Business torts and product liability

Some torts are aimed at business interests rather than bodies or property: lies that destroy a company's reputation, imitations that confuse customers, interference with contracts and the misuse of confidential information. Other torts arise from the products a business makes and sells. This lesson covers the torts that protect reputation, relationships and goodwill, and the law of product liability, which is one of the largest sources of business litigation. Intellectual property statutes, which protect many of the same interests, are introduced in lesson 12, and consumer protection and privacy legislation in lesson 11.

Deceit

Deceit, also called fraud or fraudulent misrepresentation, is a false statement of fact made knowingly, without belief in its truth or recklessly, intending the other party to rely on it, which causes loss when that party does rely. It overlaps with contract law (lesson 4): a party induced to contract by fraud can rescind the contract and claim damages in tort. Deceit also arises outside contracts, for example when a seller of a business inflates its revenues to a prospective buyer. Because it involves dishonesty, courts can award punitive damages, and individuals who personally made the fraudulent statements are liable even if they acted for a corporation.

Defamation and injurious falsehood

Defamation protects reputation. A statement is defamatory if it would tend to lower a person's reputation in the eyes of a reasonable person. The plaintiff must show that the words referred to it and were published, meaning communicated to at least one person other than the plaintiff. Defamation in permanent form, such as print, online posts and broadcasts, is traditionally called libel; spoken defamation is slander. Corporations can sue for defamation that harms their business reputation. Every person who repeats a defamatory statement is a publisher and can be liable, which matters for businesses that share or repost content.

In Canada, once the plaintiff proves the three elements, falsity and damage are presumed, and the burden shifts to the defendant to prove a defence. Justification (truth) is a complete defence. Fair comment protects opinions on matters of public interest that are based on true facts and could honestly be held by someone, even if exaggerated, unless the defendant was motivated by malice (WIC Radio Ltd. v. Simpson, 2008 SCC 40). Qualified privilege protects statements made in a situation where the speaker has a duty or interest in communicating and the recipient has a corresponding interest, such as a reference given to a prospective employer, unless the speaker acted with malice. Responsible communication on matters of public interest protects journalists and others who diligently try to verify a story (Grant v. Torstar Corp., 2009 SCC 61). Ontario and British Columbia have anti-SLAPP laws that let defendants seek early dismissal of claims that target expression on matters of public interest; in 1704604 Ontario Ltd. v. Pointes Protection Association, 2020 SCC 22, the Supreme Court explained that a claim survives only if it has substantial merit, the defendant has no valid defence and the harm to the plaintiff outweighs the public interest in protecting the expression.

Injurious falsehood, also called trade libel or product disparagement, protects economic interests rather than reputation. It covers false statements about a business's products, services or title to property, made maliciously or with knowledge of falsity, that cause economic loss. A competitor that falsely claims a rival's product contains harmful chemicals commits injurious falsehood and may also breach false advertising laws (lesson 11). Unlike defamation, the plaintiff must prove falsity, malice and actual economic loss.

Interference with contracts and economic relations

A person who knowingly and intentionally induces another to break a contract with a third party commits the tort of inducing breach of contract. The plaintiff must show a valid contract, the defendant's knowledge of it, intention to procure its breach, an actual breach and resulting damage. A common business example is hiring a competitor's employee knowing that doing so will cause the employee to breach a valid restrictive covenant or a fixed-term contract. The broader tort of causing loss by unlawful means applies when the defendant commits an act against a third party that would be actionable by that third party, or would be if it suffered loss, intending to harm the plaintiff (A.I. Enterprises Ltd. v. Bram Enterprises Ltd., 2014 SCC 12). Ordinary hard competition, such as offering better prices or hiring employees whose contracts allow them to leave, is not a tort.

Passing off and unfair competition

Passing off protects the goodwill attached to a business's name, get-up or other indicia from misrepresentation by a competitor. Under the test in Ciba-Geigy Canada Ltd. v. Apotex Inc. (1992), the plaintiff must prove the existence of goodwill, deception of the public due to a misrepresentation by the defendant, and actual or potential damage. Section 7 of the federal Trademarks Act creates a statutory version of the tort, including directing public attention to one's goods in a way likely to cause confusion with another's. Registering a trademark makes protection much easier, because the owner need not prove goodwill in each case (lesson 12), but passing off protects unregistered names and trade dress too.

Confidential information and trade secrets

Confidential business information, such as customer lists, formulas, pricing and plans, is protected by the equitable action for breach of confidence. The plaintiff must show the information had the necessary quality of confidence, was communicated in circumstances importing an obligation of confidence and was misused to the plaintiff's detriment. In LAC Minerals Ltd. v. International Corona Resources Ltd. (1989), a mining company that learned of a valuable property during confidential partnership talks and then bought it itself was ordered to transfer the property to the company that had shared the information. Since 2020, following amendments made to implement the Canada–United States–Mexico Agreement, the Criminal Code has also made obtaining or communicating trade secrets by deceit or other fraudulent means an offence. Practical protection depends on confidentiality agreements, access controls and marking documents confidential.

Product liability

Product liability covers injuries and losses caused by defective products. Claims may be brought in contract, against the seller under sale of goods warranties (lesson 5), and in tort, against anyone in the chain of distribution: the manufacturer, component suppliers, distributors and retailers. Product defects fall into three categories. A manufacturing defect is a flaw in a particular unit that departs from the intended design, such as a contaminated batch of food. A design defect affects every unit because the design itself is unreasonably dangerous. A warning or instruction defect exists when a product lacks adequate warnings about risks or instructions for safe use.

Canadian product liability law in the common law provinces is based on negligence, not strict liability. A manufacturer owes a duty of care to consumers (Donoghue v. Stevenson) to design, manufacture and test products carefully and to warn of dangers it knows or ought to know about. Courts may infer negligence from the existence of a manufacturing defect, and in design cases they weigh the product's risks against its utility and the feasibility of safer alternatives. The duty to warn is continuing: a manufacturer that learns of a danger after sale must warn users. In Hollis v. Dow Corning Corp. (1995), the Supreme Court held a breast implant manufacturer liable for failing to warn adequately of rupture risks, explaining that warnings must be clear, complete and current, and that where a learned intermediary such as a physician stands between manufacturer and consumer, the manufacturer must warn the intermediary fully. Retailers, though rarely negligent, are liable to their own buyers without proof of fault for breach of the statutory implied conditions. In Quebec, the Civil Code makes manufacturers and distributors liable for safety defects without proof of fault, subject to limited defences.

Defences include the plaintiff's contributory negligence, misuse of the product in an unforeseeable way, voluntary assumption of a known risk and expiry of the limitation period. Compliance with regulatory standards is evidence of care but not a complete defence.

Product safety regulation and recalls

The Canada Consumer Product Safety Act prohibits manufacturing, importing, advertising or selling consumer products that are a danger to human health or safety. It requires manufacturers, importers and sellers to report incidents that resulted or may reasonably have been expected to result in death or serious adverse health effects to Health Canada within two days of becoming aware of them, and to provide a written report within ten days if the manufacturer or importer is reporting. Health Canada can order recalls and other corrective measures, and businesses must keep records that allow products to be traced one step up and down the supply chain. Food, drugs, vehicles and other products have their own regimes, such as the Food and Drugs Act and the Motor Vehicle Safety Act.