COURT OF APPEAL FOR ONTARIO

CITATION: 10443204 Canada Inc. v. 2701835 Ontario Inc., 2022 ONCA 745

DATE: 20221101

DOCKET: C70044

Miller, Zarnett and Coroza JJ.A.

BETWEEN

10443204 Canada Inc.

Plaintiff (Respondent)

and

2701835 Ontario Inc. and Chirag Jagdishbhai Patel

Defendants (Appellants)

Simon Bieber and Robert Trenker, for the appellants

Melvin I. Rotman and Yovin Jaimangal, for the respondent

Heard: October 21, 2022

On appeal from the judgment of Justice Mohan Sharma of the Superior Court of Justice, dated August 9, 2021, with reasons reported at 2021 ONSC 5429.

Zarnett J.A.:

A.           Introduction

[1]          The appellants, Chirag Patel and his corporation 2701835 Ontario Inc., appeal the summary judgment that declared them liable for the balance of the price they agreed to pay the respondent for the purchase of a coin laundry business. The motion 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.[1]

[2]          The appellants argue 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. And they argue 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.

[3]          The respondent submits that the motion judge made no error in his approach to the entire agreement clause in the circumstances, but also asserts that the motion judge found that there was no evidence of any fraudulent misrepresentations by the respondent at all. For that reason, and independent of the effect of the entire agreement clause, the respondent submits that the motion judge correctly granted summary judgment[2].

[4]          For the reasons that follow, I conclude the motion judge erred in granting summary judgment. 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, I do not agree that he determined, 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.

B.           Background

(1)         The Purchase Agreement

[5]          In May 2019, the appellants entered into a purchase agreement (the “APS”) with the respondent. Under the APS, the appellants agreed to purchase a coin laundry business located in Brampton, Ontario from the respondent. The purchase price was $290,000, subject to adjustments. A deposit was paid on the signing of the APS. The APS contemplated the balance being paid on closing, which was originally scheduled for June 27, 2019.

[6]          The APS contained an entire agreement clause which provided, in relevant part, as follows: “There is no representation, warranty, collateral agreement or condition, affecting this Agreement other than as expressed herein.” A slightly different version of the entire agreement clause was repeated later in the APS, but nothing turns on the slightly different wording.

[7]          The APS was conditional on certain matters. One was approval of the APS’ terms by the appellants’ lawyer within 15 days of its acceptance. Another was the arranging of financing. Yet another provided the appellants with the right to attend the business for at least 15 days to “verify the income”. The conditions gave the appellants the right to terminate the APS within a specific time window if not satisfied. The appellants did not exercise any right to terminate.

[8]          In June 2019, the parties agreed to amend the terms concerning how the purchase price would be paid, and they proceeded to close the purchase in July 2019. Under the amended arrangements, a partial payment of $100,000 (including the deposit) was made on closing. The balance of the purchase price – $190,000 – was agreed to be paid with interest over a four-year term after closing, secured by a vendor take-back mortgage given by the corporate appellant to the respondent; this amount was also secured by a promissory note and a personal guarantee given by the individual appellant, Chirag Patel, in favour of the respondent.

(2)         The Dispute

[9]          The vendor take-back mortgage required monthly payments. In November 2019, the respondent 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.

[10]       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 business.

[11]       The appellants also commenced a separate action against the real estate agent and broker involved in the transaction.

[12]       In his affidavit in opposition to the summary judgment motion, Chirag Patel swore that in the negotiations leading up to the APS, the respondent’s principal assured him that the business was profitable, telling him the first time they met that it generated $12,000 per month in revenue. He stated that he entered into the APS “[b]ased on these representations”. He described how the APS was conditional on verifying income of the business by attending at it for 15 days, and that he had attended 14 times and was provided, by the respondent’s principal’s son, with certain daily totals which were consistent with the $12,000 per month figure. He deposed that in light of the revenue generated from the time the sale closed, he believed that the respondent’s principal “misrepresented the gross income of the business in order to get me to purchase it” and that the daily totals provided when he attended had been falsified “in order to induce me to purchase the business, a representation which I relied upon in doing so”.

[13]       The motion judge observed that whether the $12,000 per month figure was communicated at the first meeting was “in dispute”, but he noted that the same figure was provided on a one-page summary financial statement given by the respondent’s real estate agent to Chirag Patel after the APS was signed, and that the respondent’s principal had admitted the figure was his own calculation. The motion judge also noted that Chirag Patel’s email expressing his agreement to proceed with a vendor take-back mortgage “included calculations in which he states he relied on the $12,000 monthly income … in his assessment of his ability to repay the mortgage.”

C.           The Motion Judge’s Decision Regarding the Defence of Fraudulent Misrepresentation

[14]       The motion judge noted that there was no dispute that the APS and the mortgage, guarantee, and promissory note given on closing had been signed, and that default in payment had occurred.

[15]       The motion judge identified the “real issue” to be whether the appellants’ claim of fraudulent misrepresentation raises a genuine issue for trial.

[16]       The motion judge recognized that in Royal Bank of Canada v. 1643937 Ontario Inc., 2021 ONCA 98, 154 O.R. (3d) 561, the court held that a defence of misrepresentation is not precluded by reason only of the existence of an entire agreement clause. But he considered Royal Bank to be distinguishable, because there was unequal bargaining power in that case, unlike this one. And he held that it was not only the entire agreement clause but several other factors that combined with it to suggest the appellants could not rely on the defence of misrepresentation. The other factors were: (i) the appellants could have demanded other contractual protections such as a guaranteed minimum income for the business; (ii) the appellants had the right to walk away from the transaction based on the lawyer review or financing condition; (iii) the appellants could have sought the assistance of an accountant or included an audit of the business’ income as a condition of the APS, but did not; and (iv) the appellants had an opportunity to attend at the business and verify income.

[17]       The motion judge rejected the assertion that Chirag Patel had “completely” relied on the respondent’s representations, because the language of the APS gave him the right to independently verify the business’ income. He concluded that the entire agreement clause should be enforced, noting that he may have decided otherwise if the APS had not given the appellants the opportunity to do their own due diligence and walk away if unsatisfied.

[18]       The motion judge stated:

The [appellants] also cite the elements of the tort of fraudulent representation. Without recounting the elements, I note that there is no evidence from the affidavit or cross-examination which would suggest that [the respondent’s principal] made a false misrepresentation that would invoke this tort given the circumstances of this case. The circumstances in which this agreement was reached whereby the [appellants] had opportunity to independently verify the income of the business, and whereby the [respondent] provided the [appellants] opportunities to exit the contract if at all unsatisfied, suggest that on a balance of probabilities, the elements of this tort could not be established. Again, there are sound reasons to enforce the entire agreement clause. [Citation omitted.]

[19]       Finally, the motion judge held that there was “little to no” risk of inconsistent findings in the related action against the real estate agent and broker because there was no need for him to determine, in deciding the respondent’s case, whether the respondent’s principal made the allegedly false statements. This case was being decided on the basis of the entire agreement clause.

D.           Analysis

(1)         Fraudulent Misrepresentation as a Defence

[20]       Fraudulent misrepresentation affords a defence to a claim on a contract, because a contract that results from a fraudulent misrepresentation may be avoided or rescinded by the victim of the fraud (who may also have an action in damages against the maker of the statement): 1018429 Ontario Inc. v. Fea Investments Ltd. (1999), 179 D.L.R. (4th) 268 (Ont. C.A.), at paras. 50-51. In other words, where a contract is the foundation of the plaintiff’s claim, the right of the defendant to avoid the contract because it was entered into in reliance on a fraudulent misrepresentation by the plaintiff will undo the basis of the plaintiff’s claim.

(2)         The Effect of Disclaimer Clauses

[21]       A clause in a contract that purports to limit remedies arising from a misrepresentation does not immunize the maker of a fraudulent misrepresentation from the remedies available to the innocent party: Fea Investments, at paras. 49-54.

[22]       In Hasham v. Kingston (1991), 4 O.R. (3d) 514 (Div. Ct.), the clause in issue excluded liability for all representations outside the terms of the contract. The Divisional Court found that the clause could not apply to a misrepresentation that was found to be fraudulent: at p. 524.

[23]       The reasoning in Hasham was applied by this court in Fea Investments to conclude that a clause in a contract that limited remedies for misrepresentation did not apply to fraudulent misrepresentations: at paras. 52-54.

(3)         Entire Agreement Clauses and Fraudulent Misrepresentations

[24]       Entire agreement clauses are “generally intended to lift and distill the parties’ bargain from the muck of negotiations”: Soboczynski v. Beauchamp, 2015 ONCA 282, 125 O.R. (3d) 241, at para. 43, leave to appeal to S.C.C. refused, [2015] S.C.C.A. No. 243. 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: Soboczynski, at paras. 45-47.

[25]       However, 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. To be consistent with Hasham and Fea Investments, such a clause, in denying recourse to representations before the making of the contract, could not be read as applying to fraudulent misrepresentations. 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 to the action.

[26]       In my view, this is exactly the conclusion reached by this court in Royal Bank, at para. 43: “the defence of misrepresentation is not precluded or diminished by reason only of the existence of an entire agreement clause”.

(4)         The Motion Judge Erred in Giving the Entire Agreement Clause Preclusive Effect

[27]       The motion judge concluded that in this case the entire agreement clause should be “enforced” to preclude the defence of fraudulent misrepresentation. He cited Royal Bank, but departed from its true holding for two erroneous reasons.

[28]       First, the motion judge considered Royal Bank to be distinguishable because it was a case of unequal bargaining power. But the court in Royal Bank did not premise its finding about the effect of an entire agreement clause on a fraudulent misrepresentation defence on unequal bargaining power between the parties in that case – it described the effect as something that was already “well-established”: at para. 43. Nor can a conclusion that an entire agreement clause will be effective to preclude a defence based on fraudulent misrepresentation where the parties have equal bargaining power be drawn from Fea Investments or Hasham. The policy of the law to discourage fraud is applicable to cases of equal and unequal bargaining power.

[29]       Second, the motion judge took the word “only” in the passage from Royal Bank – “the defence of misrepresentation is not precluded or diminished by reason only of the existence of an entire agreement clause” – to allow consideration of other factors, the presence of which made the entire agreement clause enforceable to preclude the fraudulent misrepresentation defence. This included the opportunity to ask for better contractual protections, such as a guarantee of income, to terminate the transaction under certain conditions, to hire professional advisors, and to do due diligence. As the motion judge said, even if a misrepresentation was made, “there were several opportunities for the [appellants] 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.”

[30]       Importantly, the motion judge did not find that the appellants, at any relevant time before closing, learned the true facts and therefore knew the representations made to them were false. The factors to which the motion judge referred were opportunities he considered the appellants had to discover the truth, by being more diligent in the contract terms they agreed to, the professionals they hired, or the investigations they conducted.

[31]       It is settled law that such opportunities do not deprive the appellants of their right to avoid the contract on the basis of fraudulent misrepresentation. In Free Ukrainian Society (Toronto) Credit Union Ltd. v. Hnatkiw et al., [1964] 2 O.R. 169 (C.A.), at p. 173-74, this point was conclusively stated:

Unquestionably knowledge of the untruth of a representation would be a complete bar to relief, since a person aggrieved could not assert that he had been misled by such a mis- statement even if it had been made fraudulently, and in such a case the misrepresentation would cease to have any further significance. Relief, however, will not be refused on this ground except upon clear proof that the party complaining possessed actual and complete knowledge of the true facts -- actual, not constructive, complete, not fragmentary. The onus would rest upon the plaintiff to prove that the defendants had unequivocal notice of the truth. The mere fact that they had been afforded an opportunity to investigate and verify a representation made to them would not deprive them of their right to avoid a contract obtained by such means. As Lord Dunedin stated in Nocton v. Lord Ashburton, [1914] A.C. 932 at p. 962:

No one is entitled to make a statement which on the face of it conveys a false impression and then excuse himself on the ground that the person to whom he made it had available the means of correction. [Emphasis added.]

See also Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, at paras. 69-70.

[32]       Assuming without deciding that by the use of the word “only”, the court in Royal Bank was suggesting that an entire agreement clause may be combined with other factors to preclude the rights arising from a fraudulent misrepresentation, the other factors cannot be ones incapable in law of having that effect. In other words, one cannot take an entire agreement clause, which cannot on its own preclude a defence of fraudulent misrepresentation, combine it with a failure of a defendant to take opportunities or exercise due diligence to discover the truth, which on its own cannot preclude such a defence, and treat them together as having that preclusive effect.

[33]       For these reasons, I conclude 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.

(5)         The Motion Judge Did Not Find That There Had Been No Fraudulent Misrepresentation Independently of the Effect He Gave to the Entire Agreement Clause

[34]       I reject 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.

[35]       The respondent relies on a single sentence in the motion judge’s reasons (which appears in a passage I have quoted above at para. 18):

Without recounting the elements [of the tort of fraudulent misrepresentation], I note that there is no evidence from the affidavit or cross-examination which would suggest that [the respondent’s principal] made a false misrepresentation that would invoke this tort given the circumstances of this case.

The respondent suggests that the sentence means that there was no evidence of a statement by the respondent that was false, or perhaps, that was false to the knowledge of the respondent. With respect, the respondent takes the sentence out of context and attributes a meaning it does not have. The context is inconsistent with the respondent’s position.

[36]       First, the sentence the respondent relies on appears after the motion judge’s analysis of the effect of the entire agreement clause, an analysis which would have been completely unnecessary if he was satisfied there was no genuine issue requiring a trial that a knowingly false statement had actually been made.

[37]       Second, the motion judge, before and after the sentence the respondent points to, noted a factual dispute about whether the representation of monthly revenues had been made before the APS was signed. He expressly did not resolve that dispute, as he would have been expected to if he were coming to the conclusion the respondent suggests.

[38]       Third, the motion judge also made no finding about what the monthly revenues of the business were compared to what Chirag Patel said had been represented by the respondent about them. Such a finding would be expected to support a conclusion that what Chirag Patel said he was told was not false when the statement was actually made, or that the respondent believed it was true.

[39]       Fourth, the motion judge went on to say there was no risk of inconsistent results given the continuing action against the real estate agent and broker, because he was not deciding if the $12,000 per month revenue representation was made before the APS was signed. If he was deciding that either the statement was not made, or that what Chirag Patel was told was true, then he would have been concerned about the risk of a different finding on those points in the continuing action.

[40]       Given the context, it is highly unlikely the motion judge was saying what the respondent contends. Read in context of the reasons as a whole and the paragraph in which the sentence appears, 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.

E.           Conclusion

[41]       For these reasons, I would allow the appeal, set aside the summary judgment, and direct that the matter return to the Superior Court to proceed toward trial.

[42]       In addition to granting summary judgment, the motion judge dismissed a cross-motion by the appellants for production of certain financial information about the gross income of the business before the sale. He held that there was no right to such information post-closing. He does not appear to have addressed whether the information sought was relevant to the issues in the action, if the action were to continue.

[43]       As the summary judgment is being set aside and the action will continue, I would set aside the dismissal of the cross-motion, and give leave for it to be raised in the Superior Court so that it can be decided in the context of the discovery and production phase of the ongoing action.

[44]       In accordance with the agreement of the parties, (i) the costs of the appeal shall be to the appellants in the sum of $11,000 inclusive of disbursements and applicable taxes; and (ii) costs of the motion for summary judgment shall be to the appellants in the same amount as was awarded by the motion judge to the respondent.

Released: November 1, 2022 “B.W.M.”

“B. Zarnett J.A.”

“I agree. B.W. Miller J.A.”

“I agree. Coroza J.A.”