Legal Blog

That’s It, That’s the Entire Agreement

Any standard agreement of purchase and sale (APS) almost invariably has an entire agreement clause. In essence it states “See this agreement; well, that’s it; do not rely on anything that took place between us unless you see it here.” What happens when the purchaser alleges that the vendor made a representation after the APS was signed? Such was the case in Soboczynski v. Beauchamp, (2015) 52 R.P.R. (5^th) 175 (Ont C.A.).

 

SPIS

A Seller Property Information Statement contains a raft of property information and representations. Why vendors in their right minds would willingly sign this form is beyond us. It is a lawsuit waiting to happen.

 

Normally, an SPIS is signed before the APS; perhaps as early as the listing agreement. Its effect depends on the APS terms. In this case, however, the vendors signed the SPIS after the APS. The vendors did not have to sign it, but, it seems, in a gesture of goodwill did so anyway. Big mistake.

 

The SPIS contained a representation that the property was not subject to flooding. In it, the vendors also represented that they would inform the purchasers if there were any “important” changes in the condition of the property.

Floods

Before closing, because of heavy rain and melting snow, water entered the basement through the window wells, soaking the carpet and underpad. The vendors dried the carpet and replaced the underpad at a cost of $1,650.00. They did not notify the purchasers of the occurrence. They believed the water seepage to be an isolated event, not sufficiently important to require them to give notice.

 

Three weeks after the transaction closed, the skies opened and another flood occurred. This time, the purchasers investigated; they discovered that the back yard was ponding and the window wells were lower than the surrounding land. The cost to clean up the water damage and correct the physical problems was $22,600.00.

 

Alleging negligent misrepresentation, the purchasers sued the vendors for those costs. They did not sue in contract.

 

APS

The APS contained the usual entire agreement clause. It read “[The APS] including any Schedule attached hereto, shall constitute the entire Agreement between Buyer and Seller. There is no representation, warranty, collateral agreement or condition, which affects [the APS] other than as expressed herein.”

 

The vendors contended that this clause precluded the purchasers from alleging misrepresentation. The Court disagreed. It explained that “Consequences flowing from representations made in the SPIS were outside the reach of the entire agreement clause. The entire agreement clause in the APS operates retrospectively, not prospectively. In other words, the application of the clause is restricted to limit representations, warranties, collateral agreements, and conditions made prior to or during the negotiations leading up to the signing of the APS. When the appellants made representations in the SPIS, a document completed after the APS had been signed by all parties, the entire agreement clause was spent.”

 

The Court then looked to other factors to support this conclusion.

 

1. Legal commentators have noted that the general purpose of an entire agreement clause is “to lift and distill the parties’ bargain from the muck of the negotiations” and, in doing so, “the clause attempts to provide clarity and certainty.” An entire agreement clause is retrospective in nature and is, in essence, a codification of the parol evidence rule.

 

2. Prior jurisprudence of the Court has stated that the entire agreement clause does not restrict the parties from subsequently amending their agreement and that the clause would not apply prospectively unless it specifically stated it would. In this case, the clause read, in the present tense, that “There is no representation…,” rather than there will be no representation.

 

3. Post-contractual conduct is relevant to interpret the terms of a contract. The vendors were not obligated to sign the SPIS and did so only after speaking to their lawyer. That conduct revealed that the vendors took their obligations under the SPIS seriously. By also undertaking to inform the purchasers of subsequent changes in the conditions of the property, they demonstrated that the SPIS affected their prior contractual relationship with the purchasers.

 

Caveat Emptor

The vendors also argued that circumventing the entire agreement clause eroded the doctrine of caveat emptor (“buyer beware”). The Court disagreed, noting prior decisions that stated, “once a vendor ‘breaks his silence’ by signing the SPIS, the doctrine of caveat emptor falls away as a defence mechanism and the vendor must speak truthfully and completely about the matters raised in the unambiguous questions at issue.”

 

The essence of caveat emptor is the vendor’s silence (i.e. I, the vendor, say nothing and you, the purchaser, must come to your own conclusions). Once the vendors signed the SPIS, they broke the silence necessary to rely on the doctrine.

 

Breach

 After the Court decided that vendors were bound to their SPIS representations, it then had to decide whether the vendors were liable for negligent misrepresentation.

 

Lawyers sometimes overlook the constituent elements of negligent misrepresentation: a duty of care based on a special relationship; an untrue, inaccurate, or misleading statement; negligence in making the statement; the plaintiff’s reasonable reliance on the statement; and damages that the plaintiff suffers as a result.

 

The court agreed that the vendors ought to have notified the purchasers of the first flood and, in failing to do so, were negligent and caused damages to the purchasers. The real issue revolved around reliance. “Reasonable reliance is fundamental to the tort…[It] states a factual test for causation…..representation must not only be made but it has to be such as to cause the plaintiff, as a result, to do some act to his detriment. Although reliance can be inferred in certain circumstances, such an inference must be supported by the facts and evidence.”

 

The purchasers argued that they relied on the representations in two ways (i) they waived a home inspection condition; and (ii) they were denied the opportunity to seek remedies available to them under the APS relating to insurance and damage.

 

As to the first, the Court noted that the purchasers had waived the home inspection condition before receiving the SPIS and, regardless, provided no evidence that the home inspector had relied on the SPIS.

 

As to the second, the Court noted that, under the APS, before the purchasers had a right to terminate the APS after damage, the damage had to be “substantial.” The trial judge had made no ruling on the matter, but had indicated that it was doubtful that the flooding was a substantial change under the SPIS. That, together with a mere $1,650 in repair costs, was enough for the Court to conclude that there were no real damages, substantial or otherwise.

 

The court also concluded that, although on occasion it is possible to infer reliance, this case had insufficient evidence to support that inference.

 

Upshot

The Court dismissed the plaintiffs’ action with costs agreed upon at $5,000. We do not fully understand the Court’s disposition of costs at trial and on the appeal to the Divisional Court, so we will comment no further.

 

This action, which had been worth approximately $25,000, went through a trial, an appeal to the Divisional Court, and an appeal to the Court of Appeal – all because the vendors signed an SPIS that they ought not to have signed.

 

 

 

Image courtesy of Flikr, Creative Commons.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.