We looked at Warranties and the doctrine of merger. The Robinson v. Hobbs-Lingard case in 2015 highlighted several issues. It was heard in the Small Claims Court in Milton on 28 May 2015 before Deputy Judge Kelertas.
There were two clauses in the contract which were reviewed and interpreted. They were both warranties: 1) dealt with the furnace, and 2) dealt with the pool.
The purchaser found that the furnace didn’t work and the pool required repairs. Both of these Warranties were worthless. Why?
Let’s have a look at the full case:
The Plaintiff and her husband bought a house in Milton, Ontario from the Defendant. The transaction closed on May 30, 2014. The Agreement of Purchase and Sale, dated March 16, 2014, provided in part that:
The Seller represents and warrants that the chattels and fixtures as included in this Agreement of Purchase and Sale will be in good working order and free from all liens and encumbrances on completion.
The Seller represents and warrants that the swimming pool and equipment are now, and on the completion date shall be, in good working order. The Parties agree that this representation and warranty shall survive and not merge on completion of this transaction, but apply only to the state of the property existing at completion of this transaction.
The Plaintiff says that when she and her husband took possession of the house in early June 2014, the pool pump and the solar control panel to the pool’s heater were found not to be functioning. Further, upon having Union Gas attend at the house to turn on the natural gas supply, they were advised that the furnace venting and/or chimney liner had to be replaced before Union Gas would turn on the gas. After calling in a heating, ventilation and air conditioning (“HVAC”) contractor to replace the chimney liner, the Plaintiff was advised that the heat exchanger in the furnace was defective and needed to be replaced. The Plaintiff says that the old furnace (and all necessary duct work, venting materials, electrical connections) was subsequently replaced with a new, high efficiency furnace at a total cost of $4,237.50. The Plaintiff says that she had the pool pump and solar control panel replaced at a total cost of $1,778.62. Consequently, the Plaintiff claims damages from the Defendant for breach of contract in the amount of $6,016.12.
In response, the Defendant says that the pool pump and solar control panel were working when the pool was closed in the fall of 2013, and that there was no indication that the pool equipment was not working as of the date of closing. She says that the furnace was fully operational on the date of closing. Furthermore, she says since the Plaintiff waived her right to a home inspection as a condition set out in the Agreement of Purchase and Sale, it is unfair for the Plaintiff to now claim that the Defendant should somehow be responsible for fixing problems that, if they existed, should have been brought to the Defendant’s attention before closing.
The only witnesses at trial were the Plaintiff and the Defendant.
The Plaintiff submitted into evidence a copy of the Agreement of Purchase and Sale for the home. She testified that she and her husband took possession of the house on May 30, 2014, and moved in gradually, such that they were fully living in the house on or about June 6, 2014. The first indication that there was a problem with the furnace came on June 8, 2014 when a Union Gas representative did an inspection of the furnace. The furnace inspection was required as a condition of turning on the gas to the home. According to a Violation Notice filed with the Court, the furnace venting was found to be split, and had to be replaced along with a liner and a sleeve. The Plaintiff also filed two photographs taken by her at the time to show that the vent and the sleeve were rusted and corroded. The Plaintiff subsequently contacted B.C. Mechanical, a HVAC contractor to do remedial work. In a letter dated July 3, 2014, Brett Copeland of B.C. Mechanical advised the Plaintiff’s husband that:
“The furnace was inspected and found to have defective heat exchanger. The furnace was shut down at this time. Heat exchanger needs replacement but recommend replacement of furnace. Lack of maintenance caused premature failure.” (Original emphasis)
The Plaintiff testified that the furnace was subsequently replaced in its entirety. She filed two pictures that were taken by her at the time of the removal of the furnace that she says show rot and rust inside the furnace.
The Plaintiff testified that on or about June 10, 2014, a representative from Cannonball Pools, Shane Bailey, came to the house to open the pool for the season. The Plaintiff said she called Cannonball Pools because she remembered that the Defendant had used the same company to open and maintain the pool in prior years. The Plaintiff filed two undated letters from Mr. Bailey, one of which was signed. In that letter he wrote that:
“At the time of pool closing on 10/04/2013 the pool was functioning. The pump was running off an extension cord as it has been for the 4 years we were opening and closing the pool. There was no power to the plug dedicated for the pump, so the pump was running off an extension cord to a different location.
At the time of the pool opening on 06/10/2014, we found that the pump motor was not functioning. To repair this old pump would have cost more than to replace it with a new pump. The pump was past its lifetime and a replacement was required. A new pump had to be installed to make this pool in proper working order and electrical work had to be done to wire the new pump properly so it was no longer on an extension cord. At the time of opening The Solar Auto Controller was also not functioning. A new circuit board had to be installed to the Solar Auto Controller in order for it to function properly.”
It was not disputed that the Plaintiff paid Cannonball Pools $1,778.62 to replace the defective pool equipment.
On cross-examination, the Plaintiff confirmed that prior to the completion of the Agreement of Purchase and Sale, no home inspection was performed. While she and her husband visited the house twice in the time between the execution of the Agreement of Purchase and Sale on March 16, 2014 and the closing date on May 30, 2014, the Plaintiff did not personally check to see if the pool equipment or the furnace were working. The Plaintiff had no knowledge as to whether the furnace or pool equipment were actually operational on May 30, 2014. The Plaintiff confirmed that Union Gas did not advise her that the furnace was not working on June 8, 2014; rather, she was advised only that the furnace venting was split and had to be replaced before the gas could be turned on. The Plaintiff did not obtain a quote for the replacement for the venting alone. The Plaintiff also confirmed that B.C. Mechanical had only told her that the heat exchanger in the furnace was found to be defective and that it merely recommended that the furnace be replaced. The Plaintiff did not obtain a quote from B.C. Mechanical for the repair or replacement of the heat exchanger alone.
The Defendant agreed in her testimony in-chief that, as the vendor of the house, she gave certain warranties to the Plaintiff. However, at the time of the completion of the sale of the house on May 30, 2014, the Defendant testified that she had no knowledge of any problems with the furnace or the pool equipment. It was her testimony that on May 30, 2014, the furnace and air conditioner were running, and to the best of her knowledge the pool equipment was in good working order. She testified that Cannonball Pools had maintained the pool and the pool equipment for her for four years prior to selling the house. There were no issues with the equipment when the pool was closed on October, 2013. She testified that the pool pump had always been plugged into a standard electrical outlet as opposed to being hard-wired and that Cannonball Pools had never told her that this was a problem. On cross-examination, the Defendant stated that the she did not know if such an electrical connection was legal or not. She testified she had lived in the house for ten years before selling it, and the pool pump had not been replaced in those ten years. However, she had never had any problems with it. The furnace, in her estimation (based on information from the manufacturer’s website), was at least twelve years old in 2014. She was not sure when it had last been serviced, but she thought it might have been serviced in 2012. She argued that had the Plaintiff done a home inspection, the age of both of the pool pump and the furnace would have been apparent to the inspector and therefore to the Plaintiff.
Buying a house is the most significant transaction in most people’s lives. When buying a house, it is critical to ensure that it is very clear in the Agreement of Purchase and Sale that everyone knows exactly what is being bargained for, and that the Agreement of Purchase and Sale contains clear, unambiguous clauses that express the intent of the parties. It is equally important that purchasers obtain good professional advice before and after entering into an Agreement of Purchase and Sale to ensure that they properly understand the meaning of the terms and conditions of the Agreement. Otherwise, misunderstandings may arise.
Unfortunately, this is a situation where the Plaintiff clearly misunderstood the meaning and the limitations of the representations and warranties given by the Defendant in the Agreement of Purchase and Sale. The Plaintiff apparently believed that the warranty regarding chattels and fixtures (which included the furnace) protected her from buying a house with a defective furnace. However, the clause in the Agreement relating to chattels and fixtures did not have any language that indicated that the warranty would survive closing. Therefore, any warranty given by the vendor to the purchaser ended on the closing date, May 30, 2014. It was up to the Plaintiff and her husband to determine whether or not the furnace was in good working order before that date. Since the Plaintiff did not identify a problem with the furnace’s operating condition or any problem with the venting from the furnace on or before May 30, 2014 (as noted above, she and her husband waived any right to a home inspection prior to closing), she has no claim as against the Defendant with respect to the problems with the furnace that were discovered after the completion of the sale of the house.
With respect to the pool equipment, the situation in law is a bit different, but the result is the same. While the warranty given by the Defendant in relation to the swimming pool and pool equipment survived the closing date, the warranty only applied “…to the state of the property existing at completion of this transaction”. This means that the Defendant only promised that the pool equipment would be in good working order on the closing date. The Defendant did not promise that the pool equipment would be in good working order after the closing date. Rather, she only agreed that her promise of working order on the closing date of May 30, 2014 would continue after closing, such that if the pool equipment was not in good working order on May 30, 2014, she was obligated to either fix the problem at her own expense or be potentially liable in damages to the Plaintiff after the closing of the sale of the house.
When representations and warranties of this sort are given, purchasers should inspect the property just before closing to ensure that the vendor’s warranties are true. If anything is not working, the problems can be addressed before closing. If they cannot be addressed, the purchaser will at least have some proof that there was a problem that existed before closing. Otherwise, if the purchaser discovers a problem with respect to a warranted fixture, chattel, or the state of the property after closing and they do not have proof, on a balance of probabilities, that the problem existed at the time of closing, they will not succeed in a claim for breach of warranty under the Agreement of Purchase and Sale. In this case, the Plaintiff could not provide any evidence that the pool pump or the solar controller panel did not work on the date of closing. Consequently, her Claim against the Defendant must fail.
As an aside, there were many ways that the Plaintiff could have protected her interests in relation to the pool equipment. She and her husband could have included a clause in the Agreement of Purchase and Sale that the pool equipment be in good working order as of a certain date after the closing date and thereby given themselves the opportunity to open the pool and inspect the equipment to verify the Defendant’s warranty. They also could have included a clause that required the Defendant to open the pool and ensure that the pool equipment was in good working order before the closing date. There also could have been a provision in the Agreement of Purchase and Sale that monies be held back as security on closing to ensure that the pool equipment was working on the closing date, failing which the funds could have been used to fix the pool if the Defendant failed to live up to the warranty. Lastly, the Plaintiff and her husband likely made a mistake in not ensuring that they had a right to inspect the pool and its equipment (or any other fixtures and chattels included in the Agreement of Purchase and Sale) on the closing date to satisfy themselves that the pool equipment and the furnace were in good working order. Had they done so, they likely would have avoided the grief and additional cost associated with the purchase of their home.
The Plaintiff’s Claim is dismissed. I have endorsed the record accordingly. If the parties cannot agree on costs, they may make brief written submissions to me, making reference to any Offers to Settle made under Rule 14. All such submissions are to be exchanged by the parties and submitted to the Clerk of the Milton Small Claims Court as follows:
1. By the Defendant within 20 days of the date of these Reasons;
2. By the Plaintiff within 10 days of the receipt of the Defendant’s submissions; and
3. The Defendant may then make reply submissions, if she so chooses, within 7 days of the receipt of the Plaintiff’s submissions.
Dated: July 13, 2015
K.J. Kelertas, Deputy Judge”
When dealing with the furnace the trial Judge said:
“…..the clause in the Agreement relating to chattels and fixtures did not have any language that indicated that the warranty would survive closing. Therefore, any warranty given by the vendor to the purchaser ended on the closing date, May 30, 2014.”
Doctrine of Merger
So, what’s the doctrine of merger? This is a legal doctrine to “keep things simple”. We started out with an executory contract, that is, one which required completion at a later date. We had the Agreement and then we completed the Agreement on closing. In exchange for the monies paid, the Purchaser received a Deed. The Deed replaced the Agreement. We didn’t need two documents any longer to determine the parties’ rights, just one will be enough, and that’s the Deed.
Several hundred years ago, if there were warranties intended to last after closing, they would actually be written into the Deed. Now, there’s no room for that, with the Transfer/Deed used in connection with the Land Registration Reform Act. So, those warranties intended to have effect later will have to be placed elsewhere.
The result at the present time is the placement of those surviving warranties into the Undertakings delivered on closing. Now, the Agreement is gone, replaced by the Deed (which says nothing) and the Undertakings (which contain the Warranties.
How do we know whether those warranties were intended to apply later? We said so, that’s why!
First, we said that the statement would “survive” completion. That means that we intended for this statement to apply afterwards. It’s just like we said it a second time in the Undertakings.
Second, we said that the statement would not “merge” on completion. That means that common law doctrine of merger would not apply. That means that the simplification consequences at common law won’t apply. Ordinarily, the Deed would replace the Agreement in its entirety, but we just said “no, we don’t want that”.
In the statement about the furnace, we didn’t rule out the doctrine of merger. So, it applies. The statement about the furnace ended when the transaction was closed. The contract is no longer executory. It’s over. It’s finished and we failed to make an exception.
Missing that was fatal, since we know that the furnace didn’t work, and had to be replaced immediately.
This time, the correct words were included in the Agreement. This warranty actually survived the closing. But, for how long, and what did it mean?
The pool was closed in the Fall of 2014. The deal closed on 30 May 2015. It was discovered that the pump was defective on 10 June 2015. So, who knows what condition it would have been in, on 30 May 2014? That would be just a “guess”.
As the trial Judge said:
“the Defendant (Seller) only promised that the pool equipment would be in good working order on the closing date. The Defendant did not promise that the pool equipment would be in good working order after the closing date.”
Advice from the trial Judge:
When representations and warranties of this sort are given:
- purchasers should inspect the property just before closing to
- ensure that the vendor’s warranties are true.
If anything is not working,
- the problems can be addressed before closing.
- If they cannot be addressed, the purchaser will at least have some proof that there was a problem that existed before closing.
Alternate Advice from the trial Judge on other Clauses:
- Buyers could have included a clause in the Agreement of Purchase and Sale that the pool equipment be in good working order as of a certain date after the closing date:
- opportunity to open the pool and inspect the equipment to
- verify the Defendant’s warranty.
- a clause that required the Defendant (Seller) to open the pool and ensure that the pool equipment was in good working order before the closing date.
- monies be held back as security on closing to ensure that the pool equipment was working on the closing date, failing which the funds could have been used to fix the pool if the Defendant (Seller)failed to live up to the warranty.
Further Advice on this Transaction:
The Judge said:
“Lastly, the Plaintiff and her husband likely made a mistake in not ensuring that they had a right to inspect the pool and its equipment (or any other fixtures and chattels included in the Agreement of Purchase and Sale) on the closing date to satisfy themselves that the pool equipment and the furnace were in good working order. Had they done so, they likely would have avoided the grief and additional cost associated with the purchase of their home.”
As we know, there is a right to inspect immediately before closing to ensure that there has been no damage (see Harkness v. Cooney 1979). Would this include testing for the “working order warranty”? I would certainly think so. However, to eliminate any misunderstanding add the clause.
The doctrine of merger can be eliminated in two ways:
- expressly, or
- by implication.
We saw the wording with respect to the express elimination (survive and not merge). The Supreme Court of Canada confirmed that “implication” works. They concluded that the parties had agreed to eliminate the application of the doctrine in Fraser Reid 1979, but that case cost a good deal of money to get that decision. The cheapest way, would have been to simply add the non-merger clause.
This was an interesting case. Rarely, do Judges go that one step further and comment upon what should have been done, or offer advice for future litigants.
Brian Madigan LL.B., Broker