Fraud Eliminates the Entire Agreement Clause

The Ontario Court of Appeal just confirmed that the “entire agreement” clause does not prevail when it comes to fraud in 10443204 Canada Inc. v. 2701835 Ontario Inc. November 1, 2022.

The Buyer purchased a coin operated laundry in Brampton from the Seller. The Buyer takes the position that the financial statements were fraudulent and misled him into purchasing the business.

The agreement contained a number of conditions to protect the Buyer, however, they were just not enough to uncover the financial errors.

Buyer:                   Chirag Patel and his corporation 2701835 Ontario Inc.,

Seller:                   10443204 Canada Inc.

Business:              coin operated laundry

Location:              Brampton

Purchase Price:      $290,000, subject to adjustments.

Date:                     May 2019

Closing:                June 27, 2019

Conditions:           approval of APS’ terms by the Buyer’s lawyer within 15 days

arranging of financing.

right to attend for at least 15 days to “verify the income”.

The conditions gave the appellants the right to terminate the APS within a specific time window if not satisfied.

The Buyer did not exercise any right to terminate.

Amendment:         closing in July 2019

                             $100,000 which included the deposit was paid

                             $190,000 vendor take back mortgage was provided

The “entire agreement clause provided:

“There is no representation, warranty, collateral agreement or condition, affecting this Agreement other than as expressed herein.”

Patel attended the business on 14 occasions to see the income. He was told that the business generated $12,000 per month. Obviously, that turned out to be false. He couldn’t make the mortgage payments and the Seller is suing him.

At Motions Court, the Judge ruled that the “entire agreement” clause prevailed. He wasn’t allowed to introduce evidence of other matters outside of the written agreement.

The Ontario Court of Appeal disagreed. If there were allegations of fraudulent misrepresentations designed to induce him to enter into the agreement, waive his conditions, and close the deal, then, they could all be brought forward. The Court ordered the matter to proceed to trial.

Here are some of the important points when it came to the law and the entire agreement clause as set out by the Court:

ANALYSIS

(1)                Fraudulent Misrepresentation as a Defence

[20]       Fraudulent misrepresentation affords a defence to a claim on a contract, because a contract that results from a fraudulent misrepresentation may be avoided or rescinded by the victim of the fraud ….

In other words, where a contract is the foundation of the plaintiff’s claim, the right of the defendant to avoid the contract because it was entered into in reliance on a fraudulent misrepresentation by the plaintiff will undo the basis of the plaintiff’s claim.

(2)         The Effect of Disclaimer Clauses

[21]       A clause in a contract that purports to limit remedies arising from a misrepresentation does not immunize the maker of a fraudulent misrepresentation from the remedies available to the innocent party…

[22]       In Hasham v. Kingston (1991), 4 O.R. (3d) 514 (Div. Ct.), the clause in issue excluded liability for all representations outside the terms of the contract.

The Divisional Court found that the clause could not apply to a misrepresentation that was found to be fraudulent…

[23]       The reasoning in Hasham was applied by this court in Fea Investments to conclude that a clause in a contract that limited remedies for misrepresentation did not apply to fraudulent misrepresentations…

(3)         Entire Agreement Clauses and Fraudulent Misrepresentations

[24]       Entire agreement clauses are “generally intended to lift and distill the parties’ bargain from the muck of negotiations”….

They are generally read to apply to what was said or done before the agreement was made, so as to exclude such dealings from affecting the interpretation of the agreement. They are essentially a codification of the parol evidence rule…

[25]       However, it is one thing to exclude pre-contractual dealings from the interpretive process. It is another to attempt to extend the reach of an entire agreement clause so that it effectively limits the remedies available for a fraudulent misrepresentation.

To be consistent with Hasham and Fea Investments, such a clause, in denying recourse to representations before the making of the contract, could not be read as applying to fraudulent misrepresentations.

It could not be read as denying the right of an innocent party to a remedy for a fraudulent misrepresentation, including to rely on the fraudulent misrepresentation as a defence to the action.

[26]       In my view, this is exactly the conclusion reached by this court in Royal Bank, at para. 43:

“the defence of misrepresentation is not precluded or diminished by reason only of the existence of an entire agreement clause”.

(4)         The Motion Judge Erred in Giving the Entire Agreement Clause Preclusive Effect

[27]       The motion judge concluded that in this case the entire agreement clause should be “enforced” to preclude the defence of fraudulent misrepresentation.

He cited Royal Bank, but departed from its true holding for two erroneous reasons.

[28]       First, the motion judge considered Royal Bank to be distinguishable because it was a case of unequal bargaining power.

But the court in Royal Bank did not premise its finding about the effect of an entire agreement clause on a fraudulent misrepresentation defence on unequal bargaining power between the parties in that case – it described the effect as something that was already “well-established”: at para. 43.

Nor can a conclusion that an entire agreement clause will be effective to preclude a defence based on fraudulent misrepresentation where the parties have equal bargaining power be drawn from Fea Investments or Hasham.

The policy of the law to discourage fraud is applicable to cases of equal and unequal bargaining power.

[29]       Second, the motion judge took the word “only” in the passage from Royal Bank – “the defence of misrepresentation is not precluded or diminished by reason only of the existence of an entire agreement clause” – to allow consideration of other factors, the presence of which made the entire agreement clause enforceable to preclude the fraudulent misrepresentation defence.

This included the opportunity to ask for better contractual protections, such as a guarantee of income, to terminate the transaction under certain conditions, to hire professional advisors, and to do due diligence.

As the motion judge said, even if a misrepresentation was made, “there were several opportunities for the [appellants] to conduct their own due diligence, to obtain independent legal, accounting or real estate advice, and to walk away from the deal before it closed.”

[30]       Importantly, the motion judge did not find that the appellants, at any relevant time before closing, learned the true facts and therefore knew the representations made to them were false.

The factors to which the motion judge referred were opportunities he considered the appellants had to discover the truth, by being more diligent in the contract terms they agreed to, the professionals they hired, or the investigations they conducted.

[31]       It is settled law that such opportunities do not deprive the appellants of their right to avoid the contract on the basis of fraudulent misrepresentation.

In Free Ukrainian Society (Toronto) Credit Union Ltd. v. Hnatkiw et al., [1964] 2 O.R. 169 (C.A.), at p. 173-74, this point was conclusively stated:

Unquestionably knowledge of the untruth of a representation would be a complete bar to relief, since a person aggrieved could not assert that he had been misled by such a mis- statement even if it had been made fraudulently, and in such a case the misrepresentation would cease to have any further significance.

Relief, however, will not be refused on this ground except upon clear proof that the party complaining possessed actual and complete knowledge of the true facts — actual, not constructive, complete, not fragmentary. 

The onus would rest upon the plaintiff to prove that the defendants had unequivocal notice of the truth. The mere fact that they had been afforded an opportunity to investigate and verify a representation made to them would not deprive them of their right to avoid a contract obtained by such means. As Lord Dunedin stated in Nocton v. Lord Ashburton, [1914] A.C. 932 at p. 962:

No one is entitled to make a statement which on the face of it conveys a false impression and then excuse himself on the ground that the person to whom he made it had available the means of correction. [Emphasis added.]…

[32]       Assuming without deciding that by the use of the word “only”, the court in Royal Bank was suggesting that an entire agreement clause may be combined with other factors to preclude the rights arising from a fraudulent misrepresentation, the other factors cannot be ones incapable in law of having that effect.

In other words, one cannot take an entire agreement clause, which cannot on its own preclude a defence of fraudulent misrepresentation, combine it with a failure of a defendant to take opportunities or exercise due diligence to discover the truth, which on its own cannot preclude such a defence, and treat them together as having that preclusive effect.

[33]       For these reasons, I conclude that the motion judge erred in treating the entire agreement clause as having the effect of diminishing or precluding the ability of the appellants to rely on the defence of fraudulent misrepresentation.

Comment

If there is an allegation of fraud, that will enable the Court to look beyond the paperwork in play between the parties and other matters which involve an issue of fraud will be taken into consideration.

The “entire agreement” clause has limited value in those types of transactions.

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

Leave a Reply

Your email address will not be published.