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 iii Citation and Language Notes v Table of Cases vi Table of Statutes xv List of Figures xvii Acknowledgements xviii Chapter 1 Introduction 1 1.1 The Nature of the Claim 1 1.2 Thesis Plan : 4 1.2.1 Research Approach 4 1.2.1.1 Research "In" the Law '. 6 1.2.1.2 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 12 2.2 In the British Columbia Supreme Court 14 2.3 In the British Columbia Court of Appeal 14 2.4 Hard Case? 17 Chapter 3 In Theory - A Conceptual Framework 22 3.1 Introduction 22 3.2 Tort Law as an End in Itself - Corrective Justice 24 3.3 Tort Law as an Instrument 28 3.3.1 Distributive Justice 29 3.3.2 Law and Economics 32 3.3.2.1 The Enterprises of Law and Economics 32 3.3.2.2 Core Assumptions 33 3.3.2.3 Wealth Maximization as a Norm 35 3.3.2.4 Efficiency and Wealth Maximization 36 3.3.2.5 Efficiency and Tort Law 41 3.3.3. General Functions of Tort Law 48 3.4 Negligence and Duty of Care 50 3.4.1 Proximity and Policy — An Overview 50 3.4.2 Closeness, Directness, Justice and Fairness 59 3.4.3 Policies Supporting the Imposition of a Duty of Care 62 3.4.4 Counter Policies and General Negligence 64 3.4.4.1 Individualism 65 3.4.4.2 Change is Bad 67 3.4.4.3 Avoidance of Political Interference 68 3.4.4.4 Certainty 68 3.4.4.5 Special Considerations 69 3.4.4.6 Floodgates 70 3.4.5 Counter Policies and Economic Negligence 70 3.4.5.1 Loss Spreading 71 3.4.5.2 Indeterminate Liability 71 3.4.5.3 Social Loss Neutrality 72 3.4.5.4 Laisse^-Faire 73 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 3.5.1.1 Closeness, Directness, Justice and Fairness 86 3.5.1.2 Policies Supporting the Imposition of a Duty of Care 89 3.5.1.3 Counter Policies 90 3.5.2 Efficiency and Negligent Misrepresentation 101 3.5.2.1 Direct Advice 102 3.5.2.2 Basic Contract 104 3.5.2.3 Free Rider 107 3.5.2.4 A Note on Public Authorities 109 3.5.3 Choosing the Right Rule 109 3.5.3.1 The Reliance Model 110 3.5.3.2 The Consent Model 112 3.5.3.3 And the Winner Is? 115 Chapter 4 In Practice - Negligent Misrepresentation in Canada 117 4.1 A Tort is Born 117 4.2 Consenting Parents 123 4.2.1 Contractual Relationships 123 4.2.2 Fiduciary Relationships 124 4.2.1 The Special Relationship Extension 136 4.3 Negligent Misrepresentation Today 138 4.3.1 The Approach to Negligence Law Generally 138 4.3.2 The Special Case of Economic Negligence 139 4.3.2.1 General 139 4.3.2.2 Duty or Remoteness? 141 4.3.2.3 Comparison with Intentionally Caused Economic Loss 141 4.3.2.4 Professor Feldthusen's Taxonomy 142 4.3.3 Negligent Misrepresentation — A Short History 150 4.3.3.1 The Early Years 150 4.3.3.2 Hercules and Reliance 153 4.3.3.3 Micron Construction Revisited ; 156 4.3.4 Negligent Misrepresentation and Disclaimers 161 4.3.4.1 General 161 4.3.4.2 Non-contractual Disclaimers 162 4.3.4.3 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 Kingdom 169 4.4.2 Australia 178 4.4.3 New Zealand 182 4.4.4 United States 184 4.4.5 Summary 189 Chapter 5 Conclusions 191 5.1 Summary and Argument 191 5.2 Proposal for Improvement 196 5.3 In the Meantime 202 5.4 Suggestions for Further Study 203 Glossary 207 Bibliography 209 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.