Entire Agreement Clause and Due Diligence Cannot Oust Fraudulent Misrepresentation

November 08, 2022

Written By Scott Bower, Preet Gill, Ciara Mackey and Josephine Bulat

The defence of misrepresentation is still alive in circumstances involving entire agreement clauses and opportunities for due diligence, the Ontario Court of Appeal recently held in 10443204 Canada Inc. v 2701835 Ontario Inc., 2022 ONCA 745. In setting aside a summary judgment decision, the Court of Appeal confirmed that the existence of an entire agreement clause and opportunities to discover the truth cannot preclude a party from raising fraudulent misrepresentation to answer an alleged breach of contract, even when there is no inequality of bargaining power.

Background and Summary Judgment

The case involved an appeal of a summary judgment ruling, which found the appellant purchasers liable for the outstanding price for the purchase of a coin laundry business. The purchase agreement included an entire agreement clause and was also conditional on certain matters, including a right for the purchasers to attend the business to "verify the income" and terminate the agreement if not satisfied.

After closing, the purchasers defaulted on payment and the vendor sued for the entire balance of the purchase price due. The purchasers defended and counterclaimed alleging that they were induced to buy the business as a result of fraudulent or negligent misrepresentations by the seller about the business' profitability and income.

The motion judge granted summary judgment, finding that the entire agreement clause should be enforced against the appellants' defence of misrepresentation. He cited Royal Bank of Canada v 1643937 Ontario Inc., 2021 ONCA 98 [Royal Bank] for the proposition that a defence of misrepresentation "is not precluded by reason only of the existence of an entire agreement clause"; but then distinguished Royal Bank on the basis that, in that case, there was unequal bargaining power between the parties. He also found that the entire agreement clause, combined with other factors—including the purchasers' opportunity to verify the business' income and their right to walk away from the sale—meant that the purchasers could not rely on the defence.

Ontario Court of Appeal Orders That the Action Proceed Toward Trial

The unanimous Court of Appeal overturned the decision and confirmed that a "clause in a contract that purports to limit remedies arising from misrepresentation does not immunize the maker of a fraudulent misrepresentation from the remedies available to the innocent party" (emphasis added). The motion judge's approach to the contrary was "not consistent with settled law". 

The Court of Appeal decision further clarified that the availability of a defence (or a claim) of fraudulent misrepresentation in the face of an entire agreement clause does not depend on inequality in bargaining power. Nor can other factors, including the ability of the purchaser to conduct due diligence or walk away from the transaction, preclude a party from raising fraudulent misrepresentation. Opportunities to "discover the truth," even if provided for under the contract, do not deprive the purchasers of their right to avoid the contract based on a fraudulent misrepresentation.

As a result of the Court of Appeal decision, the action will return to the discovery and production phase on the path to trial. 

Key Takeaways

Entire agreement clauses are a common feature of commercial contracts and remain important to exclude representations or conditions outside of the agreed contract terms. However, the settled law confirmed by the Ontario Court of Appeal in this case is that an argument that there was fraudulent misrepresentation—whether as a defence to a claim of breach of contract or as a claim for damages—will not be barred by an entire agreement clause or the existence of opportunities for the other party to verify the truth of a false statement. 

While the purchasers avoided summary judgment in this case, they have yet to prove their allegations of fraud. The Court of Appeal's decision to allow the action to proceed gives the appellant purchasers another chance to try. 

If you have any questions about this case, or entire agreement clauses more generally, please contact a member of the Bennett Jones Commercial Litigation group or the authors of this blog, Scott Bower, Preet Gill and Ciara Mackey.

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