McGill Faculty of Law: Extra-Contractual Obligations/Torts: Prof. Lara Khoury, 2002-03/Summary by Derek McKee
In the Hedley Byrne case (1964), third parties were compensated for pure economic loss resulting from an auditor’s negligent misstatement about a company’s financial health.
English and Canadian common law accepted Hedley Byrne as a precedent, but they required more than foreseeability. Canadian courts added extra limitations (not important) to the Anns test.
Relational economic loss has been one of the main exceptions. Relational economic loss arises when someone injures someone else’s person or property, and a third party suffers an economic loss because of her relationship with the victim.
The relationship in question can be contractual or extra-contractual:
e.g., If a woman was hit by a car,
her employer could sue for the loss of her services (“action per quod servitium amisit”).
her husband could sue for the cost of looking after her.
Traditionally, only the husband was entitled to sue if the wife was injured; now some common law provinces also allow the wife to sue if the husband is injured.
There is no recovery for extra-contractual relational economic loss in common law.
CNR v. Norsk is the leading Canadian common law case on contractual relational economic loss.
Canadian National Railway Co. v. Norsk Pacific Steamship Co.,  1 SCR 1021. (CB2p110)
Norsk Pacific’s tugboat negligently hit a railway bridge belonging to the federal government. CN had a contract for the use of this bridge; 86% of the traffic on this bridge was CN trains. The bridge was known locally as “the CNR bridge,” and it formed an essential link between the Vancouver terminus and CN’s main line. CN participated in negotiations whenever the bridge had to be closed for maintenance; it also supplied materials, inspection and consulting services for the bridge. As a result of the accident, CN had to reroute its traffic for several weeks.
Can a third party recover for economic loss they suffer as a result of damage to the property of another party with whom they have a contract?
Yes. (3-3 split between McLachlin J (yes) and La Forest J (no)); Stevenson J (yes) broke the tie. There was no majority reasoning.
McLachlin J used an incremental, case-by-case, policy-based approach. She did not want to formulate any general principle. For her, the main issue was proximity, and this could be determined through the two-stage test devised in Anns and Kamloops. However, she modified the first (proximity) stage of the Anns test:
Rather than a test, proximity should be an “umbrella” grouping together different situations and factors, including the relationship between the parties, physical closeness, any assumed obligation to take the other party’s interests into account, etc. Courts should proceed by analogy, but if a new situation should arise, they should take these factors into account.
As for economic policy reasons, McLachlin was not impressed by the “floodgates” argument. She also rejects the “insurance” argument on the basis that it would reduce the defendant’s duty to be careful. (She also doubts that CN could insure at a reasonable cost.) Nor does McLachlin believe in the loss-spreading argument (similar to the insurance argument): she thinks it would result in more losses. She also rejects the suggestion that the contract should have allocated such a risk, because it rests on an oversimplified view of contractual bargaining, and it ignores fault.
Applying these thoughts to the facts of the case, McLachlin found that CN was so closely connected to the bridge that it was if it had a “joint venture.” She held that in such cases, liability should be allowed. It was such an exceptional case that it would not lead to “floodgates.”
In his dissenting opinion, La Forest J held that there could be no duty of care for policy reasons. He said that floodgates was not the only policy reason behind the bright line rule, and so McLachlin J’s judgement didn’t solve the problem. The rule was also meant to encourage parties to act economically efficiently. He decided the case based on the contractual allocation of risk, and the fact that CN was the better loss bearer. CN had had the same problem before, so it was in a position to make contingency