Contract Language Doesn’t Prevent Buyer’s Fraudulent Misrepresentation Defence

The Ontario Court of Appeal Restates the Law Concerning “Entire Agreement” Clauses

Issue:  If a seller (allegedly) lies to you to entice you to sign a contract to buy their business, will a court prevent you from arguing fraudulent misrepresentation to avoid paying the buyer because the contract contains a clause stating that anything not found within the written contract is of no effect?

 Answer: No.

In 10443204 Canada Inc. v. 2701835 Ontario Inc., 2022 ONCA 745 – or “Numbered Company v. Numbered Company” – the Ontario Court of Appeal allowed the appeal of the appellants / defendants / buyers (the “appellants”) from the lower Superior Court’s summary judgment (judgment without trial) declaring them liable for the balance of the price they agreed to pay the respondent /plaintiff / seller (the “respondent”) for the purchase of a coin laundry business. The motion (lower court) judge held that “the appellants’ defence, that they had been induced by the respondent’s fraudulent misrepresentations about the revenues of the business to enter into the purchase agreement, waive its conditions, and complete it, did not raise a genuine issue that required a trial.”

The appellants argued “that the motion judge erred in law because he treated an “entire agreement” clause in the purchase agreement as precluding their fraudulent misrepresentation defence. They argue that the clause, which stated that there were no representations other than those in the agreement itself, could not, in law, oust a fraudulent misrepresentation defence.”  They also argued “that the motion judge erred in finding that the clause could have preclusive effect because the appellants had opportunities to perform due diligence on the financial status of the business”.

The Court of Appeal, in its decision released on November 1, 2022, concluded that the motion judge erred in granting summary judgment in favour of the respondent seller. “His approach to the effect of the entire agreement clause in the circumstances he found to be present was not consistent with settled law. And, reading the motion judge’s reasons as a whole,” he did not determine “independently of his approach to the entire agreement clause, that there was no genuine issue requiring a trial as to whether a fraudulent misrepresentation was made.”

The Fine Print

To learn more about this important decision from Ontario’s highest court, read on, or join me at the end of this blog for “What You Must Know”. You can also just skim the following yellow highlighted sections.

The entire agreement clause in the purchase agreement (“APS”) read as follows:

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

The APS also contained a vendor take-back mortgage—whereby the seller lends all or part of the purchase price to the buyer—requiring monthly payments on account of the purchase price. The respondent later “commenced an action against the appellants alleging that there was default in payment of an instalment under the vendor take-back mortgage such that the entire balance of the purchase price was now due.”

“…The appellants defended and counterclaimed. They alleged that the APS and the obligations they undertook in favour of the respondent on its completion had been the result of fraudulent or negligent misrepresentations made to them by the respondent and its principal concerning the gross revenues of the coin laundry.”

The Court of Appeal concluded “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” and it rejected “the argument of the respondent that, independently of his approach to the entire agreement clause, the motion judge found that there was no genuine issue requiring a trial as to whether there had been a fraudulent misrepresentation at all.”

Instead, “the motion judge was doing no more than saying that, in his view, the elements of fraudulent misrepresentation could not be met in the circumstances of this case. Those circumstances were the entire agreement clause and the opportunities the appellants had to conduct due diligence and exit the APS if unsatisfied, which the motion judge previously alluded to and which he reiterates immediately following the sentence in question. There was no finding of a lack of a genuine issue for trial independent of those considerations.”

In allowing the appeal, the Court of Appeal set aside the summary judgment, and directed that the matter return to the Superior Court to proceed to trial (see more about that below).

Further, in “accordance with the agreement of the parties”, the Court awarded the appellant $11,000.00 in costs (which is likely well below the actual legal costs), and the costs of the summary judgment motion, which were originally awarded to the respondent (the amount of which is not public, but were, presumably, greater than $11,000.00 since appeals from summary judgment motions usually cost less than the motions themselves).

What You Must Know

Welcome back if you skipped “The Fine Print” above.

Here are the key takeaways from the Numbered Company v. Numbered Company decision (which wins the award for the most boring case name featured in any of my blogs thus far):

1. Entire agreement clauses—which are commonplace in most commercial, real estate and employment agreements—are incredibly useful and should usually be included as they help promote certainty and finality. However, they aren’t the “get out of jail free” cards that some people expect them to be.
2. According to the Court of Appeal, entire agreement clauses—which are also known as “four corners” 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.” That rule provides that evidence outside the words of a written contract, that would add to, subtract from, vary or contradict a contract, is not admissible by a court when interpreting a contract.

   “However,” the Court of Appeal added, “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….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…[T]he defence of misrepresentation is not precluded or diminished by reason only of the existence of an entire agreement clause”.

3. Whether or not the appellants / defendants in this case will ultimately succeed with their fraudulent misrepresentation defence will be a matter for the trial judge to determine. Given current backlogs, it will likely take more than one year for the case to reach trial from the time this blog was written in mid-November 2022. It is important to note that the respondent seller’s court action was commenced in November 2019.
4. Given the time, expense and lack of finality of litigating a civil action through the courts—which in this case included a once-successful summary judgment motion overturned by a higher court, only to be followed by a trial one day and perhaps more appeals—counsel and their clients should give careful consideration to resolving disputes through an ADR (Alternative Dispute Resolution) process such as arbitration or mediation-arbitration (“med-arb”). These ADR processes can be built into contracts through carefully worded ADR clauses (prepared by lawyers who are experienced in drafting such clauses) so that the parties cannot commence court proceedings in most situations, and instead are required to arbitrate, mediate-arbitrate, etc. Even if such ADR clause are not found in their contracts, disputants can still agree to arbitrate or participate in med-arb—even after a court action has commenced.
5. Another potential advantage of ADR is privacy: the world won’t know your business, unlike when you use the courts, which means people like me won’t be blogging about your business dispute, and people like you won’t be reading about it.

If you are looking to hire a mediator, arbitrator, or mediator-arbitrator for your business or other civil dispute, I am a Chartered Mediator and Qualified Arbitrator, as well as a former civil litigator. For more information about my dispute resolution practice, click here. For a at-a-glance-guide to help you determine with form of ADR is right for your dispute, click here.

This blog is for educational purposes only and is not intended as legal or other professional advice.