Negligence Professor Weinrib may have exaggerated when he suggested that all stage two policies were negative ones, but he was not far off. Most of them are. The counter policies referred to next relate primarily to ordinary negligence claims,258 although some of them, such as individualism and floodgates, apply to all forms of negligence including pure economic loss claims.259 To the extent that these policies influence the courts, they prevent the expansion of duties into new 254 [1995] 1 S.C.R. 131 at 150,121 D.L.R. (4th) 222. 255 [1995] 1 S.C.R. 85 at 118,121 D.L.R. (4th) 193 [Winnipeg Condominium cited to S.C.R.]. 256 See Ernest J. Weinrib, "Does Tort Law Have a Future?" (2000) 34 Val. U.L. Rev. 561 at 567, and Justice John C. Major, "Negligence" in Torts — 2001 (Vancouver: The Continuing Legal Education Society of British Columbia, 2001) c. 1 at 1.1.10. Justice Major cited Hercules, where the Supreme Court of Canada reiterated the importance of the deterrent function of tort law. See infra note 354 and accompanying quote. 257 Supra note 3 at 536. 258 I use the term "general" or "ordinary" negligence to mean negligence claims involving personal injury or property damage. 259 To be more precise, the policies catalogued here are those which are not specific to economic negligence claims. 65 areas. When Lord Aldan's penned his "neighbour principle", he recognized that in a "practical world" the legal recognition of moral responsibility would have to have limits.260 He apparently believed that his idea of proximity incorporated the necessary limits. Since Donoghue, however, the courts have made it clear policies extrinsic to the relationship need to be accounted for. As a preliminary point, one potential counter policy should be briefly mentioned for its lack of influence in the field of general negligence: distributive justice.261 The courts have not shown much interest in denying claims mvolving personal injury or property damage based on distributive concerns. Part of the problem is that the courts lack the power to implement the necessary changes to complement the restriction of liability of particular defendants, i.e., the power to require compensation from another source. No-fault motor vehicle insurance and workers' compensation schemes rely on legislated initiatives and coverage based on mandatory insurance or more general tax-funded sources. And on a theoretical level, negligence liability and other forms of tort liability which concern physical loss are rooted in causation by human agency. Most advocates of distributive justice propose compensation for certain forms of physical loss regardless of how it is caused, i.e., whether through human agency or otherwise.262 Individualism Individualism in this context means self-reliance and self-sufficiency. Given that social and commercial interaction requires some degree of interdependence, any policy which promotes self-sufficiency will involve difficult decisions. The debate comes to this: Where do we and where should we draw the line between relying on others and relying on ourselves? A decision which refuses to recognize a duty on the basis of this policy is inspired by a belief that encouraging individuals to be independent will make them and therefore society stronger. Individualism is a counterweight to individual responsibility (in the sense of being responsibility for the consequences of one's actions). The law of negligence has always reflected a policy of self-reliance, particularly in relation to certain kinds of claims. For instance, in cases where the court is asked to impose a duty to act, Donoghue, supra note 13 at 580 (see supra note 203 and accompanying quote). As noted below (section, it has more weight in the context of economic negligence, and as described above (section 3.4.3), it is sometimes put forward as a supporting policy. 66 that is, to impose liability for an omission or nonfeasance, there has historically been and still is resistance. The policies supporting the nonfeasance rule include "rugged individualism, self-sufficiency, and the independence of human kind".263 Accepting that dependence is desirable or necessary in certain situations, a number of exceptions to the nonfeasance rule have been recognized, usually where a prior relationship exists between the parties (e.g., duties to rescue, and duties on commercial and social hosts to control impaired guests in some circumstances). On a more general level, it has been argued that the expansion of tort obligations in recent times has encouraged a belief by some that if a person is injured it must be the responsibility of someone else.264 This is a belief the courts are now starting to actively counter. The loss lies where it falls unless there is a good reason to make someone else pay. In Stovin v. Wise, Lord Hoffman said: The trend of authorities has been to discourage the assumption that anyone who suffers loss is prima facie entided to compensation from a person (preferably insured or a public authority) whose act or omission can be said to have caused it. The default position is that he is not.265 Individualism, as a counter policy, is most relevant where there are opportunities for self-protection. In commercial settings particularly, there will be such opportunities and therefore the individualism argument will have more weight. Recently, the Supreme Court of Canada refused to recognize a duty to exercise care in conducting commercial negotiations, citing a number of counter policies to justify its conclusion, mcluding the self-sufficiency argument. The Court stated that "[f]he retention of self-vigilance is a necessary ingredient of commerce".266 Opportunities for self-protection may exist in non-commercial contexts as well, and when they do there is no reason why courts should not consider them. However, in many personal injury cases (e.g., medical malpractice and products liability), there will be fewer such opportunities and this policy will be less of a factor. While we may work and play in an increasingly interdependent world, there seems to be a renewed belief that the courts should not be promoting a society of dependence, of reliance on others. The sterling point is that we must take care of ourselves if possible. Individualism, 262 See Uoyd's Introduction to jurisprudence, supra note 27 at 564. 263 Linden, supra note 191 at 282. 264 Street on Torts, supra note 225 at 176. 265 [1996] A.C. 923 at 949, [1996] 3 All E.R. 801. 266 See Mattel, infra note 276 at para. 69. 67 Benthamite liberalism, and laissez-faire ideology had their heyday in the nineteenth century, but the ideas which inspired them are not dead and may even be enjoying somewhat of a renaissance. Change is Bad Judicial activism in "creating" new laws has ebbed and flowed over the years. But there have always been arguments against change, whether based on the pretence that judges do not have the power to "make" law and must defer to legislators to implement change, or for other reasons. Mamtaining the status quo for its own sake, however, has never been one of the more popular justifications for restraint. In Donoghue, Lord Buckmaster, in dissent, made this argument against a products liability principle: If such a duty exists, it seems to me it must cover the construction of every arflcle, and I cannot see any reason why it should not apply to the construction of a house. If one step, why not fifty? Yet if a house be, as it sometimes is, negligendy built, and in consequence of that negligence the ceiling falls and injures the occupier or any one else, no action against the builder exists according to the English law, although I believe such a right did exist according to the laws of Babylon. Were such a principle known and recognized.. .much of the discussion of the earlier cases would have been waste of time, and the cnstinction as to articles dangerous in themselves or known to be dangerous to the vendor would be meaningless.267 Admittedly, part of his concern was with floodgates (and perhaps going the way of the Babylonians). But his objection that the "earlier cases would have been a waste of time", if the law were changed, is not one that finds much support if it is the only argument against change, especially when there is an otherwise a good reason for expansion. More recently, in Junior Books Ltd. v. Veitchi Co., in response to the argument that pure economic loss claims for negligent construction should not be allowed, Lord Keith stated: But in the present case the only suggested reason for limiting the damage (ex hypothesi economic or financial only) recoverable for the breach of the duty of care just enunciated is that hitherto the law has not allowed such recovery and therefore ought not in the future to do so. My Lords, with all respect to those who find this a sufficient answer, I do not. I think this is the next logical step forward in the development of this branch of the law.268 267 Donoghue, supra note 13 at 577-78. 268 [1983] 1 A.C. 520 at 546, [1982] 3 All E.R. 201 (H.L.) [Junior Books cited to A.C.]. 68 Since Junior Books, other objections have been made to expansion in the area of economic negligence, as noted below, but at the time, keeping the status quo, as a reason by itself, was not persuasive. Avoidance of Political Interference Concern about overstepping judicial authority and entering the political arena operates as a limiting force. It is a legitimate reason for judicial reluctance to "make" law. Judges are not properly situated to make political decisions. Claims against public authorities, whether based on general or economic negligence, highlight this concern. There is a general policy supporting immunity based on a "pillars of government" idea, i.e., that the courts should not question political decisions. In England, where Anns has been rejected, claims against public authorities are effectively barred, unless they can be made to fit under the Hedley Byrne principle which requires a finding of voluntary assumption of responsibility. In jurisdictions which follow Anns, such- as Canada and New Zealand, the same policy exists although it is less rigidly applied. The test from Anns requires the court to make a distinction between true policy decisions, which are not reviewable, and the operational component of statutory discretion, which is.269 This concern arises in other contexts as well. In the economic sphere, particularly, imposing obligations can amount to a form of consumer protection, which is generally considered political in nature. In Murphy, the House of Lords refused to impose a duty on builders (or public authorities) to subsequent owners in respect of loss of resale value because of negligent construction and inspection. Lord Keith has this to say: There is much to be said for the view that in what is essentially a consumer protection field..., the precise extent and limits of the liabilities which in the public interest should be imposed upon builders and local authorities are best left to the legislature.270 Certainty Certainty and predictabiUty are often cited as desirable goals and as inhibitors of the extension of legal principles.271 People want to know the bounds of their responsibility not only for general ease of mind, but also so they can plan their affairs, aware of the potential costs of 269 This aspect of the Anns test is discussed in more detail below at 4.3.1. 270 Murphy, supra note 213 at 472. 69 engaging in this or that activity. In the commercial sector, the importance of certainty is more pronounced given that the purpose of commercial activity is to make money. Without knowledge of the financial risks, no rational economic person would engage in business. The same is true to a degree in the non-commercial sector - few rational people would drive a car without some idea of the potential costs.272 A significant cause of any uncertainty in this area is the broadness of the language of duty and the resulting airiness in the concepts themselves.273 Of course, the fiipside of broad language is adaptability. As McLachlin J. commented in Norsk, referring to Canada's relatively open approach to duty of care at the time: 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.274 The desire for predictability, particularly in the economic sector, may have been part of the reason the English courts returned to a category-based approach to expansion (incremental change only in analogous categories).275 The Supreme Court of Canada cited uncertainty as a reason for falling to recognize a duty of care in the tendering process,276 and for the return to the categories approach generally in duty of care analysis.277 Special Considerations Sometimes a counter policy is very specific because of the nature of the relationship in question. For instance, in Dobson v. Dobson, the Supreme Court of Canada had to decide whether or not to recognize a duty of care on a mother in respect of her unborn child. The majority stated that no such duty should be recognized because it "would result in very 271 Street on Torts, supra note 225 at 177. 272 Following a law and economics analysis, costs relating to uncertainty would have to be quantified to determine the efficiency of a particular liability rule. 273 See, for example, Earl A. Chemiak & Elissa How, "Policy and Predictability: Pure Economic Loss in the Supreme Court of Canada" (1999), 31 Can. Bus. L.J. 209 at 231. 274 Norsk, supra note 178 at 1150. 275 Chemiak & How, supra note 273 at 233-34. 276 Mattel BuildingLtd. v. Canada, [2000] 2 S.C.R. 860,193 D.L.R. (4th) 1, 2000 SCC 60 at para. 119 [Mattel]. 277 See Cooper, supra note 218 at para. 31, where McLachlin C.J.C. has apparendy stepped back somewhat from her comments in Norsk. As noted above in section 3.4.1, analytically, it makes more sense to view the preference for incremental expansion for reasons of certainty as an Anns stage two consideration, and not a proximity issue. 70 extensive and unacceptable intrusions into the bodily integrity, privacy and autonomy rights of women".278 Floodgates The floodgates concern is the most frequendy cited "administration of justice" policy against expansion into new areas. The spectre of a flood of litigation, as Linden notes, is rarely conclusive, although it does hold more sway in pure economic loss cases.279 3.4.5 Counter Policies and Economic Negligence There are two broad types of economic loss, consequential economic loss and pure economic loss. The former is economic loss that flows from damage to the plaintiff s property (e.g., loss of profits), or from personal injur)' to the pkintiff (e.g., loss of earning capacity). Pure economic loss is not consequential in that sense and only involves financial loss, such as the loss in value of an investment.280 Typically, the courts are not any more concerned about consequential economic loss than they are about the physical loss from which it flows. Pure economic loss, on the other hand, is considered a special case. Social values have historically placed greater emphasis on bodily integrity and property, than on economic expectations.281 It is quahtatively different, it is argued.282 The following is a look at some other reasons which call for caution in allowing recover}' for pure economic loss. 278 [1999] 2 S.CR. 753 at 768-69,174 D.L.R. (4th) 1. 279 linden, supra note 191 at 271-72. See also Martel, supra note 276 at para. 71. 280 The Supreme Court of Canada has recognized five categories of pure economic loss: the liability of statutory authorities, negligent misrepresentation, negligent performance of a service, negligence supply of shoddy goods or structures, and relational economic loss. These categories are discussed in more detail in Chapter 4 (section 281 gee generally, Bruce Feldthusen, Economic Negligence: The Recovery of Pure Economic Loss, 4th ed. (Toronto: Carswell, 2000) at 9-15 [Economic Negligence], and Linden, supra note 191 at 407-08. One writer has described the difference between property damage and pure economic loss in an interesting way. Relying on Hegelian philosophy, he argues that individuals constitute their personalities in part by the property they own, but not by abstract holdings of wealth: see Christian Witting, 'TJistinguishing Between Property Damage and Pure Economic Loss in Negligence: A Personality Thesis"(2001) 21 L.S. 481. 282 This view is not universal, however. For instance, some civil law jurisdictions do not draw a distinction between pure financial loss and physical loss: see Daniel Jutras, "Civil Law and Pure Economic Loss: What Are We Missing?" (1986-87) 12 Can. Bus. L.J. 295. Also, most law and economics scholars do not see a substantive distinction between the two forms of loss: see, for example, William Bishop, in "Negligent Misrepresentation Through Economists' Eyes" (1980) 96 Law Q. Rev. 360 at 362, who writes, "Financial costs are costs, too, and there is no fundamental difference between financial and physical costs." 71 Loss Spreading The loss spreading counter argument is that it is preferable to spread numerous small economic losses among potential plaintiffs than require one defendant to bear the burden of the whole loss. In some cases this argument rests on efficiency grounds, but more often it is a question of fairness involving a form of distributive justice.283 It was argued unsuccessfully in Norsk, and as McLaclilin J. noted this argument rests on some faulty assumptions making it inapplicable in many cases.284 Not all economic negligence cases involve multiple plaintiffs and not all losses are small. However, on occasion, a case presents itself where, on fairness grounds, the court chooses to let a class of plaintiffs absorb relatively small losses for the benefit of a particular defendant.285 Indeterminate Liability The most frequently cited policy reason against recovery for pure economic loss is the spectre of ^determinate liability. Cardozo C.J.'s concern about "liability in an ^determinate amount for an ^determinate time to an ^determinate class" from Ultramares Corp. v. Toucbe,286 is repeated almost religiously in cases of economic negligence. As the Supreme Court of Canada stated in Marie/, "The scope of ^determinate liability remains a significant concern underlying any analysis of whether to extend the sphere of recovery for economic loss."287 This policy has both a fairness component, specific to the particular defendant, and a broader social aspect, which is concerned with the impact on the defendant's profession or a similarly situated group of defendants, and the prospect of unsustainable liability costs.288 283 Cf. distributive justice as a supporting poliq^: see section 3.4.3. The loss spreading justification in this context could be more accurately described as based on "shallow pockets". 284 See discussion above at 285 This was one of five arguments that was put forward by Denning, M.R. in Spartan Steel <& Alloys Ud. v. Martin & Co. (Contractors) Ud., [1973] Q.B. 27, [1972] 3 All E.R. 557 (CA.) [Spartan Steel cited to All E.R.]. A contractor had negligendy damaged a power cable and electricity was cut off to the plaintiffs factory. In denying the plaintiffs claim for its lost profits while the factory lay idle, Lord Denning cited the loss spreading idea - it was better that the whole community should suffer comparatively smaller losses, rather than the defendant bear the whole burden. The other arguments were: the equality argument (electricity boards cannot be sued for pure economic loss therefore contractors should be immune too); the common hazard argument (the law should encourage self-sufficiency for this type of loss which is usually small); floodgates; and the rather vague policy that the law should only provide for "deserving" cases. 286 2 55 N.Y. 170,174 N.E. 441 at 444 (N.Y.CA. 1931) [Ultramarescited to N.E.]. 287 Martel, supra note 276 at para. 57. 288 Professor Feldthusen makes the point that indeterminate liability has a "relational" or proximity component to it, i.e., the prospect of indeterminate liability in a particular case may make the relationship too distant to satisfy 72 In Bryan v. Moloney, an Australian High Court decision, the majority juxtaposed the problem of ^determinate liabiHty with considerations rekting to social loss (and free market economics): One policy consideration which may militate against recognition of a relationship of proximity in a category of case involving mere economic loss is the law's concern to avoid the imposition of liability "in an indeterminate amount for an indeterminate time to an indeterminate class". Another consideration is the perception that, in a competitive world where one person's economic gain is commonly another's loss, a duty to take reasonable care to avoid causing mere economic loss to another, as custinct from physical injury to another's person or property, may be inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage. The combined effect of those two distinct policy considerations is that the categories of case in which the requisite relationship of proximity with respect to mere economic loss is to be found are properly to be seen as special. Commonly, but not necessarily, they will involve an identified element of known reliance (or dependence) or the assumption of responsibility or a combination of the two.289 [footnotes omitted] While the chance of exposure to ^determinate liability is a significant concern, the absence of such risk does not mean a duty will automatically be imposed. There may be other reasons for negating or limiting the duty.290 Social Loss Neutrality As the Austrahan High Court pointed out in Bryan v. Moloney, in many economic negligence cases there are transfers of wealth without any net "social loss". Linden explains it this way: One person's gain becomes another's loss, but nothing is destroyed. Such transfers...are not necessarily objectionable. Unsuccessful investments, for example, are.. .not, without more, socially objectionable. Indeed, ordinary commerce would grind to a halt were the law to seek to deter transfers of wealth to the same extent it seeks to deter destruction.291 In Martel,292 the Supreme Court of Canada relied on this argument in part in refusing to recognize a new duty of care in respect of pure economic loss. The plaintiff owned a building of which a federal Crown agency was a major tenant. The lease expired and the Crown invited the neighbour principle: see Economic Negligence, supra note 281 at 96. I would argue as well that it raises relationship-specific questions of fairness. But there is a broader element to this concern. For example, in discussing indeterminate liability in Hercules, supra note 6 at 194, La Forest J. referred to the "socially undesirable consequences to which the imposition of indeterminate liability on auditors might lead". Indeterminate liability therefore has a dual aspect nature — it is concerned not only with the particular relationship, but also the impact of finding liability in a broader social sense. It is on solid ground as an Anns second stage consideration. 289 (1995), 128 A.L.R. 163,182 CL.R. 609 at 618-19 (H.C). 290 For instance, in Martel, indeterminate liability was not an issue, but other concerns were present, as described above in section ("Floodgates"), and below in section ("Social Loss Neutrality") and section (under the subheading "Free Competition"). 291 Linden, supra note 191 at 408. See also, Economic Negligence, supra note 281 at 14. 292 Supra note 276. 73 tenders for the provision of space. The plaintiff sued in negligence when it lost the contract arguing that the Crown owed a duty of care in negotiations and in the tendering process. Both ckims were denied. With respect to the duty of care in negotiations, the essence of the claim was that Crown was negligent in not providing the plaintiff with adequate information concerning the Crown's bargaining position, and that the it engaged in "hard bargaining", displaying casual contempt toward the plaintiff and its personnel by breaking appointments and generally chsregarding the expectation of basic courtesy. The Court applied Anns and found proximity under stage one. In negativing the prima facie duty under stage two, the social loss argument was considered: 63 Perhaps following the traditional view that, at least in some circumstances, economic losses are less worthy of protection than physical or proprietary harm, it has been noted that the absence of net harm on a social scale is a factor weighing against the extension of liability for pure economic loss. That is to say, negotiation merely transfers wealth between parties. Although one party may suffer, another often gains. Thus, as an economic whole, society is not worse off: see Feldthusen, "liability for Pure Economic Loss: Yes, But Why?" [(1999) 28 U.W.A.L. Rev. 84] at p. 102: ...many pure economic losses are qualitatively different from physical damage. They represent not social loss, as occurs when property is damaged or destroyed, but private loss when wealth is transferred from one part}' to another with nothing being lost overall. The plaintiffs loss will often be a competitor's gain...293 There were other policy considerations in this case, such as the concern that extending a duty of care to pre-contractual commercial negotiations would deter socially and economically useful conduct, and that it would amount to using tort law as "after-the-fact insurance against failures to act with due diligence or to hedge the risk of failed negotiations through the pursuit of alternative strategies or opportunities".294 The transfer of wealth factor alone will be insufficient in most cases, but added to other policy concerns it can tip the balance against extension of duty of care.295 Laissez-Faite The authors of one text sum up the relationship between torts, economic interaction and laisse^Jaire in this way: Much of the law relating to economic transactions is only understood if the implied judicial acceptance of laisse^faire is considered. This is merely one facet of the individualism of the law of 293 Ibid, at para. 63. 294 Ibid, at paras. 64-70. 295 It would be cold comfort to a plaintiff that the only reason liability was denied was because someone else gained, i.e., that a private economic loss is not worthy of protection where there is no overall social loss. 74 torts, especially in the nineteenth century, and is an influence which still persists, although less pervasively, in the face of the modern tendency towards collectivism.296 Laissez-faire and the individualism were manifestations of nineteenth century liberalism. Laisse^faire is particularly reflected in free market economics and contractualism, which is the idea that all obligation should arise only through the will of parties contracting freely.297 To appreciate the influence of free competition and contractualism on economic negligence as counter policies, it is necessary to recognize their current limits. The increasing acceptance during the twentieth century of collectivism, a political ideology opposed to laisse^faire which holds that the state is justified in sacrificing a measure of individual freedom to provide benefits to society generally, has meant that some degree of government control over commercial interaction is taken for granted. Collectivism is the ideology behind consumer protection legislation as well as some judge-made law. • Limits Economic Darwinism has been tempered by enforced conceptions of fairness. A variety of legislation has been enacted impacting on the ability of individuals to compete and contract freely. Trade practices legislation imposes certain standards of conduct in trading, the breach of which can lead to various remedial consequences such as damages and rescission. The effect of this legislation has been to create a legislated tort of fair trading, and it applies whether or not there is fault.298 Some legislation impacts more specifically on freedom of contract (along with the more general impact of trade practices legislation), prohibiting some 296 Street on Torts, supra note 225 at 13. 297 See Andrew Robertson, "Situating Equitable Estoppel Within the Law of Obligations" (1997) 19 Sydney L. Rev. 32 at 33, and Morris R. Cohen, "The Basis of Contract" (1933) 46 Harv. L. Rev. 553 at 558. I use the word contractualism in a more moderate sense to refer to the desirability of voluntariness in assuming economic obligation - as such it is just a convenient way to group together under one heading the ideas of freedom of contract, caveat emptor and contractual overlap, which are all described in this section. 298 For example, in B.C., the Trade Practice Act, R.S.B.C. 1996, c. 457 grants remedies for "deceptive acts or practices" and "unconscionable acts or practices" in the context of "consumer transactions": see ss. 1, 3, 4, and 22. The relatively narrow definition of consumer transaction in the legislation means the Act does not apply to established businesses dealing with each other. Australia and New Zealand have enacted comprehensive fair competition legislation which extends well beyond the unsophisticated consumer and applies to businesses generally. This legislation, because of its breadth (it prohibits almost all forms of misleading or deceptive conduct in almost all commercial contexts), overlaps with and expands upon many economic torts, such as negligent misrepresentation, injurious falsehood and passing off. See Chapter 4 (sections 4.4.2 and 4.4.3) for a brief discussion of the Australian and New Zealand legislation. 75 kinds of terms or imposing others, generally with the aim of protecting vulnerable parties in various contractual settings.299 Judicial attempts to limit taisse^faire in the name of collectivism are also varied. While courts in Canada have not recognized a general tort of unfair competition,300 this belies their apparent willingness to address fairness at other times. A number of common law and equitable claims have grown out of a desire for fairness. Besides the reliance-based economic negligence claims, others include breach of fiduciary duty, breach of confidence, undue influence, duress and unconscionability.301 However, to the extent that these claims apply in the commercial arena, courts generally exercise caution, recognizing that they are not in the best position to assess the economic or political consequences of their decisions.302 • Free Competition Free competition doctrine goes hand in hand with individualism.303 Free competition, however, is more centred in the economic sphere. Under the influence of collectivism, the doctrine is now more often referred to as free andfair competition. The federal Parliament has made "undue" interference with competition a criminal offence.304 Consonant with legislated policy, the Supreme Court of Canada has affirmed that free and fair competition underpins our economic system.305 The belief in free market economics is often called into service to justify certain kinds of intentional behaviour. As Lord Reid said in Dorset Yacht 299 In B.C., see for example the Consumer Protection Act, R.S.B.C. 1996, c. 69 and Sale of Goods Act, R.S.B.C. 1996, c. 410. In the United Kingdom, notable examples include the Misrepresentation Act 1967 (U.K), Unfair Contract Terms Act 1977 (U.K.) and Contract (Rights of Third Parties) Act 1999 (U.K.). 300 This broad-based common law tort has been recognized in some states in the United States. 301 These latter five apply in a wide range of contexts including non-commercial settings. Also, it should be noted, undue influence, duress (including economic duress) and unconscionability are not independent causes of action, but claims which may arise in the context of contractual disputes. 302 See for example Lord Keith's comment about consumer protectionism in Murphy, quoted above in section 303 See above section 304 Competition Act, R.S.C. 1985, c. C-34, Part VI. 305 For example, see Consumers Distributing Co. v. Seiko, [1984] 1 S.C.R. 583 at 595-96,10 D.L.R. (4th) 161, and R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606 at 653, 93 D.L.R. (4th) 36. 76 [CJausing economic loss is a different matter; for one thing, it is often caused by deliberate action. Competition involves traders being entided to damage their rivals' interests by promoting their own...306 The authors of Street on Torts argue that imposing liability for careless acts, however, does not harm the doctrine of free competition.307 This is debatable. The example they give is a relational economic loss claim. The gravamen of this claim is that the defendant has negligendy damaged or destroyed property (or, less frequently, caused personal injury) and a third party, the plaintiff, has suffered economic loss as a result. Admittedly, in most cases, imposing liability for relational economic loss does not harm free competition. Freedom from constraint in conducting one's business has never meant freedom to injure other people and damage their property. Also, the activity causing the loss in relational claims, while frequendy commercial in nature need not be. Relational claims are similar to traditional accident cases. However, the other recognized areas of pure economic loss308 are different. These complaints relate to activities of an economic nature. Imposing liabiUty in these areas does interfere with the doctrine of free competition. This is easiest to see in cases mvolving misrepresentations, services and defective buildings and products. For instance, in products liabiHty cases a manufacturers' obligation to correct non-dangerous defects, if such an obligation were found to exist, could be seen as an inappropriate interference with market forces. Risk-averse actors might alter, cease, or move their activities, if they had not accepted the risk. The argument even applies in public authority cases, although the interference is mdirect and less clear. The more expensive government becomes, the more difficult it becomes to compete in a free market. In Mattel, one of the reasons for not recognizing a duty in commercial negotiations was the concern that it would deter socially and economically useful conduct.309 In the words of the Court: It would defeat the essence of negotiation and hobble the marketplace to extend a duty of care to the conduct of negotiations, and to label a party's failure to disclose its bottom line, its motives or its final position as negligent. Such a conclusion would of necessity force the disclosure of privately 306 Supra note 205 at 1027. 307 Street on Torts, supra note 225 at 116. 308 See supra note 280. 309 See discussion above at 77 acquired information and the dissipation of any competitive advantage derived from it, all of which is incompatible with the activity of negotiating and bargaining.310 The Supreme Court of Canada is cleady of the opinion that liability for careless conduct in this situation would harm free competition. Not every economic negligence claim will do so, however, and there may be other factors, such as the potential for health and safety problems, that override the benefit obtained from promoting competition. The nature of the claim and the context in which it arises must be considered. • Contractualism Adherents of the view that all economic restraint is objectionable argue in favour of complete freedom in contractual matters. Few theorists support this view today, given the general acceptance of limits based on fairness. Three aspects of conttactualism are described next as they relate to economic negligence. Freedom of Contract I refer to freedom of contract here in the sense of allowing parties to agree to bargain as they wish. This policy is not as absolute as it was when Jessel M.R. uttered the words: [Tjf there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred.. .311 There are many statutory and judge-made limitations to this doctrine today,312 but it still remains the starting place when mterpreting commercial contracts. For instance, in Hunter Engineering Co. Ltd. v. Syncrude Canada Ltd., where the Court considered general limits to exclusion clauses in contracts, Wilson J. stated that: [if] there is no.. .inequality of bargaining power.. .the courts should, as a general rule, give effect to the bargain freely negotiated by the parties.313 310 Supra note 276 at para. 67. 311 Printing & Numerical Registering Co. v. Sampson (1875), L.R. 19 Eq. 462 at 465. 312 Of particular note are those relating to the enforceability of exclusion clauses. Some contractual exclusion clauses are regulated by legislation (see for example, in British Columbia, s. 20 of the Sale of Goods Act, R.S.B.C. 1996, c. 410, and in the United Kingdom, the Unfair Contract Terms Act 1977 (U.K.)). Judge-made rules tend to protect vulnerable parties, requiring notice in some situations, and subjecting clauses to scrutiny if they are unconscionable, unfair or unreasonable. See S.M. Waddams, The Taw of Contracts, 4th ed. (Toronto: Canada Law Book, 1999) at paras. 470-91, G.H.L. Eridman, The Taw of Contract, 4th ed. (Toronto: Carswell, 1999) at 608-37, and Cheshire, Fifoot <& Furmston's Law of Contract, supra note 1 at 171-215. 313 [1989] 1 S.C.R. 426 at 515, 57 D.L.R. (4th) 321 [Hunter Engineering cited to S.C.R.]. 78 In this somewhat narrow view of freedom of contract, there is no conflict with economic negligence the way there is with free competition. In commercial dealings, parries are generally free to contract out of kability for negligence, economic or otherwise. Caveat Emptor Caveat emptor or "buyer beware" refers to the idea that buyers must take the property they purchase "as is". To protect themselves they must inspect and test property before purchasing or negotiate warranties with respect to quality and to cover risks of future defects. Consumer protection legislation limits this principle with respect to goods, but it survives largely intact in real property contracts.314 liability for economic negligence can mdirecdy interfere with the idea of caveat emptor. Imposing duties in some situations can amount to imposing non-contractual warranties of quality. In Winnipeg Condominium, this argument was made by a builder in resisting a claim that it owed a duty of care to a subsequent owner and was liable for the cost of repairs (no one was injured but the construction defects posed a threat of injury). The Court noted that the caveat emptor doctrine stemmed from the laisse^Jdire attitudes of the nineteenth century and was based on the assumption that the buyer was in the best position to discover or bear the risk of defects. Disagreeing with this assumption, the Court concluded: [A] subsequent purchaser is not the best placed to bear the risk of the emergence of latent defects... For this Court to apply the doctrine of caveat emptor to negate [the contractor's] duty in tort would be to apply a rule that has become completely divorced, in this context at least, from its underlying rationale.315 How much caveat emptor rests on the assumption noted or simply on hard-nosed individuaUsm is arguable. But the decision to impose a duty is a good one given the risk of personal injury. The Court was careful to limit the duty to dangerous defects.316 In a recent commercial sale of 314 See Winnipeg Condominium, supra note 255 at 122, quoting Fraser-Reid v. Droumtsekas, [1980] 1 S.C.R. 720 at 723, ' 103 D.L.R. (3d) 385. 315 Winnipeg Condominium, ibid, at 128. 316 Ibid, at 129. See also the earlier case of Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189, 40 D.L.R. (3d) 530 [Rivtow Marine), where a majority of the Supreme Court of Canada denied a claim for the cost of repairs to a defective crane because it was akin to liability under a warranty of fitness. Laskin J., in dissent, argued that the threat of physical harm justified a finding of liability. His position was finally adopted in Winnipeg Condominium. 79 goods case, the British Columbia Court of Appeal refused to impose a duty in respect of non-dangerous defects causing pure economic loss.317 Contractual Overlap The problem of contractual overlap is related to caveat emptor but is broader in scope. The argument is that tort duties which are conttact-like in nature should not be imposed against the will of the parties. Doing so not only offends the idea of contractoalism, but also results in a lack of coherence in approach or purpose.318 In imposing a duty in Winnipeg Condominium, the Court rejected this argument, in addition to the caveat emptor argument. The Court stressed the dangerous nature of the defect: [Tjhe duty to construct a building according to reasonable standards and without dangerous defects arises independently of the contractual stipulations between the original owner and the contractor because it arises from a duty to create the building safely and not merely according to contractual standards of quality. It must be remembered that we are speaking here of a duty to construct the building according to reasonable standards of safety in such a manner that it does not contain dangerous defects. As this duty arises independendy of any contract, there is no logical reason for allowing the contractor to rely upon a contract made with the original owner to shield him or her from liability to subsequent purchasers arising from a dangerously constructed building.319 [emphasis by the Court] A duty to avoid dangerous defects is closer to classic tort obligations than contractual ones. It makes sense to class the obligation as tortious.320 In Hasegaiva, the contractual overlap argument was successful where the defect was not dangerous. The obligation was closer to a 317 M. Hasegawa &• Co. v. Pepsi Bottling Group (Canada) Co. (2002), 213 D.L.R. (4th) 663, [2002] 7 W.W.R. 600, 2002 BCCA 324 [Hasegawa]. 318 It should be noted that the question of contractual overlap is not the same thing as the concurrenq' issue, i.e., whether tort claims can arise in contractual settings (see the Appendix for an overview of the basic concurrency issues). The problem of contractual overlap concerns the appropriateness of tort claims that bear certain similarities to contract claims. 319 Winnipeg Condominium, supra note 255 at 123-24. 320 There is an argument, however, that even considering the risk of injury, the obligation is contractual in nature. Professor Blom argues that the "contractual dimensions of the situation were unduly discounted" in Winnipeg Condominium. Purchasing a building is an economic risk and the price should reflect the risk, i.e., contract is an acceptable way to allocate risk in this context. To shift the responsibility to builders when the defect is associated with some vague notion of "dangerousness", exposes builders to uncertain costs making tort liability inappropriate. See Joost Blom, "Tort, Contract and the Allocation of Risk" (2002) 17 Sup. Ct. L. Rev. 289. Professor Feldthusen makes a similar point. He argues that there is no reason to assume a market failure in this context. The builders, sellers, and buyers will have allocated the risk of this kind of loss by contract already, and imposing a duty in tort will have little effect on that allocation, through deterrence or otherwise. The court is in effect is giving the plaintiff owner insurance that was not paid for. See Economic Negligence, supra note 281 at 176-77. These arguments have an efficiency aspect to them, and the courts have not been inclined so far, except in rare instances, to let economics be their guide in duty analysis. 80 contractual warranty of quality,321 and therefore Chief Justice Finch, for the Court, refused to impose a duty in tort: A legal rule which imposed liability for the manufacture or supply of defective, but non-dangerous, goods would create an implied warranty of product quality for the sale of commercial products, in the absence of contract.322 It is a primarily a question of functional coherence. If the law treats a type of economic obligation as consensual in one context (i.e., in contract), it should treat a similar type of obligation the same way even though the claim may be framed differendy (i.e., in tort), unless there is a justifiable reason to do otherwise. Simply because standards of conduct are usually imposed against the will of the defendant in tort is not a justifiable reason. 3.4.6 A Note on Efficiency and Duty of Care As described earlier, the Canadian courts have not enthusiastically adopted the economic analysis of law.323 In the context of duty analysis, Norsk is the leading case.324 If efficiency ever becomes a seriously considered "policy" by the courts in "choice of rules" negligence cases, it could be a supporting policy or a counter policy. It could provide insight into liability for general negligence or for economic negligence. Norsk was an economic negligence case and the efficiency arguments were raised as counter policies, but law and economics analysis, of course, is not so restricted. In Norsk, La Forest J. pointed out, in relation to the insurance arguments, that lawyers will have to become conversant with "fundamental matters of insurability" in new tort cases and inform the courts of their research if efficiency is to become a significant policy consideration.325 In fact, they will have to become educated in economics generally, and not just in matters of insurability, to do the cost-benefit analyses required. The costs of various forms of risk avoidance besides insurance, of different liability rules, of uncertainty7, etc. will all factor into the calculus of wealth maximization. 321 It should be noted that tort obligations in these circumstance are not identical to typical contractual warranties. A duty in negligence would only result in liability if there were a breach of the standard of care; liability for breach of warranty is strict. However, in many cases it would amount to the same thing. Its purely economic nature and relation to quality is what makes the obligation contract-like. 322 Hasegawa, supra note 317 at para. 57. 323 See generally above section 324 See supra note 178 and accompanying discussion. 325 Ibid. 81 Efficiency arguments are considered below in relation to negligent misrepresentation to see if they support one form of liability over another.326 3.5 IMPLICATIONS FOR A THEORY OF LIABILITY IN NEGLIGENT MISREPRESENTATION In this section, I look first at the foregoing deontic and mstrumentalist approaches to tort law, as they have been absorbed into the duty of care analysis, to see if they point to a particular model of liability' for negligent misrepresentation. The economist's goal, the efficient attainment of maximum wealth, is considered next. The question is asked: Does law and economics analysis favour one theory of liability over another? Its separate heading reflects its mterdisciplinary status. Lastly, certain problems specific to the reliance and consent models of liability are examined. As a preliminary matter, I diagram and describe the various contexts in which negligent misrepresentation claims arise • in the following three figures. The failure to distinguish between them is responsible, I believe, for some of the confusion that exists in the analysis of Hedley Byrne liability. I have isolated three main contexts, although, as I mention, there are variations on these themes and in some cases a certain degree of overlap. The names I use to describe them, "direct advice", "basic contract", and "free rider", are my own and not generally accepted nomenclature. In the figures, "K" refers to contract. 326 See section 3.5.2. 82 Figure 3.5-1 Direct Advice Gratuitously Provided Information Provider |noK Information Recipient (K) I I ^ I TTiird Party Subject of | Information I I This is the classic Hedley Byrne scenario. Information, generally financial in nature, is provided gratuitously in response to a request by the plaintiff. .Variations: Other considerations may apply if the information provider has ..a contract with .a third party to-provide the information or-is in a fiduciary relationship with the iun'formation recipient. • ' J Explanation. The direct advice scenario is the first context in which the tort of negligent misrepresentation was held applicable. The information is provided directly (or through an agent) to the information recipient and without consideration (i.e., without contractual obligation). Both Hedley Byrne and Micron Construction are examples. Professor Bishop refers to this as three-party negligent misrepresentation, apparently because the information typically relates to a third party (usually a client with whom the information provider has a contractual relationship).327 Such was the case also in both Hedley Byrne and Micron Construction. However, neither the House of Lords nor the British Columbia Court of Appeal predicated their decisions on the existence of such a third party relationship. Analytically, it is not necessary, although it should be noted that when such a relationship does exist, the lack of consideration is less significant, because there will likely be an "mdirect" financial benefit in providing the information. Further, if one could establish that the banking or other contract with the third party authorized or even required the provision of relevant financial information concerning the third party's business, this situation becomes a variant of the "free rider" scenario illustrated in Fig. 3.5-3.328 Besides the third party contract variation, other considerations apply where the information provider has a fiduciary relationship with the information recipient — besides a duty of care, a duty of loyalty will also exist in such a case. 327 Bishop, "Negligent Misrepresentation Through Economists' Eyes", supra note 282 at 373-77. 328 It is also potentially raises issues relating to third party beneficiaries under contracts (the third party here would be the information recipient or intended information recipient), which are described below in section under "Laisse^-Faire". 83 Figure 3.5-2 Negligent Misrepresentation in Basic Contract Settings A little more than a decade after Hedley Byrne was decided it was established that negligent misrepresentation claims could anse in contractual settings (it had long been established that actions in deceit could arise in this context). As explained below, the negligent misrepresentation can either be pre-contractual (during negotiation) or post-contractual (after agreement is reached). Most cases involve pre-contractual misrepresentations, as evidenced by the greater number of decisions in this category. Variations: Other considerations may apply if the mformation provider is in a fiduciary relationship with the information recipient. Explanation. In the basic contract setting, the information provider and information recipient have a contract with one another. Generally, the information will be specific to their relationship and have little value to anyone else. The negligent misrepresentations can occur either before or after agreement. Misrepresentations occurring during negotiations may be classed as "mere" misrepresentations (i.e., without contractual force), or may also be terms of the contract (sometimes referred to as collateral contracts) based on the parties' intention objectively determined.3"9 In the former case, besides an action in tort for damages, the equitable remedy of rescission may also be available (for an innocent but negligent misrepresentation). In die latter case, an alternative claim for contract damages is available. Misrepresentations occurring after agreement, in most cases, will be connected with performance of a contractual obligation,33" and therefore an alternative claim for contract damages will be available here too. If the misrepresentation follows completion, however, a tort claim will be the only option.'31 As in the direct advice setting, where the information provider has a fiduciary' relationship with the information recipient, besides a duty of care, a duty of loyalty will also exist. Information Provider Information Recipient 329 Esso Petroleum Co. Ud. v. Mardon, [1976] Q.B. 801, [1976] 2 All E.R. 5 (CA.) [Esso Pelro/eum] was the first case to clearly establish that Hedley Byrne could apply to pre-contractual misrepresentations. The majority of the Court of Appeal found that the misrepresentation was also a warranty, but Lord Denning was prepared to allow the claim whether it was or not. See also Williams, supra note 5. In Canada, Hedley Byrne is finnly entrenched in dus context too: see Sodd Corp. v. Tessis (1977), 17 O.R. (2d) 158, 79 D.L.R. (3d) 632"(CA.) [Sodd Corp], Cognos, supra note 49, and BG Cbeco International Ud. v. British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12, 99 D.L.R. (4th) 577 [BG Checo cited to S.C.R.]. 3311 /. Nunes Diamonds Ud. v. Dominion Electric Protection Co., [1972| S.C.R. 769, 26 D.L.R. (3d) 699 [Nunes Diamonds cited to S.C.R.] is an example of such a case, although the Court's approach to concurrent liability in that case is no longer followed. See also Henderson v. Merrett Syndicates Ud. (1994), J1995] 2 A.C. 145, [1994] 3 All E.R. 506 (H.L.) [Henderson cited to A.C.]. 331 See the Appendix for an overview of the issues relating to concurrent liability' in negligent misrepresentation and contract. 84 Figure 3.5-3 Negligent Misrepresentation and the Free Rider Third Party Users (Free Riders) Information Provider t-Information Recipient/Facilil itor 1 . The classic free rider problem involves accountants whose reports (most frequently audited corporate financial statements required by statute) may be used by non-paying third party users for investment purposes. However, other experts whose work is widely distributed could also have negligent misrepresentation claims made against them. Varianons": The "free rider" problem is less pronounced where the information has little "outside" value. Examples.include expert reports prepared, as part of tender, documentation, the third party contract variation, and the wills cases, as explained Explanation. As in the basic contract situation, the information here is generated in a contractual setting, but the difference is that the information has value to others outside the contractual relationship. Oftentimes, the information recipient is more of a facilitator, having the information prepared so that certain third parties can use it. It may be, however, that others than the intended users have access to it and/or that it is used for unintended purposes. As noted above, the dispute commonly involves corporate financial reports prepared by accountants. Shareholders of the corporation or other investors, who have access to the report, then rely on it in making investment decisions.332 I refer to these third party users or consumers as free riders, to borrow an economics expression, because they have not paid for the information, at least not directiy. Part of the problem with this secondary market is that the information producers cannot readily benefit from this usage. There is a danger in imposing liability in this situation that, because of the potential liabiUty costs, the information will stop being produced or become very expensive and therefore under produced. Traditional duty analysis deals with this problem by applying rules to limit ^determinate liability, for 332 Some notable cases include Ultramares, supra note 286, Candler v. Crane Christmas & Co. (1950), [1951] 1 All E.R. 426, [1951] 2 K.B. 164 (CA.) [Candler cited to K.B.], Haig v. Bamford, [1977] 1 S.C.R. 466, 72 D.L.R. (3d) 68 [Haig], Scott Group Ltd v. McFarlane, [1978] 1 N.Z.L.R. 553 (CA.) [Scott Group], Caparo Industries Pic. v. Dickman, [1990] 2 A.C. 605, [1990] 1 All E.R. 568 (H.L.) [Caparo cited to A.C], Esanda Finance Corporation Ud. v. Peat Marwick Hungerfords (Reg) (1997), 142 A.L.R. 750 (H.C) [Esanda] and Hercules, supra note 6. Accountants are not the only advice givers that need to worry about the possibility of wide-ranging liability, however. Newspaper columnists dispensing financial advice, valuers, surveyors, cartographers, marine hydrographers (Lord Denning's example referred to in Candler, at 183), and generally all experts whose work is widely available need to be concerned. 85 instance, the "end and aim" rule.333 Economists look at the problem from an efficiency standpoint. This problem does not generally arise in the previous two contexts. In some free rider cases, the mdeterminacy problem is minimal because of the particularized nature of the information. In construction cases, for example, engmeering or architectural reports prepared for tender purposes are generally only seen by a limited number of contractors.334 The third party contract variation described under Fig. 3.5-1 is another example of this - a bank whose client conteactually provides for the release of information to specified parties is not likely to be confronted with an ^determinate liability problem. A somewhat special situation is the case of the disgrunded beneficiary under a will who loses his bequest because of negligent draftsmanship or execution of the will by the lawyer.335 There is no concern about unlimited Ikbility. These cases do, however, stretch the reliance concept (whether at the duty stage or the causation stage) — the reliance is passive at best. They are really service cases not misrepresentation cases.336 As indicated, these categories are not watertight and there can be a degree of overlap. For instance, misrepresentations by real estate agents to purchasers concerning the property have generated much litigation. When the real estate agent acts for the vendor, there can be elements of all three scenarios. If the information provided is outside the scope of the agency agreement, it resembles the direct advice scenario. If the information is authorized by the agency arrangement, it is part basic contract (pre-contractual misrepresentation in negotiations between the vendor and purchaser — it is as if the vendor supplied the information) and part free rider. To further complicate matters, if there is a joint agency arrangement (i.e., the real estate agent represents both the vendor and purchaser), the agent's obligation may also be fiduciary in nature. If the agent only represents the purchaser, however, the same degree of overlap does not arise - this would be an example of the basic contract scenario. One final point should be mentioned: Regardless of which scenario is involved, if the information provider is a public authority, other considerations, particulady from an efficiency standpoint, may be relevant.337 3.5.1 Duty of Care and Negligent Misrepresentation In Canada, since Hercules, traditional duty of care analysis has been applied to negligent misrepresentation. It is no longer a separate "pocket" of negligence with its own special rules 333 The "end and aim" rule requires the information provider to know who will be using the information and for what purpose as a condition of liability. This rule is described below in section (under the subheading 'Indeterminate Liability and the End and Aim Rule'"). 334 See Edgeworth Construction Ud. v. N.D. Ua & Associates Ud, [1993] 3 S.C.R. 206,107 D.L.R. (4th) 169 [Edgeworth Construction cited to S.C.R.]. 335 See Whittingham v. Crease e> Co. (1978), 88 D.L.R. (3d) 353, [1978] 5 W.W.R. 45 (B.C.S.C.) [Whittingham] and Ross v. Counters (1979), [1980] Ch. 297, [1979] 3 All E.R. 580 (Ch.) [Ross], for example. 336 Negligent performance of a service is another one of the five categories of economic negligence recognized by the Supreme Court of Canada. The five categories are described below in section 337 Cases in this category include Windsor Motors Ud. v. Powell River (District) (1969), 4 D.L.R. (3d) 155, 68 W.W.R. 173 (B.C.C.A.) [Windsor Motors] and Porky Packers Ud. v. The Pas (Town) (1976), [1977] 1 S.C.R. 51, [1976] 3 W.W.R. 138 [Porky Packers], both involving a misrepresentation (direct advice) by a municipal official. The action succeeded in Windsor Motors but failed in Porky Packers because of lack of actual reliance. See section for a brief note on the efficiency aspect of public authority liability for negligent misrepresentation. 86 for deterrnining duty of care.338 In England, liability for careless words is not exacdy a pocket of negligence, however, but one of two main branches of negligence, the first based on Donoghue and proximity (and other considerations), and the second based on an extended Hedley Byrne principle (which applies to services cases too) and voluntary assumption of responsibility. In abandoning the consent model in negligent misrepresentation cases, Canada has parted company with England, and apparently the rest of the Commonwealth. The Supreme Court of Canada may have been motivated by a desire for formal coherence in duty analysis, but this unified approach has come at the expense of functional coherence. Section 3.4 was an overview of duty analysis. The following is an examination of those aspects of the analysis which have particular relevance to negligent misrepresentation together with any considerations which are unique to this area.339 Closeness, Directness, Justice and Fairness Proximity bears some similarity to the more general conception of corrective justice, which is also concerned with liability based on a specific relationship. As described earlier, the idea of corrective justice has been expanded upon since Aristode first expressed it, but it remains open-textured.340 It most clearly applies in the field of accident compensation. Corrective justice has so far not been clearly associated with careless words, reliance-based forms of causation and pure economic loss. And there does not appear to be any compelling reason why it should be. The tools of proximity and policy are adequate to the task of forming a theory of liabiUty in this area. In Cooper and Edwards, the Supreme Court of Canada held that proximity characterizes the type of relationship where a duty of care might arise, that the starting point is existing categories, and that various factors such as expectations, representations, and reliance will help the court determine whether the plaintiff is closely and directly affected by the defendant's conduct and whether it is just and fair to impose a duty on the defendant. 338 The expression, "pocket" of negligence, is Professor Stapleton's and was quoted with approval by the Supreme Court of Canada in Hercules, along with the idea that negligent misrepresentation should not be treated differently from other negligence cases. See Jane Stapleton "Duty of Care and Economic Loss: A Wider Agenda" (1991) 107 L.Q. Rev. 249, and Hercules, supra note 6 at 186. 339 For a general discussion of many of the following elements of the duty of care analysis, see the corresponding subheading in section 3.4. 340 See section 3.2 above. 87 In Canada, it is now clear that the type of relationship can include one that is based on "words". This is more than Lord Atkin intended when he originally conceived his neighbour principle. In his King's College lecture just before the Donoghue decision,341 he not only talked about injury by act, but also about injury by word. He said: The idea of law is that the obligations of a man are to keep his word. If he swears to his neighbour, he is not to disappoint him. In other words, he is to keep his contracts. He is not to injure his neighbour by word. That is to say, he is not to libel or slander him. He is not to commit perjury in respect of him, and he is not to defraud him into acting to his detriment by telling him lies.342 Liability for words included contractual liability, and certain forms of imposed Uability for injury by word (defamation, the crime of perjury, and intentional deception or fraud). Imposed liability for careless words was not in his thinking. In Hedley Byrne, the House of Lords also considered negligent words to be outside the purview of Donoghue and an imposed duty of care.343 Moral responsibility did not require a person to use care with words the same way it required care when engaging in other kinds of conduct. Another aspect of negligent misrepresentation which distinguishes it from most ordinary negligence cases is the nature of the causation — it requires reliance by the plaintiff.344 However, the need for reliance is not and probably never has been by itself a significant objection to the application of the proximity concept. In Norsk, La Forest J. considered the relevance of causation in defining the nature of the obligation in contractual relational economic loss cases (it was part of a comparative analysis of civil law systems and their treatment of economic negligence): 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 341 See supra note 202 and accompanying quote. 342 Lewis, supra note 202 at 58. 343 por example, see Lord Reid in Hedley Byrne, supra note 3 at 482-83. But note also Lord Devlin's opinion at 530-31 that proximity was a flexible concept capable of evolving, and that in the future cases may arise where a broader theory of liability might be appropriate, apparendy alluding to the "free rider" scenario. 344 Professor Blom describes two forms of reliance or causation that frequendy occur in economic negligence cases: coincidental dependence and voluntary reliance. See Joost Blom, "The Evolving Relationship Between Contract and Tort" (1985) 10 Can. Bus. L.J. 257 at 285-87. Coincidental dependence is a kind of implied reliance on others to conduct themselves with due care. Voluntary reliance, on the other hand, involves a deliberate decision on the part of the plaintiff to rely on the defendant, which is typically the case in negligent misrepresentation cases. The suggestion is not so much that proximity is an inappropriate concept in this area, but that where the reliance is on the skill of the defendant the specific criteria for liability should approximate that of contract, i.e., there should be some form of assumed responsibility by the defendant close to a contractual intention to be bound (292-95 and 304) 88 control liability. The directness criterion was rejected in Overseas Tankship (U.K.) Lid. v. Moris 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.. .345 Directness is a difficult test and was rejected in Norsk as a lirmting factor.346 In Hercules, the need for directness was also implicidy rejected in negligent misrepresentation cases by the adoption of the reliance model of lkbility. However, the Supreme Court of Canada was not stretching the proximity concept too much, in recognizing a relationship based on reliance. Despite Lord Atkin's test requiring the plaintiff to be "directly affected" by the defendant's conduct, in Donoghue itself there was a certain indirectness and even reliance in the causation.347 More troubling than the nature of the causation is the nature of the loss. It is almost certain that Lord Atkin did not have financial relationships in mind when he conceived his neighbour principle — there was no reference to them in his judgment. Nonetheless, the Supreme Court of Canada has now applied the proximity principle to five categories of pure economic loss, of which negligent misrepresentation is just one.348 We may conclude that while the proximity7 concept may not have been overly strained in its application to reliance-based relationships, its application to relationships based on words and money extends it well beyond its original reach. Besides concerns about the nature of the conduct, causation and the type of loss involved, there is also a fairness argument for lirrtiting Hability that stems from the fact that the claimant in a negligent misrepresentation action has not paid for the information (except possibly in the basic contract scenario). There are efficiency issues that flow from this which are described below,349 but as Professor Bishop writes: It is also possible to phrase the effect [that inefficient levels of information production could result if non-paying users are allowed to sue in negligence] as one of fairness — only those who have paid should be allowed to recover if they lose. We can say to the man who complains of a loss: you were not required to use the information and you intentionally used it to benefit yourself. This is unlike an accident case where the victim would have behaved in the way he did if the injurer had 345 Norsk, supra note 178 at 1079. 346 Whether La Forest J. was considering causation as a means of limiting proximity or duty generally (e.g., as an Anns second stage consideration) is not entirely clear from his judgment. Using causation to control floodgates (a concern in economic loss cases in France and Quebec, he noted) suggests a second stage analysis, but controlling liability by reference to the nature of the causation in the particular relationship suggests proximity. 347 Supra note 237. The nature of the reliance is relevant to other considerations, however. See discussion of individualism below in section 348 See section below for a discussion of the other categories. 349 See section 3.5.2. 89 been entirely absent. There is a possible moral objection in the case of statements, as there is not in the case of accidents, to someone taking a free ride on another's efforts.350 Bishop is likely basing his fairness argument on a regime that permitted a wide-open form of liability, such as one based on simple foreseeability. It would be somewhat like a thief stealing something, and then having a claim against the owner because it doesn't work right. The requirement of foreseeability and reasonable reliance under Hercules minimizes this unfairness, but the argument still has some merit even under this rule. Of course, La Forest J.'s counter position is that "simple justice"351 requires a person to stand behind his word when reliance by others is reasonable and foreseeable. There are also more general fairness considerations, such as those based on loss spreading and distributive justice, but they are broader in scope and concern consequences beyond the specific relationship in question. As noted above, they are more clearly Anns second stage consideration