Ineffective Exclusionary Clauses

Most agreements of purchase and sale will contain an exclusionary clause. Do they work?

First, let’s have a look at exactly what they say. Reproduced below is the relevant wording contained in the standard form Agreement of Purchase and sale currently in use in Ontario.

24. AGREEMENT IN WRITING. If there is a conflict or discrepancy between any provision added to this Agreement (including any Schedule attached hereto) and any provision in the standard pre-set portion hereof, the added provision shall supersede the standard pre-set to the extent of such conflict or discrepancy. This Agreement including any Schedule attached hereto shall constitute the entire Agreement between the Buyer and Seller. There is no representation, warranty, collateral agreement or condition, which affects this Agreement other than as expressed herein. For the purposes of this Agreement, Seller means vendor and Buyer means purchaser. This Agreement shall be read with all changes of gender or number required by the context.”

Actually, the wording is rather poor. First, the description of the clause in the heading, namely “Agreement in Writing” really gives no indication of its contents. It combines the elements of several clauses contained in commercial contracts:

· Entire agreement provision

· No representations provision

· No collateral agreements provision

These clauses are the basic exclusionary provisions contained in most standard commercial agreements.

However, this particular clause is a little different. It is broader than that. At the outset, it deals with interpretation. There is now a standard form document. Basically, it should apply to everyone. Don’t change it! If you want to add anything, go to the Schedule. Also, if you want to have something specific to your agreement, then go to the Schedule.

Then, following the exclusionary clauses there is the definition of Seller and Buyer as well as the reference to gender and number. It is difficult to interpret an agreement when the corporation as Seller is referred to as “him” and the husband and wife buyers are also referred to as “him”. Nevertheless, hopefully correct grammar, gender, singulars and plurals will be used in Schedule “A”.

So, that brings us back to the exclusionary clauses? Will they work? Maybe not! The reason is due in part to the fact that they are buried in the fine print under a Clause entitled “Agreement in Writing”. At the very least, it should say “Limitation of Liability” or “Exclusion of Liability”. That’s what they say in other agreements. So, why bury them here?

Courts are reluctant to apply them, so why beg the question? Get them in the open and “call a spade a spade”.

Truly, if you want an exclusion or limitation on your liability as a Vendor then put it in the agreement as follows:

  • Big print, so everyone can read it
  • Make it clear
  • Make it simple
  • Make it unambiguous
  • Place it in Schedule “A”

Now, you have a fighting chance. It’s part of the agreement. The other party saw it and agreed to it. There is a specific contractual term limiting your liability. So, why not go one step further, and limit your tort liability as well. This way, you are gaining the benefit of some added protection.

What’s the law about this? The exclusionary clause will be strictly interpreted by the Courts. If there is fraud, it will not apply. If there is negligence, that is, you as the Seller said something that turned out to be incorrect, but you did not know, then, the Court may or may not allow this clause to benefit you. Certainly, if the Court finds any kind of fraud, this clause will not help. But, if you were simply mistaken, then “maybe”.

Let me give you an example. You have a restaurant which is doing reasonably well. You decide to sell. You list for $350,000 and produce financial statements. Possibly, when the buyer takes over, the business doesn’t do so well. Is that your fault? Would an exculpatory clause have helped? What if the purchase price were $250,000 and your leasehold improvements, chattels and fixtures were worth $300,000? The buyer is already getting a discount. So, you might be able to say:

· I am giving you the financial statements as a courtesy

· Don’t rely upon them

· If you wish, use some of the items as a guideline

· I will not be held responsible for their correctness

· This is not your business plan

· If I were staying, I would make some changes myself

That seems to be a fair enough deal, particularly when the buyer is getting hard assets that are worth more than the purchase price.

So, all in all, there is no particular reason that the Court would not come to the vendor’s rescue. Realtors should use exculpatory clauses and negotiate them into the contract specifically. It will save litigation afterwards.

Brian Madigan LL.B., Broker

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