Contracts form the basis of every business relationship. Contracts can be customized to fit the needs of the parties who choose to enter them. However, it is not uncommon for parties to default on their contractual obligations, leading to contract disputes and litigation.

In the recent case of 10443204 Canada Inc. v. 2701835 Ontario Inc., the Ontario Court of Appeal allowed a small business owner and their company to rely on the defence of fraudulent misrepresentation. The case involved the default of a contract to purchase a business.

Contract Provided Purchaser Opportunity to Terminate

The matter arose from a purchase agreement contract (the “contract”) that the parties entered in May 2019. The contract set out the terms and conditions concerning the purchase of a laundromat in Brampton, Ontario, for a purchase price of $290,000. The contract contained a provision stating that “‘[T]here is no representation, warranty, collateral agreement or condition, affecting this Agreement other than as expressed herein.” This clause is sometimes referred to as an “entire agreement” clause.

The contract gave the appellant purchasers 15 days to verify the business’s income. It also provided a “specific window” of time during which they would be allowed to terminate the contract, which was not exercised.

The purchasers paid $100,000 in June 2019 and agreed to pay the outstanding amount over the following four years.

Purchasers Claim Vendor “Falsified” Financial Representation

In their motion for summary judgment, one of the purchasing parties, Patel, claimed that he relied upon a statement by the respondent’s principal that the business generated $12,000 in revenue each month.

While the principal’s son provided Patel with daily totals consistent with the represented monthly revenue, Patel claimed that these figures were falsified to induce him into purchasing the business.

Motion Judge Dismisses Claims

At the summary judgment motion, the motion judge dismissed Patel’s defence, stating that it did not raise a genuine issue requiring a trial. Further, the motion judge dismissed Patel and 2701835 Ontario Inc.’s cross-motion for the production of the vendor’s pre-sale financial records, finding that they had no right to the requested information after the closing.

In its summary judgment, the motion judge ordered that the applicants were liable to pay the outstanding balance of the business purchase price in accordance with the contract.

The Defence of Fraudulent Misrepresentation

To rely on fraudulent misrepresentation as a defence to a claim in contract disputes, three elements must be established by the defendant:

1. The plaintiff made a false representation of a material fact;
2. That plaintiff knew the representation was false or did not know whether the representation was true or false; and
3. The plaintiff intended for the defendant to act on the misrepresentation.

In other words, where a plaintiff’s claim is based on breach of a contract, the claim may fail if the defendant can show that they entered into the contract because of a fraudulent misrepresentation by the plaintiff.

Purchasers Appeal Motion Judge’s Findings Based on Error of Law

Patel and 2701835 Ontario Inc. appealed the decision based on an error of law. They claimed that the motion judge improperly treated the “entire agreement” clause in the contract as precluding a defence of fraudulent misrepresentation.

The respondent argued that the motion judge did not err in his decision and further claimed that the motion judge found no evidence of any fraudulent misrepresentation made by the respondent.

Court of Appeal Finds Purchasers Not Precluded From Relying on Defence of Fraudulent Misrepresentation

Justice Zarnett of the Ontario Court of Appeal stated that:

“[T]he motion judge did not find that the appellants [purchasers], at any relevant time before closing, learned the true facts and therefore knew the representations made to them were false… [i]t is settled law that such opportunities do not deprive the appellants of their right to avoid the contract on the basis of fraudulent misrepresentation.”

The Court of Appeal set the summary judgment aside after finding that the motion judge erred in treating the “entire agreement clause” as diminishing or preventing the purchasers from relying on the defence of fraudulent misrepresentation.

Case Directed Back to Ontario Superior Court for Trial

The Court of Appeal spoke to the respondent’s claim that the motion judge did not find evidence of fraudulent misrepresentation. Justice Zarnett stated that, when read in context, it appeared that the motion judge was simply stating that the elements of fraudulent misrepresentation were not met in these specific circumstances. Ultimately, there was no finding that there was a lack of a genuine issue for trial outside of these issues.

Further, the Court of Appeal set aside the motion judge’s dismissal of the purchaser’s cross-motion requesting the production of certain financial documents. The Court of Appeal left the issue to be raised in the Superior Court within the discovery and production phase of the action.

The Court of Appeal directed the case back to the Superior Court to proceed to trial.

Contact Milosevic & Associates in Toronto For Trusted Advice on Contract Disputes

At Milosevic & Associates, our corporate lawyers have extensive experience assisting clients in complex commercial litigation, including contract disputes. Our lawyers have significant experience defending the rights of business owners and providing representation at various levels of litigation, including before the Ontario Court of Appeal and the Supreme Court of Canada. Our goal is to help clients manage and mitigate their legal and financial risks to help ensure that their business runs smoothly. To speak with a member of our corporate law team today, contact us online or call us at 416-916-1387.