COURT OF APPEAL FOR ONTARIO

CITATION: D.L.G. & Associates Ltd. v. Minto Properties Inc., 2015 ONCA 705

DATE: 20151022

DOCKET: C59891

Doherty, Lauwers and Huscroft JJ.A.

BETWEEN

D.L.G. & Associates Ltd.

Plaintiff (Appellant)

and

Minto Properties Inc.

Defendant (Respondent)

Shaun Laubman and Christine Muir, for the plaintiff (appellant)

Adam Grant and Alyssa Caverson, for the defendant (respondent)

Heard: June 29, 2015

On appeal from the order of Justice P. Perell of the Superior Court of Justice, dated December 16, 2014, reported at 2014 ONSC 7287.

Doherty J.A.:

I

[1] This is an appeal from an order striking most of the claims advanced by the appellant as disclosing no reasonable cause of action. I agree that some of the claims were properly struck. I would hold, however, that the motion judge erred in striking the negligent misrepresentation claim and the claim that the respondent was estopped from relying on the covenant to insure in the lease in respect of the damages caused by the second of the two sewer backups. In my view, those pleadings cannot be struck at this stage.

II

the assumed facts

[2] The motion judge properly took the facts as pleaded by D.L.G. for the purposes of the motion. He also considered the contents of the lease and a Lease Amending Agreement, as both documents were referred to in the pleadings. The relevant facts can be summarized as follows.

[3] The respondent, Minto Properties Inc. (“Minto”) owned a property at 2177 Yonge Street in Toronto. In February 2011, the appellant, D.L.G. & Associates Ltd. (“D.L.G.”), agreed to lease a part of the property. D.L.G. planned to operate a restaurant on the premises. The lease commenced on July 15, 2011 and D.L.G. opened the restaurant.

[4] In October 2011, a sewer backup caused by a backward surge in the main line accepting drainage from the rented premises caused extensive damage to the restaurant premises. D.L.G. was forced to close the restaurant for extensive repairs. It turned out that the backup was caused by a drainage pipe that did not meet the standards set by the Building Code Act, S.O. 1992, c. 23.

[5] D.L.G. recovered under its insurance policy. Minto agreed to cover additional costs associated with cleanup and reconstruction. The restaurant eventually reopened in December 2011.

[6] As a result of the first sewer backup, D.L.G.’s insurer removed sewer backup coverage from D.L.G.’s insurance policy. D.L.G. notified Minto of the cancellation. At no time after learning of the cancellation did Minto require D.L.G. to obtain new coverage for sewer backup.

[7] After the first flood, Minto undertook to D.L.G. that it would repair and maintain the plumbing system. Unbeknownst to D.L.G., Minto did not take the steps necessary to correct the defects in the plumbing system that had caused the first sewer backup.

[8] In April 2012, D.L.G. and Minto entered into a “Lease Amending Agreement”. The agreement reduced the amounts that had been payable by D.L.G. under the lease while the necessary repairs were being made. The Lease Amending Agreement also provided that D.L.G. would release and “forever discharge” Minto from any and all “actions, causes of action, claims and demands, for damages, restitution, compensation, proprietary interests, loss of injury, howsoever arising” which may have been sustained by D.L.G. in any manner prior to the date of the Amending Agreement.

[9] A second sewer backup occurred in September 2012. The restaurant closed again. It never reopened.

[10] In October 2012, D.L.G. notified Minto that it was in breach of the lease for failing to take steps to repair the plumbing after the first sewer backup. D.L.G. also advised Minto that if D.L.G.’s franchisor cancelled the restaurant franchise, D.L.G. would treat the lease as terminated. Minto responded that it was not in breach of the lease and that D.L.G. was in arrears on its rent payments.

[11] The franchisor terminated D.L.G.’s franchise in November 2012. D.L.G. advised Minto that it was in breach of the lease and purported to terminate the lease. Minto responded by declaring that D.L.G. was in breach of the lease for non-payment of rent and it, too, purported to terminate the lease.

[12] D.L.G. commenced this action in July 2013. D.L.G. claimed damages for fraudulent and negligent misrepresentation, breach of the terms of the lease and negligence. Minto denied liability and counterclaimed, principally for amounts owing for back rent.

III

the motion

[13] In September 2014, Minto brought a motion pursuant to r. 21 to strike all of the claims as failing to disclose a reasonable cause of action. Minto argued that:

• D.L.G.’s covenant in the lease to obtain “all risk” insurance coverage precluded recovery by D.L.G. for damages caused by the sewer backups;

• The limitation of liability clauses in the lease excluded Minto from any liability for damages caused by the sewer backups;

• Minto did not waive compliance by D.L.G. with any of the terms of the lease;

• The Lease Amending Agreement in April 2012 released Minto from any pre-existing claims that D.L.G. might have against Minto.

[14] The motion judge held that the fraudulent misrepresentation claim could proceed to trial (paras. 64-70) and that the effect of the release executed by D.L.G. as part of the Lease Amending Agreement on the fraud claim should also be determined at trial (paras. 93-102). Minto does not challenge either holding.

[15] The motion judge found that it was plain and obvious that the covenant to insure in the lease barred D.L.G.’s claims for breach of contract, negligence and negligent misrepresentation (paras. 50-58) and that Minto had not waived the covenant by its acknowledgment that D.L.G.’s insurer had terminated the sewer back-up insurance after the first incident (paras. 59-63). The motion judge went on to consider whether, assuming the covenant to insure could be regarded as an exclusion clause, the principles in Tercon Contractors Ltd. v. British Columbia (Minister of Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, precluded Minto from relying on the provision. After a careful analysis (paras. 72-91), the motion judge determined that it was plain and obvious that the enforceability of the covenant to insure was not negated by the principles described by the Supreme Court of Canada in Tercon.

IV

The covenant to insure

[16] D.L.G. in para. 7.1 of the lease undertook to obtain “all risks” insurance which specifically included insurance for “sewer back-up”. D.L.G. accepts that a claim in negligence against Minto for failure to properly maintain the plumbing is barred by the covenant to insure, but submits that it is not plain and obvious that the covenant also bars a claim based on Minto’s breach of its “quiet enjoyment” and “good repair” obligations under the lease.

[17] D.L.G. argues that a trial is necessary to properly interpret the covenant to insure in the context of the entire agreement. I do not accept this argument. The covenant to insure focuses on risk and the responsibility as between D.L.G. and Minto for losses covered should the identified risks materialise during the term of the agreement. The provision is not concerned with the legal characterization of claims for losses arising out of the materialization of the risks.

[18] D.L.G.’s submission runs aground on this court’s judgment in Madison Developments Ltd. v. Plan Electric Co. (1997), 1997 CanLII 1277 (ON CA), 36 O.R. (3d) 80 at para. 9. Carthy J.A., speaking of a situation in which the landlord had covenanted to insure against all risks said:

The law is now clear that in the landlord-tenant relationship, where the landlord covenants to obtain insurance against the damage to premises by fire, the landlord cannot sue the tenant for a loss by fire caused by the tenant’s negligence. A contractual undertaking by one party to secure property insurance operates in effect as an assumption by that party of the risk of loss or damage caused by the peril to be insured against. This is so notwithstanding a covenant by the tenant to repair which, without the landlord’s covenant to insure, would obligate the tenant to indemnify for such a loss. This is a matter of contractual law not insurance law, but of course, the insurer can be in no better position than the landlord on a subrogated claim. The rationale for this conclusion is that the covenant to insure is a contractual benefit accorded to the tenant, which, on its face, covers fire with or without negligence by any person. There would be no benefit to the tenant from the covenant if it did not apply to a fire caused by the tenant’s negligence. [Emphasis added.]

[19] The language from Madison applies here. A covenant to insure is one of several provisions within a lease which allocates risk as between the parties to the lease. The allocation of risk is presumably reflected in the rent to be paid. A covenant to insure would hardly serve the purpose of risk allocation if it were read as allocating the risk to the tenant if the landlord was negligent, but to the landlord if the same act amounted to a breach of a provision in the lease, e.g. the obligation to maintain and repair. As almost any act of negligence would also be a breach of the obligation to maintain and repair, the interpretation urged by the appellant would effectively put the risk on Minto despite D.L.G.’s obligation to obtain “all risks” insurance.

The enforceability of the covenant to insure

[20] D.L.G. submits that the covenant to insure is an exclusion clause and is unenforceable under the principles set down in Tercon. In my view, the covenant to insure cannot be read as a clause excluding Minto from liability it would otherwise carry but for the clause. Instead, the covenant to insure assigns risk for certain losses by requiring that the tenant, D.L.G., obtain insurance coverage for those losses: Smith v. T. Eaton Co., 1977 CanLII 39 (SCC), [1978] 2 S.C.R. 749 at 756, St. Lawrence Cement Inc. v. Wakeham & Sons Limited (1995), 1995 CanLII 2482 (ON CA), 26 O.R. (3d) 321 at paras. 37-39 (C.A.).

[21] As I am satisfied that the covenant to insure cannot be read as an exclusion clause, I need not address the enforceability of that clause. I would, however, observe that in the context of a negotiated lease between arms-length commercial entities I see little room for an argument that a covenant to insure, whether directed at the landlord or the tenant, could be viewed as unconscionable.

[22] Nothing in the pleadings alleges any inherent unfairness in placing the burden of obtaining “all risks” insurance on D.L.G. I reject the argument that the relationship between D.L.G. and Minto during the lease negotiations was one of unequal bargaining power because Minto had knowledge about the plumbing that D.L.G. did not have. Nothing in the pleadings suggests that D.L.G. could not have made the relevant inquiries and conducted the necessary inspections to obtain whatever information about the plumbing it deemed necessary. Although D.L.G.’s claim that it relied on fraudulent/negligent misrepresentations by Minto gives rise to tort claims against Minto, it does not provide the basis for the assertion that D.L.G. was in a position of unequal bargaining power during the lease negotiations: see also the reasons of the motion judge at paras. 85-89.

The misrepresentation claims

[23] D.L.G. alleges both fraudulent and negligent misrepresentations. D.L.G. alleges misrepresentations that induced it to enter into the lease with Minto and it alleges different misrepresentations after the first sewer backup that induced D.L.G. to continue to operate under the lease and attempt to restart its restaurant business. These misrepresentation claims are founded in tort and are not premised on any obligations created by the terms of the lease.

[24] D.L.G. alleged that during the negotiations which led to the lease, Minto represented that the plumbing in the unit to be rented was in good order and that there had been no prior flooding in the unit. D.L.G. alleged that both representations were false and that the unit had been flooded as a result of a sewer backup during the prior tenant’s occupation. D.L.G. alleged that Minto either knew the representations were false, or did not care whether the representations were false. Alternatively, D.L.G. contends that Minto made the representations negligently and that it owed a duty of care to D.L.G. D.L.G. asserts that it relied on the representations made by Minto when entering into the lease.

[25] D.L.G. also alleged misrepresentations by Minto after the first sewer backup. D.L.G. maintained that Minto represented that it had carried out the necessary repairs and reconstruction of the plumbing and would maintain the plumbing in good repair going forward. D.L.G. alleged that it relied on those representations to reopen the restaurant and continue the lease. D.L.G. alleged that Minto did not make the repairs as it had represented and that the failure to do so led to the second sewer backup and flood.

[26] The motion judge held (at paras. 42-44) that D.L.G. had advanced a “legally viable” fraudulent misrepresentation claim although the pleading of the claim was somewhat deficient. In holding that it was not plain and obvious that the covenant to insure foreclosed the fraudulent misrepresentation claim the motion judge said at paras. 64-65:

… In other words, the covenant to insure may exculpate liability for the risks and claims for which insurance is to be obtained but it is not plain and obvious that the insurance in this case was meant to cover damages for fraudulent misrepresentation.

I emphasize that I am not deciding that the covenant to insure does not cover a fraudulent misrepresentation or that the property or income damages consequent upon a fraudulent misrepresentation were not covered by the covenant to insure, but the Cummer-Yonge Investments line of cases does not appear to have addressed this type of claim, which goes more to the formation of the contract than it does to the performance of it. And, it is also worth noting that a fraudulent misrepresentation claim may have a different doctrinal approach to damages and a different measure of damages than a breach of contract claim. In any event, it is not plain and obvious that the covenant to insure precludes D.L.G.’s fraudulent misrepresentation claim.

[27] The motion judge also held (para. 102) that it was not plain and obvious that the release executed by D.L.G. as part of the amendment to the lease foreclosed the fraudulent misrepresentation claim.

[28] The motion judge did not deal separately with the negligent misrepresentation claim. In his analysis, he treated that claim no differently than the breach of contract and negligence claims advanced by D.L.G.: e.g. see para. 58. The motion judge also did not distinguish between the alleged misrepresentations made prior to the parties entering into the lease, and those made after the first sewer backup.

[29] D.L.G. submits that the motion judge’s analysis of the fraudulent misrepresentation claim quoted above (para. 28) applies equally to the negligent misrepresentation claim. D.L.G. submits that the negligent misrepresentation claim, like the fraudulent misrepresentation claim, is based on alleged tortious conduct that occurred outside of the lease. D.L.G. submits that the covenant to insure allocates risk in the performance of the lease and does not impact on claims based on tortious conduct that predated the lease, or are unrelated to any obligations or rights created by the lease.

[30] In response, Minto submits that the motion judge’s analysis precluding a claim of negligence in the face of the covenant to insure is equally applicable to a claim of negligent misrepresentation. Minto also relies on the “entire agreement” clause in para. 13.5 of the lease. That paragraph provides:

This lease and its schedules and riders, if any, set forth the entire agreement between [Minto] and [D.L.G.] with respect to the premises and there are no representations, agreements or understandings between them other than is set out in this lease. This lease supersedes and revokes all previous negotiations, arrangements, letters of intent, offers to lease, lease proposals, brochures, representations and information conveyed whether orally or in writing between the parties…This lease and its schedules and riders may not be modified except by agreement in writing executed by [Minto] and [D.L.G.].

[31] Setting aside Minto’s argument based on the “entire agreement” clause in the lease for the moment, it is arguable that Minto’s liability for negligent misrepresentation, like its liability for fraudulent misrepresentation, is not precluded by the covenant to insure in the contract. The covenant to insure was intended to assign risk within the operation of the contractual relationship between D.L.G. and Minto. The alleged tortious conduct, be it fraudulent or negligent, occurred outside of that relationship. It is not plain and obvious to me, setting aside the “entire agreement clause”, that the terms of the contract demonstrate that the parties intended to exclude Minto’s potential liability for any negligent misrepresentations that induced D.L.G. to enter into and/or continue the tenancy.

[32] The “entire agreement” clause argument made by Minto requires a separate consideration of the misrepresentations made by Minto before the lease was entered into and those made after the first sewer backup.

[33] The reach of the “entire agreement” clause is a matter of interpretation and the wording of the clause is of primary importance. It is arguable that absent very clear language, the “entire agreement” clause does not apply prospectively to representations made after the contract was entered into by the parties: see Shelanu Inc. v. Print Three Franchising Corp., 2003 CanLII 52151 (ON CA), [2003] O.J. No. 1919 at paras. 48-50 (C.A.); M.G. Ogilvie “Entire Agreement Clauses: Neither Riddled Nor Enigma”, (2008) 87 Can. B.R. 625 at 633, 642; A. Swan, J. Adamski, Canadian Contract Law, 3rd ed (2012) at p. 600. It is not plain and obvious that the “entire agreement” clause should immunize Minto from liability for post-contract misrepresentations.

[34] Nor does the language in the “entire agreement” clause requiring that any “modification” to the lease be in writing, make it plain and obvious that claims based on negligent misrepresentations made after the lease was entered into must fail. A determination of whether those misrepresentations stand apart from the terms of the lease and are therefore not a “modification” of the terms of the lease, cannot be decided within the narrow confines of a pleadings motion.

[35] Finally, nothing in the terms of the Lease Amending Agreement clearly makes the “entire agreement” clause in the lease applicable to negligent misrepresentation claims based on representations made after the first flood. The Lease Amending Agreement provides that “all provisions of the lease continue in full force and effect”. Those words, however, do not assist in interpreting the provisions of the lease and specifically do not assist in determining whether “the entire agreement” clause applies prospectively to misrepresentations made after the lease was entered into.

[36] Minto stands on firmer ground in relying on the “entire agreement” clause to preclude any possible liability based on negligent misrepresentations made before the lease was entered into by the parties. Entire agreement clauses in contracts negotiated at arm’s length by commercial entities are often read as excluding liability for alleged negligent misrepresentations that were said to have induced one party to enter into the contract, e.g. see No. 2002 Taurus Ventures Ltd. v. Intrawest Corp. 2007 BCCA 228, [2007] B.C.J. No. 812, at para. 59; McNeely v. Herbal Magic Inc., 2011 ONSC 4237, 89 B.L.R. (4th) 226, at para. 16-19; Ogilvie “Entire Agreement Clauses: Neither Riddle nor Enigma” at p. 636-637. Some of the cases exclude liability as a matter of contractual interpretation, and some read the “entire agreement” clause as negating any possible reliance on the pre-contract representations.

[37] None of the cases, however, involve motions to strike claims based on the pleadings. They arise out of trial decisions or decisions made on motion for summary judgment. The courts have looked to a variety of interpretive aids in considering the potential application of an “entire agreement” clause to pre-contractual misrepresentations: see J.D. McCamus: The Law of Contract, 2^nd ed 2012, Irwin Law Inc., at 365-66. The courts have considered:

• the language used in the entire agreement clause;

• the relationship of the parties when the contract was consummated;

• the sophistication of the parties;

• the nature of the negotiations;

• the language of other terms of the contract and specifically the extent to which allowing or precluding a negligent misrepresentation claim would be inconsistent with the other terms of the agreement.

[38] Taurus provides a good example of the kind of analysis that has led courts to conclude that an “entire agreement” clause forecloses a party to the contract from successfully advancing a negligent misrepresentation claim. In holding that the “entire agreement” clause foreclosed the plaintiff from successfully advancing a claim that it had been induced to enter into the contract by negligent misrepresentations, the court said, at para. 59:

The parties were both sophisticated, commercial entities. Mr. Houghton had extensive experience in real estate development, was a “player” in the Whistler real estate market, and had dealt extensively with Intrawest. The contract was not a “standard adhesion contract”. It included, in the Disclosure Statement, a detailed description of not only lot 13, but the Kadenwood development and the responsibilities and obligations of the various parties involved in the development including Intrawest, the owners of the lots in the development, and the strata corporation. Mr. Houghton read the disclosure statement before Taurus entered into the contract. He had personal contact with Intrawest representatives both before and after he purchased lot 13. He had ample opportunity to ask questions and seek answers to any concerns he had about the details of the development of Kadenwood. In these circumstances, where the contract was clearly intended to govern the relationship between the parties, it would not accord with commercial reality to give no effect to the entre agreement clause in determining whether Taurus can claim a tort remedy.

[39] The evidentiary detail necessary to decide whether an “entire agreement” clause precludes reliance on pre-contractual negligent misrepresentations is not available on a motion to strike based on the pleadings. It may be that Minto can convince a trial judge or a judge on a summary judgment motion that just as in Taurus at para. 59, it would not “accord with commercial reality to give no effect to the entire agreement clause” in deciding whether a tort claim for negligent misrepresentation based on pre-contractual representations should succeed. The argument is premature at this stage.

The waiver/estoppel claim

[40] D.L.G. pleaded that after the first sewer backup, Minto had agreed to cover the costs of cleanup, repairs and reconstruction, and to investigate and fix the problems that had led to the first sewer backup. D.L.G. further pleaded that it told Minto that its insurer had refused to provide sewer backup coverage after the first sewer backup. According to D.L.G., Minto:

[a]cknowledged and accepted the continuation by D.L.G. of its tenancy under the lease with correspondingly reduced insurance coverage. At no time after learning of the cancellation by D.L.G.’s insurer did the defendants [Minto] require D.L.G. to obtain new coverage for sewer backup.

[41] D.L.G. pleaded that as a consequence of Minto’s conduct after the first sewer backup, Minto could not rely on the covenant to insure in the lease in respect of damages flowing from the second sewer backup. D.L.G. pleaded “acquiescence, waiver and equitable or promissory estoppel”.

[42] The motion judge concluded that neither waiver nor estoppel could assist D.L.G. (paras. 59-63). In doing so, he briefly examined the individual circumstances relied on by D.L.G. in support of its waiver and estoppel arguments. For example, he determined that Minto’s apparent acquiescence in D.L.G.’s continued tenancy despite its inability to obtain sewer backup insurance coverage did not constitute waiver (para. 60).

[43] Counsel for Minto relies on the motion judge’s reasons and on para. 10(5)(a) of the lease. That paragraph reads:

The waiver by the landlord of any breach of any provision of this lease is not deemed to be a waiver of that provision or any subsequent breach of it or of any other provision of this lease. The subsequent acceptance of any rent or other amount by the landlord is not deemed to be a waiver of any provision of this lease or of any proceeding breach by the tenant of any provision of this lease, even if the landlord had knowledge of the proceeding breach. No provision in this lease nor any breach of any provision (whether or not continuing or recurring) is deemed to have been waived by the landlord unless that waiver is expressly set out in writing and signed by the landlord. [Emphasis added.]

[44] Minto submits that the waiver and the estoppel argument are one and the same. Absent any claim of a written waiver, and there is none, Minto submits that it is plain and obvious that D.L.G. cannot rely on waiver or estoppel to prevent the operation of the covenant to insure in the lease.

[45] The waiver clause presents a formidable obstacle to D.L.G.’s waiver/estoppel claim. However, it is not plain and obvious that an estoppel argument based on Minto’s conduct after the first sewer backup cannot succeed. Waiver under the terms of the lease cannot necessarily be equated with the broader equitable doctrine of promissory estoppel. As Professor McCamus has observed, promissory estoppel is a “more expansive version of the waiver doctrine”: McCamus: The Law of Contract, at p. 287.

[46] A party relying on promissory estoppel to escape an obligation that the party would otherwise have must show three things:

• A pre-existing legal relationship between the parties;

• A promise or assurance, express or implied, by one party to the other that it would not hold the other party to the performance of an obligation imposed under the pre-existing legal relationship; and

• Reliance on the promise or assurance by the other party who acts in some way to change its position because of the promise or assurance: see Maracle v. Travellers Indemnity Co. of Canada, 1991 CanLII 58 (SCC), [1991] 2 S.C.R. 50 at 57; B. MacDougall, Estoppel, 2012 LexisNexis Canada Inc., at pp. 303-304, 310-14.

[47] The facts as pleaded provide a basis for the factual determinations necessary to support a promissory estoppel claim. Consequently, it is not plain and obvious on the pleadings that the claim cannot succeed. Clearly, the “entire agreement” provision and the strict waiver provision in the lease will be relied on by Minto to refute D.L.G.’s assertion that Minto is estopped by its conduct from relying on the covenant to insure. The terms of the agreement may be particularly important in respect of the reliance requirement: see Marble Trend Ltd. v. Sir Wynne – Hyland’s Inc., [2004] O.J. No. 3127, at paras. 99-100 (S.C.), aff’d by [2005] O.J. No. 3730 (C.A.); MacDougall, Promissory Estoppel at p. 325. Similarly, D.L.G.’s reliance on conduct as the basis for the promissory estoppel rather than any express assurance or promise made by Minto could pose additional forensic problems for D.L.G. These and any other evidentiary problems D.L.G. may encounter are battles to be fought at some later stage in this litigation.

V

conclusion

[48] I agree with the motion judge that the fraudulent misrepresentation claim should proceed. I would allow D.L.G.’s negligent misrepresentation claim to stand, and would allow D.L.G.’s assertion that Minto is estopped from relying on the covenant to insure in respect of damages caused by the second sewer backup to stand. I would also hold that the effect of the purported release on any of D.L.G.’s claims cannot be resolved on the pleadings motion. Finally, I would extend the leave to amend the claim granted to D.L.G. by the motion judge in respect of the fraud claim to all of the claims that remain alive.

[49] After judgment was reserved, the parties helpfully advised the court that they had reached an agreement on costs. Their agreement, however, assumed that one side or the other would be entirely successful on the appeal. Success has been divided. Hopefully the parties can come to an agreement as to the appropriate disposition of costs having regard to the divided success. If they cannot, the parties should exchange and file costs submissions of no more than 4 pages within 30 days of the release of these reasons.

Released: October 22, 2015 (“D.D.”)

“Doherty J.A.”

“I agree. P. Lauwers J.A.”

“I agree. Grant Huscroft J.A.”