'Entire agreement' clause doesn't preclude fraudulent misrepresentation defence: Ontario CA

A judge improperly held that an entire agreement clause in a purchase agreement diminished or precluded the ability to rely on a defence of fraudulent misrepresentation, the Ontario Court of Appeal has ruled.

The individual appellant and the corporate appellant in 10443204 Canada Inc. v. 2701835 Ontario Inc., 2022 ONCA 745 entered into a purchase agreement in May 2019 in which they agreed to buy a Brampton-based coin laundry business from the respondent corporation. The appellants paid a deposit upon the agreement’s signing.

The agreement provided that the purchase price was $290,000, subject to adjustments, and that the balance was payable on the closing date, originally scheduled for June 27, 2019. It included an entire agreement clause which stated that there was no representation, warranty, collateral agreement, or condition that would affect the agreement, except for what the agreement expressed.

The parties agreed to amend the terms on the manner of payment in June 2019 and closed the transaction the next month. The amended arrangements stated that the appellants made a partial payment of $100,000, including the deposit, upon closing and would pay the balance of $190,000 with interest over a four-year term after closing.

The transaction was secured by a vendor take-back mortgage given by the corporate appellant requiring monthly payments as well as a promissory note and a personal guarantee given by the individual appellant.

In November 2019, the respondent filed an action against the appellants alleging that the purchase price’s entire balance was due upon the default of one of the vendor take-back mortgage’s instalment payments. The appellants provided a defence and counterclaim. They also brought a separate action against the real estate agent and broker involved in the transaction.

Find out the Canadian laws that can be used to sue a real estate agent in this article.

In August 2021, Justice Mohan Sharma of the Ontario Superior Court of Justice issued summary judgment holding that the appellants were liable for the balance of the agreed price. The appellants’ defence – that the respondent’s fraudulent misrepresentations about business revenues induced them to enter into the purchase agreement, waive its conditions, and complete it – did not raise a genuine issue requiring a trial, the motion judge said.

Summary judgment erroneous

The Court of Appeal allowed the appeal, set aside the summary judgment, and returned the matter to the Superior Court for trial.

The appellate court ruled that the motion judge erred by giving the entire agreement clause preclusive effect. The motion judge departed from the true holding in Royal Bank of Canada v. 1643937 Ontario Inc., 2021 ONCA 98 for two reasons, the appellate court said.

First, the judge said that Royal Bank was distinguishable since it involved a situation of unequal bargaining power between the parties. The Court of Appeal disagreed and said that the Royal Bank case did not premise its finding about an entire agreement clause’s impact on a fraudulent misrepresentation defence on unequal bargaining power.

Second, Royal Bank stated that “the defence of misrepresentation is not precluded or diminished by reason only of the existence of an entire agreement clause.”

The judge interpreted the word “only” in this passage as permitting the consideration of other factors, including the opportunity to ask for better contractual protections such as guaranteeing income, terminating the transaction under certain conditions, hiring professional advisors, and doing due diligence.

The presence of these factors made the entire agreement clause enforceable to preclude the fraudulent misrepresentation defence, the judge found. Even if there was a misrepresentation, the appellants had several opportunities “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,” the judge added.

In response, the appellate court said that, while the judge identified opportunities for the appellants to discover the truth, such opportunities did not deprive them of their right under settled law to avoid the contract based on fraudulent misrepresentation.

According to the Court of Appeal, it would be improper to combine:

• an entire agreement clause, which on its own could not preclude a fraudulent misrepresentation defence
• a failure to take opportunities, which by itself also could not preclude such a defence

then consider them, together, as amounting to a preclusive effect.

Lastly, the appellate court rejected the respondent’s argument that the judge found, independently of his approach to the entire agreement clause, that there was no genuine issue requiring a trial on whether there was a fraudulent misrepresentation at all.