Legal Blog

Misrepresentation

We are bombarded with cases dealing with misrepresentation: fraudulent, negligent, and innocent. The case of Mariani v. Lemstra (2004) 39 C.L.R. (3d) 71 (Ont. C.A.) is another one of these cases, but deals with misrepresentation in the real estate context.

Dream Home

The vendors built a house. The female vendor designed the house; the male vendor acted as the general contractor. After all, if they worked on it themselves, they could turn a mere house into their dream home. Unfortunately, the dream could not last. The male vendor suffered an employment reversal and the couple had to sell the house.

The listing agreement stated that the house was “well built”. The prospective purchaser and her father inspected the house and the father agreed that the house was well built. Based on his opinion, the purchaser entered into an agreement of purchase and sale with the vendors. The agreement had an “entire agreement” clause (i.e. there are no representations etc. that induced any party to sign, other than those in the agreement).

Of course, the home was not a dream. Within a month of closing, the purchaser discovered that there were structural problems with the centre wall of the house and problems with the building envelope that ultimately resulted in toxic mould.

The purchaser decided that it would be cheaper to demolish the house and rebuild. She sued the vendors and a host of others for the cost of demolition and reconstruction. Ultimately, the purchaser entered into a Pierienger agreement with the municipality. She accepted $150,000 and agreed that she would hold the municipality harmless for any damages for which, after trial, it would be liable.

At Trial

The trial judge dismissed a litany of other complaints regarding the house, but did find that the house was deficient in the manner that we have set out above. He held that the vendors were liable for 75% of the purchaser’s damages and the municipality liable for 25%. However, he dismissed all of the claims of the purchaser regarding damages to personal property, mental distress, and loss of rental for a basement apartment.

The trial judge held that the vendors had either fraudulently or negligently misrepresented the house as being well built, that they had known of the defects and failed to disclose them, and that they had negligently constructed the house. He awarded damages of $300,000 for the cost of demolition and reconstruction.

The vendors appealed.

Causes of Action

The Court of Appeal dealt with a host of causes of action.

Caveat Emptor

The Court noted that the purchaser did not sue in contract. It stated, “She is bound by the venerable but enduring principle of caveat emptor – buyer beware. … Mariani can only succeed if she can demonstrate fraud or the breach of some non-contractual duty owed to her by the Lemstras.”

Fraudulent Misrep

The trial judge found that because the male vendor had acted as the contractor and had personally performed much of the work, he knew or ought to have known of the defects. He also held that the statement in the listing agreement that the house was well built was a fraudulent misrepresentation. The Court differed on both grounds.

The Court set out the elements of fraudulent misrepresentation (i.e. deceit): a) the defendant makes a false representation of fact; b) the defendant knows that the statement is false or was reckless as to its truth; c) the defendant intended the plaintiff to act on the statement; d) the plaintiff relied on the statement; and e) the plaintiff suffered resulting damage.

The Court held that the vendors could not be held to have known of defects only because the male vendor acted as his own contractor. Further, the purchaser had admitted that she never saw the listing before entering into the agreement of purchase and sale, had conducted two inspections of the property, and was advised by her father that the house was well built. Accordingly, the Court concluded that the claim of fraudulent representation failed because the purchaser did not prove elements (b), (d), or (e) of the cause of action.

Negligent Misrepresentation

The court looked at the Hedley Byrne elements for negligent misrepresentation: a duty of care based on a special relationship; a false statement; negligence as to the truth of the statement; reasonable reliance on the statement; and resulting damages.

The Court held that the “entire agreement” clause negated any duty of care and explicitly excluded reliance upon any representation not in the agreement. Consequently, the Court reasoned that the Hedley Byrne duty in tort was also excluded. Further, the same reasoning regarding reliance that the Court applied to the allegation of fraudulent misrepresentation, applied equally well to the tort of negligent misrepresentation.

Failure to Disclose Defects

The Court noted that a vendor could be liable to a purchaser for failure to disclose known latent defects; however, the vendors were not shown to have knowledge of the defects.

The Court than conjectured whether there was a claim for innocent misrepresentation. However, the Court noted that the only remedy for innocent misrepresentation was rescission of the contract, not damages, and rescission was impossible.

Negligent Construction

Under normal vender-purchaser circumstances, the analysis would have been over. However, these circumstances were not normal. The vendors had not just hired a general contractor to build the house; one of them designed the house and the other built it. The Supreme Court of Canada has held that an action can lie for negligent construction of a building that results in dangerous deficiencies. At that point, the aggrieved party can recover economic damages to remedy the dangerous situation, rather than wait for someone to be hurt when the danger materialises.

The trial judge had held that the poorly designed centre wall was not stable and could collapse under certain circumstances. He also held that the purchaser’s alleged lack of maintenance did not cause the toxic mould. The Court would not interfere with those findings and, therefore, held that the deficiencies were dangerous.

Accordingly, the Court agreed that the vendors were liable to the purchaser for her damages.

Damages

The Court rejected the trial judge’s quantification of damages. The jurisprudence did not allow for the demolition and re-construction of a structure if the structure could be repaired.

The vendors argued that the purchaser should receive only $20,000 for the estimated costs for repairs at the time the deficiencies were known. The purchaser argued that these estimates were for band-aid solutions. The trial judge found that the purchaser had acted reasonably in obtaining further estimates of $100,000 and $130,000. The Court deferred to the trial judge in this regard and awarded damages of $100,000.

Costs

Since the vendors were substantially successful in the appeal, the Court awarded them costs of $30,000 plus GST and, given that the Court had reduced the award from $300,000 to $100,000, allowed the parties to make further submissions regarding the trial costs.

Epilogue

The Supreme Court of Canada denied leave to appeal the Court’s decision. Unfortunately, we cannot easily determine who had applied for leave.