D'Amato v. Badger, [1996] 2 SCR 1071

D’Amato v. Badger, [1996] 2 S.C.R. 1071

Felice D’Amato and

Arbor Body Shop (1980) Ltd.                                                            Appellants

v.

Donald Herbert Badger and

Russell Frazee                                                                                   Respondents

Indexed as:   D’Amato v. Badger

File No.:  24364.

1996:  April 25; 1996:  August 22.

Present:  Lamer C.J. and La Forest, L’Heureux‑Dubé, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.

on appeal from the court of appeal for british columbia

Torts ‑‑ Negligence ‑‑ Economic loss ‑‑ Loss of earning capacity ‑‑ Individual plaintiff injured in automobile accident ‑‑ Damages awarded to individual plaintiff for loss of earning capacity and to corporate plaintiff for pure economic loss suffered ‑‑ Whether corporate plaintiff entitled to damages for pure economic loss in circumstances of case ‑‑ Whether Court of Appeal correct in reducing trial judge’s award for loss of earning capacity.

The appellant D owned 50 percent of the appellant company.  He was injured by an automobile owned by one of the respondents and operated negligently by the other.  Liability was admitted.  Until the accident occurred, D supervised and performed repairs.  As a result of the injuries he suffered in the accident he could no longer perform the physical labour required for autobody repair,  but continued to manage, supervise and prepare estimates.  After the accident, D continued to receive the same salary from the company of $55,000 per year.  Because D was unable to perform repair work, the company hired replacement labour, and as a result suffered a loss of profits.  The trial judge awarded $73,299 to the company for economic loss suffered as a result of the accident and awarded $290,000 to D for loss of earning capacity.  The Court of Appeal allowed the respondents’ appeal in part, disallowing the company’s award for economic loss.   D personally was allowed to recover 50 percent of that loss under the alter ego principle.  The award for loss of earning capacity was reduced to $50,000.  This appeal is to determine whether the company is entitled to damages for pure economic loss in the circumstances of this case and whether the Court of Appeal was correct to reduce the trial judge’s award to D for loss of earning capacity.

Held: The appeal should be allowed in part. 

This Court`s decision in Norsk reflects the current state of the law in Canada regarding pure economic loss.  While the tests of La Forest and McLachlin JJ. in Norsk are different, they will usually achieve the same result, because in the identified categories outlined by La Forest J. permitting pure economic recovery, McLachlin J.’s tests of proximity and foreseeability will usually also be met.  The company cannot succeed in its claim for pure economic loss under the La Forest J. approach.  This is a case of contractual relational economic loss, since the company’s loss arises solely because of the contractual relationship between the company and its employee/shareholder D, and there do not appear to be any good policy reasons to depart from the exclusionary rule, if such a rule is to be adopted.  Even using the somewhat broader McLachlin J. approach, the company cannot succeed, since there is insufficient proximity between the negligent act and the damage to ground liability.  The loss was neither foreseeable nor sufficiently proximate to the act of negligence to warrant recovery.  Finally, even if one can say that defendants in the position of the respondents should have reasonably contemplated persons in the position of the company, the second stage of the Anns test, dealing with policy reasons to limit recovery, would deny recovery to the company.  If a company is allowed to recover pure economic loss arising from the loss of a key shareholder and employee, the problem of indeterminacy arises.  Since the respondents did not cross‑appeal on the damages awarded to D under the alter ego principle, the award should stand.

The trial judge’s calculation of loss of earning capacity should not be disturbed unless patently unreasonable or based on incorrect legal principles.  It is obvious that the trial judge did not ignore D’s involvement with the company when calculating loss of earning capacity.  He was entitled to find, as he did, that D would have difficulty finding work as a repairman because of his injuries and as an owner because of his lack of English skills and education.  This finding of fact justified the trial judge’s conclusion.  In suggesting its own “more realistic” approach to the assessment of future earning capacity, the Court of Appeal merely disagreed with the trial judge’s decision.  Since it failed to identify any palpable and overriding error such as to permit its interference, the trial judge’s award for loss of future earning capacity should be restored.

Cases Cited

Considered:  Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021; referred to: Cattle v. Stockton Waterworks Co. (1875), L.R. 10 Q.B. 453; Weller & Co. v. Foot and Mouth Disease Research Institute, [1966] 1 Q.B. 569; Murphy v. Brentwood District Council, [1991] 1 A.C. 398; Anns v. Merton London Borough Council, [1978] A.C. 728; Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; Winnipeg Condominium Corp. No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85; Ultramares Corp. v. Touche, 174 N.E. 441 (1931); Rivtow Marine Ltd. v. Washington Iron Works, [1974] S.C.R. 1189; Caltex Oil (Aust.) Pty. Ltd. v. The Dredge “Willemstad” (1976), 11 A.L.R. 227; Ross v. Caunters, [1979] 3 All E.R. 580; Andrews v. Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229.

Authors Cited

Feldthusen, Bruce.  “Economic Loss in the Supreme Court of Canada: Yesterday and Tomorrow” (1990‑91), 17 Can. Bus. L.J. 356.

Linden, Allen M.  Canadian Tort Law, 5th ed.  Toronto: Butterworths, 1993.

APPEAL from a judgment of the British Columbia Court of Appeal (1994), 95 B.C.L.R. (2d) 46, [1994] 10 W.W.R. 141, 48 B.C.A.C. 220, 78 W.A.C. 220,  varying a judgment of the British Columbia Supreme Court awarding damages to the appellants.  Appeal allowed in part.

James L. Barrett, for the appellants.

D. A. Webster, Q.C., and Donald J. Holubitsky, for the respondents.

The judgment of the Court was delivered by

1                                   Major J. -- On August 25, 1987, the appellant Felice D’Amato was injured by an automobile owned by the respondent Badger and operated negligently by the respondent Frazee.  Liability was admitted. 

2                                   This appeal relates to two awards made by the trial judge: an award of $73,299 to the corporate appellant Arbor Body Shop (1980) Ltd. for pure economic loss suffered as a result of the accident and an award of $290,000 to D’Amato for loss of earning capacity. 

3                                   The British Columbia Court of Appeal allowed the appeal of Badger and Frazee in part, disallowing Arbor’s award for economic loss:  (1994), 95 B.C.L.R. (2d) 46, [1994] 10 W.W.R. 141, 48 B.C.A.C. 220, 78 W.A.C. 220.   D’Amato personally was allowed to recover 50 percent of that loss under the alter ego principle.  The award for loss of earning capacity was reduced to $50,000.  The appellants seek to restore the trial judge’s decision. 

I.                 Facts

4                                   The appellant D’Amato and his partner, Sam Nomura, each owned 50 percent of Arbor, an autobody repair shop in Vancouver, British Columbia.  Until the accident occurred, D’Amato supervised and performed repairs and Nomura supervised and did the painting.  In the accident, D’Amato suffered injuries and, as a result, could no longer perform the physical labour required for autobody repair.  He continued to manage, supervise and prepare estimates.  These activities were described by the trial judge as  a “minor contribution”.

5                                   After the accident, D’Amato continued to receive the same salary from Arbor of $55,000 per year.  Arbor paid D’Amato a total of $251,108 from the date of the accident to the time of trial.  Because D’Amato was unable to perform repair work, Arbor engaged replacement labour, and as a result suffered loss of profits of $73,299.

II.                Judgments

A.                British Columbia Supreme Court

6                                   The trial judge held that Arbor’s claim for economic loss was not advanced per quod servitium amisit, which was prohibited by statute in British Columbia.  He found that recovery for corporate plaintiffs was not restricted to where the company is merely the alter ego of the individual plaintiff, the latter expression describing a person who, by ownership or otherwise, is seen as indispensable to the company.

7                                   The trial judge allowed Arbor’s claim under the principles of Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021, stating that in that case, “[t]he majority of the Court concluded that in order to recover in tort a plaintiff must prove a sufficient connection between the conduct complained of and the loss alleged. . . .  The question is whether there is sufficient proximity between the negligent act and the loss”.   The trial judge found that because of the nature of the company’s operations and the manner in which it earned income, there was sufficient proximity to recover any proven loss.  He awarded the sum of $73,299, that being the loss to the company as calculated by their expert. 

8                                   The trial judge made the following comments with regard to the loss of D’Amato’s earning capacity:

When I consider the plaintiff’s earning capacity, I cannot ignore the fact  he is almost 57 years of age and is unable to read or write in English.  Indeed, his ability to do so in Italian is also extremely limited. . . .  His entire work experience has consisted of heavy physical work and he can no longer work in his trade where he was extremely proficient.

                                                                   . . .

The job opportunities open to D’Amato before the accident were limited to work involving heavy physical labour.  Those opportunities are no longer available to him.  His inability to do heavy physical work makes him less valuable to himself as a person capable of earning income in a competitive labour market.

9                                   The trial judge concluded D’Amato could easily earn an income of $55,000 per annum employed in his trade and, allowing for the present value, he fixed the loss of earning capacity at $385,550.  The trial judge considered that D’Amato still had a management and supervisory role in the company which earned income for the company, and therefore deducted 25 percent for contingencies, leaving a total award under this head of damages of $290,000.

B.                British Columbia Court of Appeal (1994), 95 B.C.L.R. (2d) 46

10                               The British Columbia Court of Appeal, in varying the judgment, held that the trial judge, in purporting to apply the proximity test enunciated by McLachlin J. in Norsk, had failed to also consider whether the loss was reasonably foreseeable. 

11                               In addition, the Court of Appeal held (at p. 57) that the trial judge had failed to take into account the fact that D’Amato had been paid $55,000 per annum by Arbor despite his inability to perform heavy physical labour, and that a “more realistic basis” to assess loss of earning capacity would be to base it on a percentage of Arbor’s loss, projected over the next seven years.  In the result, Legg J.A. reduced D’Amato’s award to $50,000 for loss of earning capacity.

III.               Analysis

12                               There are two issues in this appeal.  First, whether Arbor is entitled to damages for pure economic loss in the circumstances of this case.  Second, whether the Court of Appeal was correct to reduce the trial judge’s award to D’Amato for loss of earning capacity.

A.                Pure Economic Loss

13                               Pure economic loss  is  loss suffered by an individual that is not  accompanied by physical injury or property damage.  In the present case, the corporate appellant, Arbor, suffered neither property damage nor physical injury.  

14                               Judicial history discloses that recovery for pure economic loss was severely restricted.  See Cattle v. Stockton Waterworks Co. (1875), L.R. 10 Q.B. 453,  and Weller & Co. v. Foot and Mouth Disease Research Institute, [1966] 1 Q.B. 569. More recently, the House of Lords in Murphy v. Brentwood District Council, [1991] 1 A.C. 398, limited recovery for pure economic loss to cases where physical damage or reliance on a negligent misstatement was present.

15                               While the House of Lords has seriously limited, if not removed,  recovery for pure economic loss, the Canadian jurisprudence has not followed such a severe path.  The principle for recovery under this head of damage in Canada was stated in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.), per Lord Wilberforce at pp. 751-52:

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....

16                               Those principles continue to influence the law in Canada.  See Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; Norsk, supra; and Winnipeg Condominium Corp. No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85.

17                               Professor Linden, in Canadian Tort Law (5th ed. 1993), at pp. 382-83, lists four policy reasons for the reluctance to allow recovery for pure economic loss.  First, economic interests have been seen as less worthy of protection than bodily security and property. 

18                               The second, and perhaps main reason for limiting recovery is that expressed by Cardozo C.J.,^* in Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y. 1931), who feared “liability in an indeterminate amount for an indeterminate time to an indeterminate class” (p. 444).  A negligent act or omission can have a ripple effect, causing economic loss to a potentially wide circle of individuals.  Widgery J., in Weller, supra, disallowed pure economic loss and opined that if auctioneers could recover for damage to farmers’ cattle, so might butchers, transport workers, and dairy workers.  This view reflects the  reluctance of courts to burden business and other activity with the indeterminate expense of all potential economic losses.

19                               Professor Linden’s third reason was that it may be more efficient to place the burden of economic loss on the “victim”.  Such losses are often seen as an ordinary business risk which can be expected and for which business people make plans.

20                               The fourth reason stated was that the restrictive approach discouraged a multiplicity of lawsuits, in favour of channelling claims into one action.

21                               The law in Canada concerning pure economic loss was expanded in Rivtow Marine Ltd. v. Washington Iron Works, [1974]  S.C.R. 1189.  There, one of the defendants designed and manufactured cranes.  The plaintiff had bought one of the cranes from a second defendant and used it on its log barge.  When another one of the defendant’s cranes crashed, killing its operator, the plaintiff withdrew its crane from service and later discovered latent defects.  The plaintiff suffered loss of profits because of “down-time” as well as repair costs.  It was determined that the defendants knew about the defects and failed to warn the plaintiff.

22                               A majority of this Court awarded the plaintiff damages for “down-time” but not for repairs.  Ritchie J., for the majority, held that the loss of profit was a direct and foreseeable result of the breach of the duty to warn.   Concurring on this point, Laskin J. (later C.J.) added that this type of recovery would not lead to the problem of indeterminacy identified by Cardozo J. because the plaintiff’s use of the product was one contemplated by the defendant.

23                               Rivtow  widened the opportunity for plaintiffs to recover for pure economic loss.  Two tests for recovery were developed.  First, pure economic loss was recoverable where the defendant had significant knowledge of the risk.  The majority seemed influenced by the fact that the defendant manufacturer knew of both the actual risk and the actual plaintiff.  The “actual knowledge” test has been used in other jurisdictions.  See Caltex Oil (Aust.) Pty. Ltd. v. The Dredge “Willemstad” (1976), 11 A.L.R. 227  (H.C.); and Ross v. Caunters, [1979] 3 All E.R. 580.  The need for some form of actual knowledge obviously eliminates the indeterminacy problem identified above.

24                               The second test emanating from Rivtow was the “direct and foreseeable” test.  Both the majority and the dissent use similar language in requiring that pure economic loss be a direct and foreseeable consequence of the tortious act or omission.  This test was not as limiting as the “actual knowledge” test.

25                               Post-Rivtow, the decisions in Anns and Kamloops confirmed that recovery of pure economic loss was available in circumstances where a public authority was negligent in allowing faulty construction of buildings.

26                               The Norsk case reflects the current state of the law regarding pure economic loss.  Norsk involved damage to a railway bridge by a barge owned by the defendant.  The plaintiff railway did not own the bridge, but used it pursuant to a contract with the owner, Public Works Canada.  As a result of the damage, the bridge was closed and the plaintiff incurred significant losses.  These losses were not covered by insurance, nor  was there any provision for indemnification in the plaintiff’s contract with Public Works Canada.

27                               McLachlin J. (L’Heureux-Dubé and Cory JJ. concurring) allowed recovery of the plaintiff’s pure economic loss.  While accepting the idea that not all pure economic loss should be recoverable, she rejected the absolute bar approach of the House of Lords in Murphy, stating that this approach accepted injustice for the sake of doctrinal tidiness.  McLachlin J. preferred an incremental approach, in which new categories of recoverable pure economic loss are developed on a case-by-case basis.

28                               Recognizing the dangers of unlimited liability for pure economic loss, McLachlin J. held that  the factor of proximity would sufficiently limit recovery of pure economic loss to avoid indeterminacy.  Her views are summarized in the following passage, from  pp. 1152-53:

In summary, it is my view that the authorities suggest that pure economic loss is prima facie recoverable where, in addition to negligence and foreseeable loss, there is sufficient proximity between the negligent act and the loss.  Proximity is the controlling concept which avoids the spectre of unlimited liability.  Proximity may be established by a variety of factors, depending on the nature of the case.  To date, sufficient proximity has been found in the case of negligent misstatements where there is an undertaking and correlative reliance (Hedley Byrne); where there is a duty to warn (Rivtow); and where a statute imposes a responsibility on a municipality toward the owners and occupiers of land (Kamloops).  But the categories are not closed.  As more cases are decided, we can expect further definition on what factors give rise to liability for pure economic loss in particular categories of cases.  In determining whether liability should be extended to a new situation, courts will have regard to the factors traditionally relevant to proximity such as the relationship between the parties, physical propinquity, assumed or imposed obligations and close causal connection.  And they will insist on sufficient special factors to avoid the imposition of indeterminate and unreasonable liability.  The result will be a principled, yet flexible, approach to tort liability for pure economic loss.  It will allow recovery where recovery is justified, while excluding indeterminate and inappropriate liability, and it will permit the coherent development of the law in accordance with the approach initiated in England by Hedley Byrne and followed in Canada in Rivtow, Kamloops and Hofstrand.   [Emphasis added.]

29                               McLachlin J. noted that the problem with the exclusionary rule, to which England had returned, was that it saw physical closeness as the only indicator of proximity.  She further noted that proximity, if found, would not guarantee liability. The second Anns test, whether policy reasons existed to limit recovery, might cause a court to reject recovery for pure economic loss for reasons not taken into account in the proximity analysis.

30                               La Forest J. (Sopinka and Iacobucci JJ. concurring) denied recovery of CN’s pure economic loss.  Citing Feldthusen, “Economic Loss in the Supreme Court of Canada: Yesterday and Tomorrow” (1990-91), 17 Can. Bus. L.J. 356, at pp. 357-58, La Forest J. identified the following five categories of economic loss cases, each of which involved different policy considerations (at p. 1049):

1.    The Independent Liability of Statutory Public Authorities;

2.    Negligent Misrepresentation;

3.    Negligent Performance of a Service;

4.    Negligent Supply of Shoddy Goods or Structures;

5.    Relational Economic Loss.

31                               La Forest J. stated that the facts of Norsk placed it in the fifth category, and restricted his judgment to determining the circumstances under which damages for pure economic loss in that category would be awarded. 

32                               Like McLachlin J., La Forest J. rejected the absolute exclusionary rule of Murphy.  However, in its place he proposed a limited exclusionary rule to apply to contractual relational loss cases, unless good policy reasons exist for granting recovery.

33                               La Forest J. noted that in relational economic loss, unlike the other categories, the defendant is already liable to another party, namely, the owner of the damaged property.  To the extent that deterrence was sought to curtail reckless conduct, it already existed, and an award for pure economic loss was unnecessary for that purpose.

34                               La Forest J. noted that excluding liability did not automatically mean that the plaintiff went uncompensated.  The plaintiff arguably had a right of recovery against the property owner, who in turn had an action against the tortfeasor.  Further, it was impossible to guarantee perfect compensation of all contractual relational economic loss, because torts create economic loss to a wide circle of individuals, all of whom cannot be realistically compensated.  He concluded that relational loss cases typically involve accidents, which distinguished them from products liability cases like Rivtow and negligent misrepresentation cases like Hedley Byrne. 

35                               La Forest J. proceeded to examine the question from the perspective of allocation of loss.  He preferred an approach which limited the possibility of recovery for relational economic loss to situations where the plaintiff could both address the problem of indeterminacy and show that no other means of protection was available. 

36                               La Forest J. held that a limited exclusionary rule was desirable because it allowed the terms of the relevant contract to dictate who should bear the risk of loss and placed incentives on all parties to minimize losses.  It allowed one party to bear the cost of carrying insurance instead of both parties.  Because the right of recovery would usually be evident on the face of the contract, less litigation would ensue.  The rule eliminated the problem of having more than one plaintiff chasing the modest resources of an impecunious defendant. 

37                               Finally, and probably most important, La Forest J. saw the rule as lending certainty to the law.  While his approach could exclude recovery by people who had undeniably suffered loss as a result of an accident, La Forest J. saw these unfortunate cases at the margin as the price paid for certainty.

38                               Stevenson J. agreed with the result reached by McLachlin J., but rejected her approach, as well as the approach of La Forest J.  Instead, he held that since the defendant had actual knowledge of the plaintiff,  the problem of indeterminacy was not present and that recovery for pure economic loss should follow. 

39                               There were three theories regarding the issue of pure economic loss in Norsk, each of which was rejected by a majority of the judges.  However, Norsk did confirm that there is no absolute bar to recovery of pure economic loss in Canada, and that the “known plaintiff” approach was rejected.

40                               While the tests of La Forest and McLachlin JJ. in Norsk are different, they will usually achieve the same result.  This is because in the identified categories outlined by La Forest J. permitting pure economic recovery, McLachlin J.’s tests of proximity and foreseeability will usually also be met.  For the reasons which follow, this case is not one in which the plaintiff would succeed on one test, but not on the other.  A choice between the two will have to await the appropriate case.

41                               The latest case from this Court assessing pure economic loss was Winnipeg Condominium Corp.  That case dealt with whether a general contractor responsible for the construction of a building could be held liable for negligence to a subsequent purchaser of the building for the cost of repairing defects in the building caused by negligent construction.  There was no privity of contract between the plaintiff and the contractor.  La Forest J., writing for a unanimous Court, distinguished the “relational economic loss case” of  Norsk, stating that Winnipeg Condominium Corp. fell into the fourth category -- negligent supply of shoddy goods or services, and held the contractor liable.

42                               La Forest J.’s judgment in the Winnipeg Condominium Corp. case obviously was not intended to alter his reasons in Norsk.  However, at least one of the differences which existed between the approaches in Norsk has been resolved.  It is apparent that this Court now recognizes distinct categories of pure economic loss.  The circumstances under which loss may be allowed under the fifth category, “Relational Economic Loss”, was left, presumably for a case where the issue arose.

43                               The appellants in this appeal submitted that the circumstances of this case  are such that the Winnipeg Condominium Corp. case was more applicable than the Norsk case.  They argued that the circumstances represent a new category of pure economic loss, and that therefore the only consideration was the Anns test, as confirmed in Winnipeg Condominium Corp.  This submission cannot succeed.  It is obvious that the facts of this case place it in the fifth category mentioned in Norsk and Winnipeg Condominium Corp., namely, relational economic loss.  Arbor’s pure economic loss arises solely because of its relationship with D’Amato.

44                               The Court of Appeal erred when they held that pure economic loss was not recoverable in this case because the respondents were unaware of the existence of Arbor.  They stated that because of this lack of specific knowledge, the requisite proximity was lacking between the respondents and Arbor.  This is the “known plaintiff ” approach of Stevenson J. in Norsk, which was rejected in that case and is not the law in Canada.

45                               The trial judge appeared to accept McLachlin J.’s approach in Norsk.  However, he focused on proximity, without regard for the concept of foreseeability.  McLachlin J.’s reasons in Norsk are specific that, in addition to proximity, the loss in question also must be foreseeable. See Norsk, at p. 1152.  In addition, the trial judge ignored the second half of the two-stage Anns test, in failing to determine whether any factors existed to limit recovery. See Norsk, at pp. 1154-55.

46                               The errors in both courts open the issue of liability here.  As previously noted, while the two approaches from Norsk differ in principle, they will most often achieve the same result.  This is the case in the present appeal, as, in my opinion, the appellant cannot succeed under either of the two approaches in Norsk.

47                               Arbor cannot succeed in its claim for pure economic loss under the La Forest J. approach.   Contrary to the submission of the appellants, this is a case of contractual relational economic loss. Arbor’s loss arises solely because of the contractual relationship between the company and its employee/shareholder D’Amato.  Second, there do not appear to be any good policy reasons to depart from the exclusionary rule, if such a rule is to be adopted.   La Forest J.’s analysis calls for a general exclusionary rule, subject to any policy concerns which militate in favour of recovery of relational economic loss.  If anything, policy reasons would tend to militate against recovery for this type of loss.  If an injury to a key shareholder in a small corporation was held to be sufficient to warrant recovery of pure economic loss, then the indeterminate possibilities with larger corporations are obvious.

48                               A party may have better prospects of recovering pure economic loss under the somewhat broader McLachlin J. approach.  However, even using that analysis, Arbor cannot succeed.  McLachlin J.’s theory is based on the Anns two-stage test.  Arbor must show that the loss was within the reasonable contemplation of the respondents so as to raise a duty of care, and, in addition, that there are no considerations which should limit the scope of that duty, the class of persons to whom it is owed or the damages arising from a breach of the duty.  There must also be sufficient proximity between the negligent act and the damage to ground liability. 

49                               At page 1153 of Norsk, McLachlin J. lists several factors which are relevant to proximity.  They are: the relationship between the parties; physical propinquity; assumed or imposed obligations; and close causal connection.  Of these factors, only the last has any relevance in this case.  There was no relationship between the respondents and Arbor, nor was there physical propinquity or assumed or imposed obligations.  The most that can be said is that the negligence of the respondents caused Arbor’s loss.  This connection is not direct.  In my opinion, there is insufficient proximity in this case to warrant recovery of pure economic loss.   In my opinion the loss was neither foreseeable nor sufficiently proximate to the act of negligence to warrant recovery.

50                                Finally, even if one can say that defendants in the position of the respondents should have reasonably contemplated persons in the position of Arbor, the second stage of the Anns test, dealing with policy reasons to limit recovery, would deny recovery to Arbor.

51                               If a company is allowed to recover pure economic loss arising from the loss of a key shareholder and employee, the problem of indeterminacy arises.  An injury to one person obviously has a ripple effect, causing economic loss in various forms to a large number of people, both individuals and corporations.  To allow recovery in these circumstances would invite similar claims by multi-membered plaintiffs.  It would remove the incentive for contracting parties to negotiate on who will bear risk of loss, and for corporations to plan for events such as this, through insurance or otherwise.

52                               To conclude, Arbor is not entitled to damages for pure economic loss under either of the tests in Norsk.  The appeal for recovery on this ground is dismissed.  As a result of this conclusion the issue arose whether the award of $36,650 by the Court of  Appeal under the alter ego principle should stand.  The rationale for the alter ego doctrine is not as strong as it once was, in light of recent developments in tort law.  However, the respondents did not cross-appeal on this issue, so the Court of Appeal’s award of $36,650 remains as is.

B.                Loss of Future Earning Capacity

53                               The trial judge awarded the appellant D’Amato $290,000 for loss of earning capacity.  The Court of Appeal reduced that amount to $50,000.  Loss of earning capacity is an award based on the recognition that a plaintiff’s capacity to earn money was an asset which has been taken away.  See Andrews v. Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229.  The calculation was based on the level of earning which the plaintiff would likely have achieved and the period that he would sustain it, subject to deductions made for contingencies of life. 

54                               The trial judge made a simple calculation:  D’Amato was skilled enough to have earned $55,000 per year as an autobody repairer, which over seven years amounted to $385,000, followed by a 25 percent deduction for contingencies.  The Court of Appeal considered the fact that D’Amato continued to receive remuneration from Arbor to be significant and altered the trial judge’s decision.  The Court of Appeal felt that the only loss in D’Amato’s earnings was his share of the loss to Arbor, averaged over the  relevant time period.  Implicit in the Court of Appeal’s decision was the assumption that Arbor would remain a viable business over the next seven years.

55                               Both judgments have frailties.  The trial judge arguably took an overly simplistic view of D’Amato’s loss when he related D’Amato’s loss of earning capacity solely to his ability to work physically as an autobody repairman.   D’Amato continued to earn much the same as he did prior to his accident, because he continued to draw a salary from Arbor.  D’Amato’s ability to earn was not based solely on his physical ability, but also on his ownership of a viable and profitable company.  That being so,  the trial judge may have erred in attributing D’Amato’s loss solely to his ability to do autobody work.

56                               Notwithstanding this, the trial judge’s calculation should not be disturbed  unless patently unreasonable or based on incorrect legal principles.  It is clear the trial judge was aware of all of the evidence of D’Amato’s income from Arbor.  The trial judge found as a fact that D’Amato had lost a significant amount of his earning capacity owing to the respondents’ negligence.  It also was a finding of fact that D’Amato would continue to contribute to Arbor, but at a greatly reduced rate.  Twenty-five percent was deducted from the award by the trial judge because of D’Amato’s continued contribution to Arbor.  It is obvious that the trial judge did not ignore D’Amato’s involvement with Arbor when calculating loss of earning capacity. 

57                               The Court of Appeal’s view may be premised on an incorrect assumption -- that Arbor will continue in business throughout D’Amato’s working life.  There was evidence to suggest that Arbor is in difficulty, owing to its loss of profits subsequent to D’Amato’s injuries, and may have to be sold.  The Court of Appeal judgment does not seem to account for this possibility.  It is apparent that if Arbor were to be sold   D’Amato would have difficulty replacing his income, unless the sale price enabled the owners to retire, and there was no evidence to that effect.  The trial judge was entitled to find, as he did, that D’Amato would have difficulty finding work as a repairman because of his injuries and as an owner because of his lack of English skills and education.  This finding of fact justified the trial judge’s conclusion.

58                               The Court of Appeal interfered with the findings of the trial judge.  While they did not point to any legal errors on the trial judge’s assessment of earning capacity, they stated that the trial judge “failed to consider the degree to which D’Amato’s overall earning capacity in the context of his position at Arbor had been impaired by his inability to perform heavy physical labour” (p. 57).  If the trial judge had ignored such evidence, an error in law may have occurred, justifying intervention.  However, in my opinion, the trial judge was aware of the basis for D’Amato’s continuing role with Arbor, and of his income from it. 

59                               In suggesting its own “more realistic” approach, the Court of Appeal merely disagreed with the trial judge’s decision.  In so doing the Court of Appeal failed to identify any palpable and overriding error such as to permit their interference.  The appeal on this ground is allowed.

IV.              Conclusion

60                               In the result, the appeal is allowed in part:

(i)    The judgment of the Court of Appeal denying recovery to Arbor for pure economic loss is upheld. 

(ii)   The judgment of the Court of Appeal awarding D’Amato the sum of $36,650 is upheld. 

(iii)The judgment of the Court of Appeal reversing the trial judge’s award   of $290,000 for loss of future earning capacity is set aside and the trial judge’s decision is restored. 

(iv)  The appellants were substantially successful in their appeal and are entitled to their costs throughout.

Appeal allowed in part with costs.

Solicitors for the appellants:  Giusti, Barrett & Ellan, Vancouver.

Solicitors for the respondents:  Bull, Housser & Tupper, Vancouver.