A recent holding by Canada’s Supreme Court serves as an excellent reminder to those in the food industry or operating restaurant chains of the law in many states here in the U.S. In a 5-4 decision reached in November 2020, Canada’s high court considered liability issues stemming from a highly publicized listeriosis outbreak in 2008, in which 22 people died and many others were sickened from deli meats.
In addition to the terrible health hazards borne by consumers, that outbreak, caused by a large meat processor in Canada, had significant economic “ripples” throughout the Canadian food supply system. In particular, there was a six-to-eight week product shortage when that processor shut down its facilities. That product shortage significantly impacted a large sandwich shop franchise – as they had no access to supply of cold cuts and, as such, became identifiable by the public as a place where contaminated product may have been sold (even though no injuries or deaths were associated with the franchised restaurants).
The sandwich shop franchisees – of which there were more than 450 restaurants – brought a lawsuit against the processor of the listeria-contaminated cold cuts; the claim is fairly straightforward:
- the franchised restaurants had significant financial losses and brand damage because they had no supply of cold cuts for a period of time (both due to the recall of contaminated products and due to the shutdown of the processor’s facilities) and because they became associated by consumers with the outbreak
- the franchisees were required by their franchise agreement with their franchisor to purchase cold cuts from the processor
- the franchisor had entered into an exclusive supply agreement with the processor – in which the processor agreed to supply the franchise system with meats, and the franchisor would require its franchisees to buy only from the processor
- there was no contract directly between the franchisees and the processor
- the franchise agreement between franchisor and franchisee precluded franchisee from suing the franchisor for claims associated with contaminated products
On those facts, and employing the economic loss doctrine (or a version of it), the Canadian court found that the processor owed no “duty of care” to the franchisees – even though the processor had supplied contaminated goods and then failed to supply any goods at all – upon which the franchisees could impose liability. Ultimately, that means that the franchisees could not recover their significant financial losses arising from this recall.
It should be noted that the economic loss doctrine is used by courts across jurisdictions here in the U.S. – in many shapes and forms – and should be a consideration taken into account by restaurant chains and food manufacturers in assessing their potential exposure arising from a food-borne illness outbreak.
Understanding this exposure can help inform contract negotiations, insurance “spend”, and enterprise risk, particularly given that food safety/product contamination risk is a “mission critical” function for these organizations. We welcome having discussions on these considerations and will bring Gallagher expertise and resources to bear for the benefit of our clients.
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