ONTARIO – Business Law – Entire agreement clause cannot preclude a defence of fraudulent misrepresentation. The existence of opportunities to discover the truth does not deprive the victim of its right to avoid a contract based on a fraudulent misrepresentation.  Even if a party was afforded an opportunity to investigate a misrepresentation, that does not deprive the party of the right to avoid a contract obtained by misrepresentation.

10443204 Canada Inc. v. 2701835 Ontario Inc. 2022 ONCA 745
2022 ONCA 745 (November 1, 2022)
ONCA (Miller J.A., Zarnett J.A., Coroza J.A.)

The appellants and respondent entered into a purchase agreement in May 2019 (“APS”) for the appellant’s purchase of a coin laundry business in Brampton. There was an entire agreement clause in the APS that included the following language: “There is no representation, warranty, collateral agreement or condition, affecting this Agreement other than as expressed herein.” (para.6)

The parties amended the APS prior to closing and agreed that a partial payment would be made on closing with the balance of $190,000 to be paid with interest over a four-year term post-closing. The corporate appellant gave the respondent a vendor take-back mortgage (“VTB”) to secure the balance. (para. 8) The same amount was secured by a promissory note and personal guarantee given by the individual appellant in the respondent’s favour.

The respondent commenced an action against the appellants in which it claimed they defaulted paying an installment under the VTB, which meant the full balance of the purchase price was due. (para. 9) In their defence and counterclaim, the appellants alleged that the APS and their obligations in favour of the respondent were the result of fraudulent or negligent misrpresentations the respondent and its principal made about the gross revenues of the business. (para. 10)

The respondent moved for summary judgement. The motion judge held that the real issue was whether the fraudulent misrepresentation claim raised a genuine issue for trial. (para. 15). In deciding that the entire agreement clause precluded the defence of misrepresentation, the motion judge distinguished the Court of Appeal’s decision in Royal Bank of Canada v. 1643937 Ontario Inc. 2021 ONCA 98 on the basis that in that case, there was unequal bargaining power, which was not present in the case before him. The motion judge also found that there were other factors that suggested the appellants could not rely on the misrepresentation defence, namely: they could have demanded other contractual protections; they had the right to walk away from the transaction based on conditions; they could have sought an accountant’s assistance or made an audit of business income a condition of the APS; and they had the opportunity to go to the business and verify its income. (para. 16)

The motion judge found the entire agreement clause enforceable and granted summary judgment. That result was overturned on appeal.

In its analysis, the Court of Appeal confirmed that fraudulent misrepresentation is a defence to a claim of breach of contract by the victim of the fraud where the victim relied on the fraudulent misrepresentation to enter the contract. (para. 20)

The Court also described the law applicable to contractual clauses that purport to limit remedies arising from misrepresentations. Where the misrepresentation is fraudulent, such a clause will not apply. (paras. 21-23)

While an entire agreement clause is generally intended to apply to what was said or done before the agreement was concluded from the interpretive process, such clauses cannot be read to apply to fraudulent misrepresentations. (paras. 24-25)  The Court held that the motion judge erred when he departed from the “true holding” in Royal Bank for two reasons:

1. Reliance on the unequal bargaining power in Royal Bank to distinguish that case from the one before him. The court in Royal Bank did not premise its finding on unequal bargaining power between the parties. Neverheless, the Court of Appeal also held that the “policy of the law to discourage fraud is applicable to cases of equal and unequal bargaining power.” ( 28)
2. Taking the use of the word “only” in a portion of Royal Bank (“the defence of misrepresentation is not precluded or diminished by reason only of the existence of an entire agreement clause” [emphasis added]) to allow him to consider other factors that showed opportunities for the appellants to learn the truth, which he found made the entire agreement clause enforceable to preclude the fraudulent misrepresentation defence. ( 29) In doing so, the Court of Appeal held that the motion judge failed to apply settled law that the existence of opportunities to discover the truth does not deprive the victim of its right to avoid a contract based on fraudulent misrepresentation. (para. 31) The “other factors” a court may consider in combination with an entire agreement clause to preclude that defence cannot be factors that themselves are in law incapble of having that effect. (para. 32)

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.” (para. 33)