An entire agreement clause clarifies that the document in which it appears (and any other documents specified) constitutes the whole agreement between the parties. This helps ensure contractual certainty: the parties know that the deal is confined to the four corners of the document.
Generally, when a contract contains an “entire agreement” clause, a party cannot rely on prior representations to avoid its obligations under the agreement. However, in a recent decision, the Ontario Court of Appeal maintained that this does not hold true regarding alleged fraudulent misrepresentations.
In 10443204 Canada Inc. v. 2701835 Ontario Inc., 2022 ONCA 745, the Court of Appeal overturned a summary judgment decision on the basis that an entire agreement clause in an agreement of purchase and sale will not preclude a defence of fraudulent misrepresentation. See Daniel Waldman’s previous article on the motion judge’s decision.
In that case, the two parties found themselves in a dispute over the purchase of a laundry business listed for sale on Multiple Listing Services (MLS). The buyer claimed that during an initial meeting, the seller alleged the company was profitable and made a certain gross income per month. Relying on those representations, the buyer made an offer to purchase the business.
When the transaction closed, the buyer paid the purchase price through an initial lump sum payment and agreed to a vendor take-back mortgage (VTB). The buyer also gave the seller a promissory note and personal guarantee for the remainder of the purchase price owed. Shortly after that, the buyer discovered that the monthly income generated by the business was significantly less than the amounts represented by the seller. As a result, the buyer alleged that the seller fraudulently misrepresented the company during the initial meeting and immediately defaulted under the VTB payments.
The seller then sued for the unpaid amounts owing under the VTB, the promissory note, and the personal guarantee, and was successful. The motion judge held that, based on the entire agreement clause under the contract, any representations made by the vendor before the contract were of no force or effect. Moreover, the motion judge held that the buyer’s failure to conduct its own due diligence before executing the contract prevented the buyer from later asserting that it relied on the vendor’s misrepresentations.
The Ontario Court of Appeal overturned the motion judge’s decision and returned the matter to trial. The court held that: (a) an entire agreement clause is not a complete defence to a fraudulent misrepresentation claim; and (b) the buyer’s failure to conduct its own due diligence did not, in itself, preclude a fraudulent misrepresentation defence.
This decision is significant as it shows that an entire agreement clause is not always an ironclad bar to misrepresentation defences, especially when fraud is alleged.
About the Authors:
Daniel Waldman is Of Counsel in the firm’s Toronto office. He has a broad commercial litigation practice with an emphasis on real property litigation, including commercial leasing, commercial real estate, construction law, and debt collection. Daniel can be reached at 416-644-2838 or firstname.lastname@example.org. To read his full bio, please click here.
Mordy Mednick is a partner in Dickinson Wright’s Commercial Litigation Group with a particular focus on business disputes. He can be reached at 416-777-4021 or MMednick@dickinsonwright.com. To access his biography, click here.