In the recent Court of Appeal ruling of 10443204 Canada Inc. v. 2701835 Ontario Inc., 2022 ONCA 745, the Court of Appeal clarified that entire agreement clauses in contracts do not shield any representor or deprive any party to a contract from remedies available for a fraudulent misrepresentation.
Background
In May of 2019 the appellant Chirag Patel and his corporation 2701835 Ontario Inc. (the appellants) entered into a purchase agreement (the “APS”) with the respondent 10443204 Canada Inc. (the respondent), related to the purchase of a coin laundry business located in Brampton. The APS contained an entire agreement clause of which the relevant part indicated: “There is no representation, warranty, collateral agreement or condition, affecting this Agreement other than as expressed herein.”
In accordance with amended terms to the APS concerning the purchase price the appellants made a partial payment of $100,000 on closing and the balance of the purchase price ($190,000) was agreed to be paid with interest over a four-year term after closing. Payment of the balance was secured by a vendor take-back mortgage provided by the corporate appellant, and a promissory note and personal guarantee provided by the individual appellant. The vendor take-back mortgage required payments.
In November of 2019 the respondent commenced an action against the appellants alleging that there was a default in the mortgage payments such that the entire balance of the purchase price was due. The appellants defended and counterclaimed, alleging that the appellants were induced into entering into the APS based on fraudulent or negligent misrepresentations made to them by the respondent concerning the gross revenues of the coin laundry business. The material representation relied upon was that the business generated $12,000 per month in revenue. The appellants contended that daily totals provided to the appellants during attendance at the business prior to closing had been falsified to support the misrepresentation.
Learned Motion Judge’s Ruling
The learned motion judge considered whether the appellants claim of fraudulent misrepresentation raised a genuine issue for trial. The motion judge rejected the assertion that the appellants had completely relied on the respondent’s representations, because the language of the APS gave them the right to independently verify the business income and the motion judge concluded that the entire agreement clause should be enforced to preclude the defence of fraudulent misrepresentation.
The motion judge distinguished the case of Royal Bank of Canada v. 1643937 Ontario Inc., 2021 ONCA 98, 154 O.R. (3d) 561, on the basis that there was unequal bargaining power in that case.
The Court of Appeal Ruling
The appellants appealed the summary judgment ruling dismissing their claim for fraudulent misrepresentation.
The Court of Appeal held that a clause in a contract such as an entire agreement clause, that purports to limit remedies from a misrepresentation does not shield the representor of a fraudulent misrepresentation nor does it deprive the innocent party who relied on same, from the remedies available under this cause of action, citing 1018429 Ontario Inc. v. Fea Investments Ltd., (1999), 1999 CanLII 1741 (ON CA), 179 D.L.R. (4th) 268 (Ont. C.A.).
The Court of Appeal held that generally entire agreement clauses lift the bargain between the parties from the muck of the negotiations and are generally read to apply to what was said or done before the agreement was made, effectively a codification of the parol evidence rule. The Court of Appeal clarified that although it excludes pre-contractual dealing from the interpretative process, it does not extend to limit remedies available for fraudulent misrepresentation.
The Court of Appeal clarified that the policy of the law to discourage fraud is applicable to cases of equal and unequal bargaining power alike.
The Court of Appeal found it important that the motion judge did not find that the appellants had at any relevant time before closing, learned the true facts and therefore knew the representations made to them were false, but rather, only referred to opportunities that the appellants had to conduct due diligence to uncover the truth. The Court of Appeal went on to reiterate that it is well settled law that such opportunities do not deprive the appellants of their right to avoid the contract on the basis of fraudulent misrepresentation. In such circumstances there is a reverse onus on the party alleged to have made the fraudulent misrepresentation to prove that the innocent party had unequivocal and full knowledge of the truth to rebut a presumption that they relied upon the fraudulent misrepresentation.
As a result, the Court of Appeal set aside the summary judgment and directed the matter return to the Superior Court for a trial.
It is important to note that the appellants did not raise for the Court of Appeal’s consideration the motion judge’s rejection of the defence of negligent misrepresentation.
The lawyers at Gilbertson Davis LLP have experience with contractual disputes, including commercial litigation; real estate litigation; construction litigation; and other types of litigation which can involve fraudulent misrepresentation. Please contact us for an initial consultation.
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