Soboczynski et al. v. Beauchamp et al.

[Indexed as: Soboczynski v. Beauchamp]

Ontario Reports

Court of Appeal for Ontario,

Hoy A.C.J.O., Epstein and Hourigan JJ.A.

April 23, 2015

125 O.R. (3d) 241 | 2015 ONCA 282

Case Summary

Sale of land — Agreement of purchase and sale — "Entire agreement" clause in agreement of purchase and sale not precluding purchaser's action in negligent misrepresentation against vendor for non-contractual representations made subsequent to agreement but before closing.

Torts — Negligent misrepresentation — Vendors completing seller property information statement ("SPIS") before closing of house sale in which they stated that property was not subject to flooding and undertook to inform purchasers of any important changes to information in SPIS — Vendors failing to disclose pre-closing flooding of basement — Purchasers' negligent misrepresentation claim failing in absence of evidence that they relied on vendors' representations.

The parties entered into an agreement of purchase and sale which contained an "entire agreement" clause. Before the transaction closed, the defendant vendors completed a seller property information statement ("SPIS") in which they stated that the property was not subject to flooding and undertook to inform the plaintiff purchasers of any important changes to the information contained in the SPIS. The defendants failed to inform the plaintiffs of a pre-closing basement flood. After the closing, the basement flooded again, and the plaintiffs found out about the earlier flood. They sued the defendants for damages for negligent misrepresentation. The trial judge found that the entire agreement clause in the agreement of purchase and sale acted as a bar to the action. The Divisional Court allowed the plaintiffs' appeal. The defendants appealed.

Held, the appeal should be allowed.

The action was not precluded by the entire agreement clause. The entire agreement clause operated retrospectively, not prospectively. Its application was restricted to limit representations, warranties, collateral agreements and conditions made prior to or during the negotiations leading up to the signing of the agreement of purchase and sale. When the defendants made representations in the SPIS, a document completed after the agreement of purchase and sale was signed, the entire agreement clause was spent.

The plaintiffs' negligent misrepresentation claim failed in the absence of evidence that they relied on the defendants' representations.

Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919, 226 D.L.R. (4th) 577, 172 O.A.C. 78, 38 B.L.R. (3d) 42, 123 A.C.W.S. (3d) 267 (C.A.); supp. reasons 2006 13954 (ON CA), [2006] O.J. No. 1729, 269 D.L.R. (4th) 152, 19 B.L.R. (4th) 19, 147 A.C.W.S. (3d) 571 (C.A.), consd

Cases referred to

BG Checo International Ltd. v. British Columbia Hydro and Power, 1993 145 (SCC), [1993] 1 S.C.R. 12, [1993] S.C.J. No. 1, 99 D.L.R. (4th) 577, 147 N.R. 81, [1993] 2 W.W.R. 321, J.E. 93-271, 20 B.C.A.C. 241, 75 B.C.L.R. (2d) 145, 14 C.C.L.T. (2d) 233, 5 C.L.R. (2d) 173, 37 A.C.W.S. (3d) 1202; Dzourelov v. T.B. Bryk Management and Development Ltd., 2004 32472 (ON SCDC), [2004] O.J. No. 4109, 190 O.A.C. 321, 40 C.L.R. (3d) 301, 31 R.P.R. (4th) 238, 134 A.C.W.S. (3d) 234 (Div. Ct.); [page242] Farmer v. H.H. Chambers Ltd., 1972 610 (ON CA), [1973] 1 O.R. 355, [1972] O.J. No. 1982, 31 D.L.R. (3d) 147 (C.A.); Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465 (U.K. H.L.); Inntrepreneur Pub Co. v. East Crown Ltd., [2000] 41 E.G. 209, [2000] 2 Lloyd's Rep. 611, [2000] 3 E.G.L.R. 31 (U.K. Ch.); Kaufmann v. Gibson, [2007] O.J. No. 2711, 59 R.P.R. (4th) 293, 158 A.C.W.S. (3d) 1016 (S.C.J.); Krawchuk v. Scherbak (2011), 106 O.R. (3d) 598, [2011] O.J. No. 2064, 2011 ONCA 352, 279 O.A.C. 109, 82 C.C.L.T. (3d) 179, 332 D.L.R. (4th) 310, 5 R.P.R. (5th) 173, 4 C.L.R. (4th) 1, 201 A.C.W.S. (3d) 848 [Leave to appeal to S.C.C. refused [2011] S.C.C.A. No. 319]; Queen v. Cognos Inc., 1993 146 (SCC), [1993] 1 S.C.R. 87, [1993] S.C.J. No. 3, 99 D.L.R. (4th) 626, 147 N.R. 169, J.E. 93-270, 60 O.A.C. 1, 45 C.C.E.L. 153, 14 C.C.L.T. (2d) 113, 93 CLLC Â14,019 at 12082, 37 A.C.W.S. (3d) 1304, D.T.E. 93T-198; Rainbow Industrial Caterers Ltd. v. Canadian National Railway Co., 1991 27 (SCC), [1991] 3 S.C.R. 3, [1991] S.C.J. No. 67, 84 D.L.R. (4th) 291, 126 N.R. 354, [1991] 6 W.W.R. 385, J.E. 91-1513, 3 B.C.A.C. 1, 59 B.C.L.R. (2d) 129, 8 C.C.L.T. (2d) 225, 29 A.C.W.S. (3d) 181; Strand v. Emerging Equities Inc., [2008] A.J. No. 50, 2008 ABCA 23, 37 B.L.R. (4th) 44, 425 A.R. 314, 54 C.C.L.T. (3d) 8, 164 A.C.W.S. (3d) 720; Usenik v. Sidorowicz, [2008] O.J. No. 1049, 166 A.C.W.S. (3d) 181, 2008 11373 (S.C.J.)

Authorities referred to

Fridman, Gerald H.L., The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011)

Linden, Allen, and Bruce Feldthusen, Canadian Tort Law, 9th ed. (Markham, Ont.: LexisNexis, 2011)

McCamus, John D., The Law of Contracts, 2nd ed. (Toronto: Irwin Law, 2012)

Ogilvie, M.H., "Entire Agreement Clauses: Neither Riddle Nor Enigma" (2009), 87 Can. Bar Rev. 642

Perell, P.M., "A Riddle Inside an Enigma: The Entire Agreement Clause" (1998), 20 Advoc. Q. 287

Swan, Angela, and Jakub Adamski, Canadian Contract Law, 3rd ed. (Markham, Ont.: LexisNexis Canada, 2012)

APPEAL from the order of the Divisional Court (Kent, Herman and Harvison Young JJ.) dated May 28, 2013 allowing the appeal from the judgment of Little J., [2011] O.J. No. 5120, 2011 ONSC 6791 (S.C.J.).

Benjamin G. Blay, for appellants.

W. Scott Gallagher, for respondents.

The judgment of the court was delivered by

EPSTEIN J.A.: —

I. Overview

[1] The appellants, Don and Louise Beauchamp, sold their home to the respondents, Adam and Olga Soboczynski.

[2] The issue at the centre of this appeal is the legal effect of an entire agreement clause in an agreement of purchase and sale. Specifically, does the clause preclude a purchaser's action in negligent misrepresentation against a vendor for [page243] non-contractual representations made subsequent to entering into the agreement but before closing?

[3] The appellants and respondents entered into the agreement of purchase and sale (the "APS") on November 21, 2007. The purchase price was $290,000. Following the execution of the agreement, but before the transaction closed, the appellants, at the respondents' request, completed and signed a seller property information statement (the "SPIS"). In the SPIS, the appellants stated that the property was not subject to flooding. They also undertook to inform the respondents of any "important changes" to the information contained in the SPIS based on events, if any, that took place prior to closing.

[4] On January 9, 2008, the basement of the house flooded, causing relatively minor damage. The appellants fixed the damage but did not disclose the incident to the respondents. The transaction closed as scheduled on January 18, 2008.

[5] On February 6, 2008, the basement flooded again. After learning of the pre-closing flood, the respondents sued the appellants for damages based on negligent misrepresentation, arguing that the SPIS required the appellants to disclose the January 9 flood to them.

[6] The trial judge concluded that the entire agreement clause in the APS acted as a bar to the respondents' action. Notwithstanding this conclusion, the trial judge proceeded to assess damages. He found that if the respondents had been successful, they would have been entitled to $25,000 in damages for negligent misrepresentation.

[7] The Divisional Court disagreed with the trial judge's conclusion that the entire agreement clause precluded the respondents' tort action. The SPIS required the appellants to tell the respondents about the pre-closing flood. They failed to do so. And the other elements of the tort of negligent misrepresentation had been made out. Therefore, the court awarded damages to the respondents in the amount assessed by the trial judge.

[8] The appellants appeal on two main grounds. First, the Divisional Court erred in finding that the entire agreement clause in the APS does not preclude a claim based on representations made in the SPIS. Second, the court erred in holding that the tort of negligent misrepresentation had been made out.

[9] I would allow the appeal. I agree with the Divisional Court that the representations the appellants made in the SPIS are actionable notwithstanding the entire agreement clause in the APS. However, in my view, the evidence does not support a finding that the respondents relied on the representations that form [page244] the basis of their claim for negligent misrepresentation. In the absence of reliance, the respondents' claim must fail.

II. Factual Background

(i) The APS and the SPIS

[10] The APS was subject to two conditions -- satisfactory financing, and a satisfactory home inspection. The APS also contained an 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.

[11] On November 22, 2007, the day after the APS was signed, Mr. Soboczynski gave the appellants the SPIS to fill out. After consulting their lawyer, the appellants completed and signed the SPIS. In the document, the appellants indicated that (i) the property was not subject to flooding; (ii) they were not aware of any moisture or water problems; and (iii) they were not aware of any damage due to wind, fire, water, insects, termites, rodents, pets or wood rot. The SPIS concluded with the following statement: "Any important changes to this information known to the sellers will be disclosed by the sellers prior to closing."

[12] As previously noted, the APS was conditional on the "[r] esults of an inspection from an inspector of [the respondents'] choice". On November 28, 2007, the respondents obtained a satisfactory home inspection from their chosen inspector. As Mr. Soboczynski testified, "We received the inspection report. There was nothing significant there to be concerned about that we thought. My wife saw the inspection report as well and I took it home to her." Having obtained a satisfactory home inspection, the respondents waived the home inspection condition. They also secured financing and waived the financing condition. As of November 28, 2008, the APS was no longer conditional.

[13] The SPIS was not incorporated into the terms of, or otherwise referenced in, the APS.

(ii) The two floods

[14] On January 9, 2008, the basement of the house flooded after a period of heavy rainfall and melting snow. Water entered the basement through the window wells. The carpet was saturated with water. The appellants repaired the damage by drying out the rug and replacing the underpad. The repairs cost $1,648.59. [page245]

[15] The appellants consulted their lawyer about the flood but did not inform the respondents of the incident. The appellants' evidence was that they believed the flood was an isolated occurrence and was not an "important change" requiring them to give notice to the respondents under the terms of the SPIS.

[16] The sale closed on January 18, 2008. The respondents were unaware of the January 9 flood. On February 6, 2008, after another period of heavy rainfall, the basement flooded again. The respondents repaired the damage and took steps to prevent further flooding. The respondents hired an expert and discovered that the backyard was ponding and the window wells were lower than the surrounding land. The remedial steps the respondents took cost $22,598.17.

[17] The respondents eventually found out about the January 9 flood. By statement of claim dated November 17, 2009, they commenced this action against the appellants. The respondents sued only in tort. They claimed damages based on alleged fraudulent or negligent misrepresentations made in the SPIS.

III. Decisions Below

(i) Superior Court of Justice

[18] The trial judge dismissed the respondents' claim.

[19] He was not satisfied that the respondents had demonstrated that the property had been subjected to any flooding prior to the January 9 flood. He found that the cause of the flood was not clearly established but reasoned that after a period of heavy rainfall and melting snow, water had entered through the window wells. He further found that the appellants made a conscious decision not to disclose the January 9 flood to the respondents because they thought it was a "one off occurrence".

[20] Citing Krawchuk v. Scherbak (2011), 106 O.R. (3d) 598, [2011] O.J. No. 2064, 2011 ONCA 352, leave to appeal to S.C.C. refused [2011] S.C.C.A. No. 319, the trial judge reasoned that statements in an SPIS can amount to non-contractual representations and can give rise to the tort of negligent misrepresentation. However, here, the SPIS was not part of or otherwise connected with the APS. The trial judge concluded that, as a result, the entire agreement clause in the APS "prevails to exclude" the representations in the SPIS. The respondents could therefore not rely on them.

[21] The trial judge expressed some reluctance about whether the tort would be made out if he had reached a different conclusion about the effect of the entire agreement clause. At para. 62, he wrote: [page246]

[I]t is doubtful that the incident, which I find the Beauchamps believed to have been a one off incident, was an "important change to the information" requiring disclosure to the purchasers as per the wording of the S.P.I.S.

[22] Notwithstanding this reluctance, the trial judge dealt with the respondents' damages. He assessed them at $25,000 -- an amount that included $22,598.17 for the costs of fixing the damage and preventing further flooding. The balance was intended to compensate the respondents for mental distress and loss of enjoyment. The amount of damages was not in issue before the Divisional Court and is not in issue before this court.

[23] The trial judge died shortly after releasing his decision in this matter but before deciding the issue of costs. The appellants suggested that costs be referred to another judge of the Superior Court or be determined by the Divisional Court. The respondents suggested that costs be determined by the Divisional Court.

(ii) Divisional Court

[24] The Divisional Court allowed the respondents' appeal.

[25] First, I note that at the conclusion of the hearing before the Divisional Court, counsel were asked the following question. If the court determined that the trial judge had erred by reviewing the appellants' conduct on a subjective rather than an objective standard, were the parties content that the court make findings of fact on the correct standard rather than send the matter back to trial? Both counsel agreed with the Divisional Court's proposal.

The entire agreement clause and an action in tort

[26] The Divisional Court held, at para. 40, that "the trial judge erred in law when he concluded that the [respondents] could not rely on the representation in the SPIS because of the entire agreement clause in the [APS ]". The court reasoned that the entire agreement clause in the APS did not interfere with the respondents' claim based on a negligent misrepresentation made in the SPIS, even though it was signed after the APS was entered into but before closing.

[27] In coming to this conclusion, Herman J., writing for the court, noted that in Dzourelov v. T.B. Bryk Management and Development Ltd., 2004 32472 (ON SCDC), [2004] O.J. No. 4109, 190 O.A.C. 321 (Div. Ct.), Dawson J. interpreted the first sentence of a comparable entire agreement clause as "deal[ing] with the situation at the time the agreement was signed. It has the effect of excluding the possibility of any representation, warranty or collateral [page247] agreement at that time, that was not included in the written agreement": para. 13.¹ Justice Dawson concluded that the entire agreement clause did not preclude a claim arising out of the formation of a subsequent oral agreement.

[28] The court also pointed to several decisions in which courts have held that representations in an SPIS can give rise to an action in tort for negligent misrepresentation.² The court noted, however, that in each case the completed SPIS was provided to the purchaser before the agreement of purchase and sale was entered into.

Was the tort made out?

[29] The Divisional Court then proceeded to determine whether the respondents had established a claim for negligent misrepresentation on the basis of the appellants' failure to advise them of the pre-closing flood.

[30] After concluding that the appellants owed the respondents a duty of care, the court found that the January 9 flood constituted an "important change" and, under the terms of the SPIS, the appellants were required to notify the respondents of the occurrence. Their failure to do so constituted an untruth.

[31] The court then held that the trial judge erred in law by applying a subjective test to the appellants' obligations under the SPIS by focusing on their honest belief that the incident did not amount to an "important change". In keeping with the approach set out in Krawchuk, an objective standard must be applied. The question is whether a reasonable person in the circumstances would have disclosed the flood.

[32] The court found that it was not reasonable for the appellants to not advise the respondents of the change. Therefore, the appellants "acted negligently in not disclosing the change in the situation": para. 59.

[33] In considering the issue of reliance, the court started with the proposition that purchasers are entitled to rely on representations in an SPIS. The court then wrote, at para. 61: [page248]

Had the [respondents] known about the flood, they might well have retained their own expert to investigate the situation to determine the cause of the problem. If it was determined that the problem was significant and was more than a one-time event, the contractual options of rescission or abatement might have been available to them.

[34] In concluding its analysis of the tort of negligent misrepresentation, the Divisional Court found that the respondents sustained damage as a result of the misrepresentation and gave judgment to the respondents in the unchallenged amount of $25,000.

Costs award

[35] After considering written costs submissions, the Divisional Court rejected the appellants' argument that costs should be reduced because the respondents had pleaded but did not establish fraud. The court found that the fraud allegations had not been actively pursued at trial. The central issue at trial was negligent misrepresentation.

[36] The court awarded the respondents their trial costs fixed in the amount of $15,000, plus $10,171.69 in disbursements. The court also awarded the respondents costs of the appeal in the amount of $7,500.

IV. Issues on Appeal

[37] The appellants advance three main grounds of appeal. They submit that the Divisional Court erred

(1) by finding that the entire agreement clause in the APS did not preclude a claim in tort based on an alleged negligent misrepresentation made in the SPIS;

(2) by concluding that the respondents had made out a claim for damages based on negligent misrepresentation; and

(3) in its trial costs award to the respondents.

V. Analysis

(i) Did the Divisional Court err by finding that the entire agreement clause in the APS did not preclude a claim in tort based on an alleged negligent misrepresentation made in the SPIS?

[38] The appellants submit that the entire agreement clause, which expressly stated that there are no representations affecting their agreement other than as expressed in the APS, precludes the respondents from advancing a claim in tort based on [page249] representations in the SPIS. The appellants point out that the respondents could have avoided the consequences of the entire agreement clause by incorporating the SPIS into the APS, but did not do so.

[39] It is well-settled that contract and tort duties may arise concurrently. In BG Checo International Ltd. v. British Columbia Hydro and Power Authority, 1993 145 (SCC), [1993] 1 S.C.R. 12, [1993] S.C.J. No. 1, the Supreme Court wrote, at p. 26 S.C.R., "where a given wrong prima facie supports an action in contract and in tort, the party may sue in either or both, except where the contract indicates that the parties intended to limit or negative the right to sue in tort". The court continued, at p. 27 S.C.R., "In so far as the tort duty is not contradicted by the contract, it remains intact and may be sued upon."

[40] Accordingly, the key question is whether the entire agreement clause in the APS negatives the respondents' right to sue in tort based on misrepresentations made in the SPIS -- a document completed after the APS was entered into.

[41] In my view, the answer to the question is that, in the circumstances of this case, any 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.

[42] This conclusion is supported by the general purpose of entire agreement clauses, jurisprudence from this court, the plain meaning of the entire agreement clause at issue in this case, and the post-contractual conduct of the parties.

General purpose of entire agreement clauses

[43] An entire agreement clause is generally intended to lift and distill the parties' bargain from the muck of the negotiations. In limiting the expression of the parties' intentions to the written form, the clause attempts to provide certainty and clarity.

[44] In Inntrepreneur Pub Co. v. East Crown Ltd., [2000] 41 E.G. 209, [2000] Lloyd's Rep. 611 (U.K. Ch.), Lightman J. colourfully described the purpose of an entire agreement clause as follows:

The purpose of an entire agreement clause is to preclude a party to a written agreement threshing the undergrowth and finding in the course of [page250] negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty . . . For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere.

(Emphasis added)

[45] Legal commentators appear to be united in their view that entire agreement clauses are, generally speaking, retrospective in nature. According to Angela Swan, "An 'entire agreement' clause deals only with what was done or said before the agreement was made and seeks to exclude those statements and acts from muddying the interpretation of the agreement; it is a contractual invocation of the parol evidence rule": Canadian Contract Law, 3rd ed. (Markham, Ont.: LexisNexis Canada, 2012), at p. 600 (emphasis in original); see, also, John D. McCamus, The Law of Contracts, 2nd ed. (Toronto: Irwin Law, 2012), at p. 733.

[46] Justice P.M. Perell agrees. He says that "[t]he parol evidence rule then directs that the written contract may not be contradicted by evidence of the oral and written statements made by the parties before the signing of the contract. The entire agreement clause is essentially a codification of the parol evidence rule": "A Riddle Inside an Enigma: The Entire Agreement Clause" (1998), 20 Advoc. Q. 287, at 290-91 (emphasis added).

[47] And according to Professor M.H. Ogilvie, entire agreement clauses are "patently not applicable . . . where the representation postdates the contract": "Entire Agreement Clauses: Neither Riddle Nor Enigma" (2009), 87 Can. Bar Rev. at 642 (emphasis added).

Jurisprudence from this court

[48] While there appears to be little jurisprudence on the effect of an entire agreement clause on representations made after the contract containing the clause is entered into, some assistance can be found in this court's decision in Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 52151 (ON CA), 64 O.R. (3d) 533, [2003] O.J. No. 1919 (C.A.), subsequent proceedings 2006 13954 (ON CA), [2006] O.J. No. 1729, 19 B.L.R. (4th) 19 (C.A.).

[49] Shelanu involved a contractual dispute in which the question was whether an entire agreement clause in a written agreement rendered unenforceable a subsequent oral agreement between the parties. Justice Weiler, writing for the court, concluded it did not.

[50] Shelanu clarified certain points about entire agreement clauses. [page251]

[51] First, an entire agreement clause does not prevent the parties from amending the terms of their agreement. In other words, post-contract events can affect both the enforceability of the obligations in the agreement and add new obligations to those imposed by its terms.

[52] Second, and relatedly, entire agreement clauses do not apply prospectively unless the wording expressly so provides. In the words of Weiler J.A., at paras. 49-50 [ (2003), 2003 52151 (ON CA), 64 O.R. (3d) 533 (C.A.)]:

[A]n exception to the parol evidence rule is the existence of any subsequent oral agreement to rescind or modify a written contract provided that the agreement is not invalid under the Statute of Frauds: Ellis v. Abell, [1884] O.J. No. 70, 10 O.A.R. 226 at para. 85.

Clauses such as the entire agreement clause in issue here are normally used to try to exclude representations made prior to the signing of the written agreement. See P.M. Perell, "A Riddle Inside an Enigma: The Entire Agreement Clause" (1998) The Advocates' Q. 287. Nothing in [the entire agreement clause] suggests that an oral agreement to surrender the franchise several years later would be of no effect. It cannot be said the entire agreement clause was clearly intended to cover any and all future contractual relations between Shelanu and Print Three.

(Emphasis added)

[53] Both the general purpose of entire agreement clauses set out above and the approach to their application evident in this court's decision in Shelanu support the conclusion that, subject to express wording to the contrary, these clauses do not apply to agreements or representations that post-date the contract in which the clause is found.

[54] I now turn to the specific circumstances in this case.

Specific words used in the entire agreement clause in the APS

[55] A consideration of the precise words the parties used to record their bargain is central to the interpretation of the entire agreement clause in the APS. For convenience, I again set out the text of the entire agreement clause in issue:

This Agreement 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 this Agreement other than as expressed herein.

[56] The clause is worded in the present tense -- "[t]here is no representation" affecting the APS (emphasis added). On their face, the words of the clause do not preclude an action for negligent misrepresentation based on a representation made post-contract. The words that reflect the parties' bargain are [page252] therefore consistent with the general legal principles animating entire agreement clauses.

[57] This interpretation of the clause is also consistent with the Divisional Court's analysis in Dzourelov -- a case relied upon by the Divisional Court in this case. In Dzourelov, the entire agreement clause was very similar to the one in this case. It read: "The parties acknowledge that there is no representation, warranty, collateral agreement or condition, affecting the Agreement except as contained in this agreement. This agreement may not be amended other than in writing" (emphasis added). In interpreting this clause, Dawson J. wrote [at para. 13]:

The exclusive agreement clause in question consists of two sentences. I agree with the appellant's submission that the first sentence deals with the situation at the time the agreement was signed. It has the effect of excluding the possibility of any representation, warranty or collateral agreement at that time, that was not included in the written agreement.

(Emphasis added)

[58] Thus, Dzourelov confirms that entire agreement clauses drafted in the present tense look backwards, not forwards.

[59] The entire agreement clause in this case is saying, "These are the terms of our agreement and nothing that was said beforehand is relevant. You have no basis for relying on anything other than the terms of the agreement. The agreement stands on its own".

Post-contractual conduct of the parties

[60] Finally, Canadian courts often look to the post-contractual conduct of the parties to shed light on what they intended the words enshrined in their written agreement to mean. The trend in Canada toward analyzing the subsequent actions of the parties is captured by G.H.L. Fridman in The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at pp. 450-51:

Canadian courts have adopted the view that subsequent conduct can be a useful guide to the interpretation of a written contract . . . In one case, concerned with whether a restrictive covenant in a contract was personal to the parties or went with the land, Thomson J. of the Supreme Court of Saskatchewan, said that in cases involving an ambiguity in an agreement, "there is no better way of determining what the parties intended than to look to what they did under it [Bank of Montreal v. Univ. of Saskatchewan (1953), 1953 166 (SK QB), 9 W.W.R. (N.S.) 193 (Sask. Q.B.), at 199]. There is much to be said for this approach, as many Canadian judges since 1970, have declared. In Canada it seems clear that the subsequent actions of the parties may be admissible to explain the true meaning and intent of their agreement.

(Citations omitted)

[61] An examination of the conduct of the parties to the APS after they entered into their agreement supports the conclusion [page253] that they intended that the appellants' obligations under the SPIS would be enforceable.

[62] It was not necessary for the appellants to complete the SPIS. If one contracting party asks, post contract, for a representation or warranty, the other does not have to give it: he or she can say, "No, the contract expresses the limit of my obligations." But that is not what transpired in this case. The fact that the appellants completed the SPIS, after consulting their lawyer, provides insight into their intentions in relation to the entire agreement clause. It reveals that the appellants considered the SPIS seriously.

[63] Moreover, in the SPIS, the appellants undertook to inform the respondents of any "important changes" to the information they provided in the document. This ongoing obligation to which the appellants committed themselves indicates that all parties considered the SPIS as affecting their relationship.

[64] For these reasons, I agree with the Divisional Court that the entire agreement clause, properly interpreted, does not preclude the respondents' claim for damages based on negligent misrepresentation. In my view, the appellants should be held to any consequences that flow, in law, from the representations they made in the SPIS. To conclude otherwise would render the entire SPIS exchange meaningless.

The doctrine of caveat emptor

[65] Before proceeding, I pause to briefly address the doctrine of caveat emptor ("let the buyer beware").

[66] The appellants submit that circumventing the parties' intentions as expressed by the entire agreement clause in the APS erodes the doctrine of caveat emptor. I disagree with the premise of this submission. Having concluded that the entire agreement clause in this case operates retrospectively, not prospectively, it cannot be said that the respondents' claim for negligent misrepresentation has the effect of circumventing the parties' intentions or the entire agreement clause.

[67] At para. 38 of its reasons, the Divisional Court quoted from Killeen J.'s decision in Kaufmann, at para. 119, for the proposition that, "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". Although the SPIS at issue in Kaufmann was expressly incorporated into the agreement of purchase and sale, I agree with the thrust of Killeen J.'s remarks. So long as a purchaser's action is not precluded by the agreement of purchase and sale, [page254] the vendor cannot hide behind the doctrine of caveat emptor if he or she breaks the silence by signing a SPIS.

[68] I would not give effect to this argument.

(ii) Did the Divisional Court err by concluding that the respondents had made out a claim for damages based on negligent misrepresentation?

[69] Despite my conclusion that the entire agreement clause does not prevent the respondents from advancing a claim in negligent misrepresentation, in my view, their claim still fails because they have not established the fourth element of negligent misrepresentation -- reasonable reliance.

[70] The tort of negligent misrepresentation has five elements: Hedley Byrne & Co. v. Heller & Partners Ltd., [1964] A.C. 465 (U.K. H.L.); Queen v. Cognos Inc., 1993 146 (SCC), [1993] 1 S.C.R. 87, [1993] S.C.J. No. 3, at p. 110 S.C.R. These elements are (1) a duty of care based upon a special relationship between the plaintiff and defendant; (2) an untrue, inaccurate or misleading statement by the defendant; (3) negligence on the part of the defendant in making the statement; (4) reasonable reliance by the plaintiff on the statement; and (5) damage suffered by the plaintiff as a result.

[71] On appeal, the parties made no written or oral submissions on the first element, the duty of care. My analysis proceeds on the assumption that the appellants owed the respondents a duty of care in these circumstances. I accept the Divisional Court's finding that the appellants were negligent in failing to advise the respondents of the pre-closing flood.

[72] Reasonable reliance is fundamental to the tort of negligent misrepresentation. The reasonable reliance element "states a factual test for causation": Allen Linden and Bruce Feldthusen, Canadian Tort Law, 9th ed. (Markham, Ont.: LexisNexis, 2011), at p. 473.

[73] In Farmer v. H.H. Chambers Ltd., 1972 610 (ON CA), [1973] 1 O.R. 355, [1972] O.J. No. 1982 (C.A.), McGillvary J.A. wrote, at p. 357 O.R.: "To recover under the rationale of the Hedley Byrne case, 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: Strand v. Emerging Equities Inc., [2008] A.J. No. 50, 2008 ABCA 23, 37 B.L.R. (4th) 44, at para. 6.

[74] The problem here is that it is far from clear that the respondents would have had a remedy even if the January 9 water incident had been disclosed prior to closing. Put another [page255] way, the misrepresentation did not cause the respondents to "do some act to [their] detriment": Farmer, at p. 357 O.R.

[75] As noted above, the respondents sued in tort. They claim damages for negligent misrepresentation. However, there is no allegation of reliance in their statement of claim.

[76] Notwithstanding the state of the respondents' pleading, in their closing submissions at trial, the respondents advanced two arguments on the reliance issue. They argued that they relied on the misrepresentation in the SPIS because they waived the home inspection condition after receiving the SPIS. The respondents also argued that they relied on the misrepresentation in the SPIS because they were deprived of the opportunity to seek remedies available to them under the APS.

[77] I address each submission in turn.

[78] There are two difficulties with the respondents' submission that they relied on the SPIS in waiving the home inspection condition in the APS. First, when the respondents waived the home inspection condition, there was nothing for the appellants to disclose. They waived the condition prior to the January 9 water incident. Second, and more significantly, there is no evidence that the inspector who performed the home inspection on behalf of the respondents relied on the SPIS in conducting his home inspection or even knew that it existed. Further, the trial judge rejected Mr. Soboczynski's testimony that the SPIS was "part of the property inspection" process. He also expressly found, at para. 30, that the SPIS "was unrelated to the results of an inspection". In the light of these findings, I would not give effect to this submission.

[79] This takes me to the respondents' argument that had the appellants advised them of the January 9 flood they would have taken advantage of remedies available to them under the APS. In terms of the available remedies, the respondents turn to s. 14 of the APS, which provided:

INSURANCE: All buildings on the property and all other things being purchased shall be and remain until completion at the risk of Seller. Pending completion, Seller shall hold all insurance policies, if any, and the proceeds thereof in trust for the parties as their interests may appear and in the event of substantial damage, Buyer may either terminate this Agreement and have all monies paid returned without interest or deduction or else take the proceeds of any insurance and complete the purchase. No insurance shall be transferred on completion. If Seller is taking back a Charge/Mortgage, or Buyer is assuming a Charge/Mortgage, Buyer shall supply Seller with reasonable evidence of adequate insurance to protect Seller's or other mortgagee's interest on completion.

(Emphasis added)

[80] The APS does not define "substantial damage". [page256]

[81] The respondents' argument is problematic as it is unclear what rights would have been available to them under this provision. And the Divisional Court's somewhat conclusory statement, at para. 61, that "the contractual options of rescission and abatement might have been available to [the respondents ]" does little to clarify the situation.

[82] The respondents' access to the remedies available under s. 14 depended on a finding of "substantial damage". The difficulty the respondents face is that no finding was made as to whether the property sustained substantial damage as a result of the January 9 flood. In my view, on this record, the trial judge would likely have concluded that the January 9 flood did not constitute "substantial damage" in the light of the observation he made, at para. 62 of his reasons reproduced above, that "it is doubtful" the January 9 flood was an "important change" as contemplated by the SPIS. The point is, however, that no finding was made.

[83] In any event, at the time the property changed hands on January 18, 2008, the $1,648.59 worth of damage caused by the January 9 flood had been repaired. There was no damage to speak of, substantial or otherwise.

[84] A consideration of the role damages play in tort cases illuminates why the respondents did not rely on the appellants' negligent misrepresentations. In Rainbow Industrial Caterers Ltd. v. Canadian National Railway Co., 1991 27 (SCC), [1991] 3 S.C.R. 3, [1991] S.C.J. No. 67, at p. 14 S.C.R., the Supreme Court outlined how to assess damages in a negligent misrepresentation action: "The plaintiff seeking damages in an action for negligent misrepresentation is entitled to be put in the position he or she would have been in if the misrepresentation had not been made."

[85] Here, had the appellants told the respondents of the January 9 flood, the respondents' position in relation to their obligations under the APS would not have changed. The respondents would have been obliged to complete the transaction under the terms of the APS. The fact that the respondents did not suffer any damage compensable in tort solidifies their inability to prove reliance.

[86] To prove reasonable reliance, it was incumbent on the respondents to adduce evidence sufficient for the court to conclude that the misrepresentation somehow caused them to act to their detriment. This they did not do. Although reasonable reliance can be inferred from the circumstances, there is not, in my view, sufficient evidence upon which to base such an inference. [page257]

[87] I conclude the respondents have not established the fourth element of negligent misrepresentation. Their tort claim must therefore fail.

(iii) Did the Divisional Court err in its trial costs award?

[88] The appellants argue that the Divisional Court erred in assessing the trial costs instead of referring them to the Superior Court. They say that proceeding in this fashion deprived them of a right of appeal.

[89] They also contend that the court erred in assessing costs on the basis that the respondents' allegation against them in fraud was not actively pursued. They say the unsuccessful allegation of fraud was pursued through to the end of trial and that the costs award should reflect the extent to which these allegations increased trial costs.

[90] The appellants seek costs payable by the respondents on a substantial indemnity basis. The appellants argue that even if they are unsuccessful in this appeal, they should still be entitled to substantial indemnity costs of the action because the respondents made completely unsubstantiated accusations of fraud against them. Unproven allegations of fraud attract this kind of costs award because they go to the root of a person's integrity.

[91] In my view, in the light of the trial judge's death, and the parties' submissions set out above, the Divisional Court was fully entitled to assess costs. The Divisional Court found as a fact that the plaintiffs did not actively pursue the fraud allegation at trial. The trial was about negligence, not fraud. The appellants were not entitled to substantial indemnity costs.

[92] I see no reason to interfere with the court's decision regarding the costs of the trial. The court's assessment of the trial costs is entitled to deference.

VI. Disposition

[93] For these reasons, I would allow the appeal, set aside the decision of the Divisional Court, and restore the decision of the trial judge dismissing the action.

[94] I would award the appellants their costs of this appeal in the agreed-upon amount of $5,000, including disbursements and applicable taxes.

Appeal allowed.

Notes

1 The entire agreement clause at issue in Dzourelov stated: "The parties acknowledge that there is no representation, warranty, collateral agreement or condition, affecting the Agreement except as contained in this agreement. This agreement may not be amended other than in writing."

2 The Divisional Court cited the following three cases for this proposition: Krawchuk; Kaufmann v. Gibson, [2007] O.J. No. 2711, 59 R.P.R. (4th) 293 (S.C.J.); and Usenik v. Sidorowicz, [2008] O.J. No. 1049, 2008 11373 (S.C.J.).

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