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Municipality Not An Insurer of Developer: Role to Protect Public Interest, not the Pure Economic Interest of Developer

6 minute read

The recent trend to limit liability for pure economic loss to the scope and nature of an undertaking is continuing with the recent decision of the Court of Appeal for Ontario in Charlesfort Developments Limited v Ottawa (City) 2021 ONCA 410The Court of Appeal overturned a trial judgment holding the City of Ottawa responsible for $4.5 million in damages to a developer.  Simply put from this case, the undertaking of a municipality accepting a fee for zoning applications does not expose a municipality to the substantial costs of a development gone wrong, even if inaccurate information from the municipality or failures to disclose information by the municipality contributed to the losses.

In this case, the developer purchased a property to redevelop for a condominium project and sued the City of Ottawa for negligent misrepresentation after the City failed to accurately inform Charlesfort of the contents of a municipal easement in 2004-2005 during the rezoning process.  During the rezoning process, Charlesfort believed that the easement contained a trunk sewer and only found out, a few years later during a site plan approval process, that the easement contained an old water main, with millions of gallons of water flowing through every hour, in unknown condition. The nature and location of the water main meant that Charlesfort could not excavate and construct its underground parking garage right up to the lot line as planned, resulting in redesign, less parking, and a delay of approximately two years.

The trial judge held that the City owed a duty of care to Charlesfort based on a close and direct relationship during the rezoning process after completing a novel duty of care analysis - an Anns/Cooper analysis (Anns v. London Borough of Merton, [1977] 2 All E.R. 492 (H.L. (Eng.)); Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537).  The trial judge held that the City had implicitly undertaken to take reasonable care to provide Charlesfort with accurate information about infrastructure in adjacent property that was materially relevant to the proposed redevelopment. Due to Charlesfort’s reliance on the information it received from the City’s planning department, the trial judge awarded damages of around $4.5 million to Charlesfort.

The Court of Appeal disagreed with the result of the duty of care analysis, allowed the appeal and dismissed the claims of Charlesfort.

It was not disputed that an Anns/Cooper test is appropriate in the context of a negligent misrepresentation claim. Harvison Young J.A., writing for the court, pointed out that the Anns/Cooper test has recently been refined by the Supreme Court in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 S.C.R. 855 (“Livent”) and 16688782 Ontario Inc. v. Maple Leaf Foods Inc., 2020 SCC 35, 450 D.L.R. (4th) 181.  She noted that the trial judge in Charlesfort did not have the benefit of the Maple Leaf Foods decision.

The Anns/Cooper test sets out two stages for establishing a novel duty of care. The first stage requires the establishment of a prima facie duty of care through the application of a proximity and foreseeability analysis. The second stage asks whether there are policy reasons for why a duty of care should not be recognized.  In Livent, the Supreme Court of Canada held that where an established proximate relationship cannot be found, courts must undertake a full proximity analysis.  This involves examining all relevant factors arising from the relationship between the plaintiff and the defendant, including expectations, representations, reliance, and the property or other interests involved as well as any statutory obligations. For pure economic loss arising from negligent misrepresentation, two factors are determinative in the proximity analysis: the defendant’s undertaking and the plaintiff’s reliance.  Through assessing all relevant factors, the proximity analysis not only determines the existence of a relationship of proximity but also delineates the scope of the rights and duties which flow from that relationship - the principled basis upon which to draw the line.  The court must consider whether the undertaking is made to the plaintiff and for what purpose – an ‘end and aim’ rule which precludes imposing liability upon a defendant for loss arising where the plaintiff’s reliance falls outside the purpose of the defendant’s undertaking.

The Court of Appeal held that the trial judge erred in failing to consider adequately the scope and purpose of the undertaking that she found had been “implicitly” made.  The trial judge held that on receipt of the rezoning application and fee, the City implicitly undertook to tell Charlesfort about the existence, location, and size of municipal structure such as the water main and to advise whether it played a critical role in the municipal water supply and whether the City had any knowledge of its condition. The trial judge did not analyze whether the City manifested an intention to induce, or deliberately solicited, Charlesfort’s reliance, as well as the purpose and scope of any such implicit undertaking. Maple Leaf held that it is the intended effect of the defendant’s undertaking that creates the relationship of proximity and duty. The purpose of any undertaking limits the scope of a party’s entitlement to rely.

Harvison Young J.A. commented that it is much more difficult to properly consider the existence and the purpose and scope of an implicit undertaking than an explicit one, partly as it is necessary to determine who the intended beneficiaries of any undertakings are.  The Court of Appeal held that the scope and purpose of the City’s undertaking to process Charlesfort’s rezoning application was limited to fulfilling its statutory duty and acting in the public interest in doing so.  The public interest purpose in zoning, as reflected in the statutory scheme and other policy instruments, does not, according to the Court of Appeal, suggest that the City had any duty to protect developers from pure economic loss.  Zoning is only one step in a development process.  There was no basis to infer that the City was intending to undertake that the ultimate project would be built or would be as profitable for Charlesfort as it had initially anticipated.  To infer that the City was guaranteeing or had Charlesfort’s economic interests in mind when it undertook to process the rezoning application could, in effect, render municipalities insurers of developers’ profits – creating a potentially limitless liability.  The Court of Appeal held that there was no relationship of proximity and so no prima facie duty of care.

The limitation of liability to the identified intended recipient or benefactor of an undertaking where there would otherwise be potentially unlimited liability for pure economic loss continues to be the trend.  Developers should be cautious to satisfy themselves rather than rely upon information from municipalities as the role of municipalities in zoning applications, absent unusual circumstances, will be limited to protecting public interests, not the economic interests of developers.

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