Engage v. Brewer and White, 2013 ONSC 3132

Engage v. Brewer and White, 2013 ONSC 3132

COURT FILE NO.: 25891/12

DATE: 2013-05-29

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Engage Agro Corporation Plaintiff/Respondent on Motions

– and –

Robert Brewer, Paula White and Northern Credit Union Defendants/Applicants on Motions

COUNSEL:

J. Greg Murdoch, for the Plaintiff/Responding party

Steven G. Shoemaker, for the Defendants/Moving Parties, Robert Brewer and Paula White

Reid Lester, for the Defendant/Moving Party, Northern Credit Union

HEARD: March 7, 2013; April 26, 2013

MOtions for Summary Judgment: REasons for Decision

E.J. Koke J.

INTRODUCTION

1On January 5, 2011, Wilderness Vegetation Management Inc. (“Wilderness”) made an assignment in bankruptcy. At the time, it owed the Plaintiff, Engage Agro Corporation (“Engage”) the sum of $324,863.74 for goods which it had purchased from Engage pursuant to a credit arrangement entered into between the parties on April 16, 2010.

2Robert Brewer (“Brewer”) was the president of Wilderness and Paula White (“White”) was employed by Wilderness as a bookkeeper/accounting assistant. Northern Credit Union (“Northern”) was Wilderness’s financial institution.

3Following the bankruptcy, Engage commenced this action. It alleges that prior to entering into the credit arrangement, the defendants negligently and intentionally made false and misleading representations in respect of the financial situation of Wilderness. Engage further alleges that it relied on these representations in agreeing to advance credit, and that it suffered a loss as a result. Engage argues that the defendants owed it a duty of care and that the defendants breached this duty.

4The defendants deny that they made false and misleading statements. Northern, which had completed a credit inquiry form on behalf of Wilderness, claims the further protection of a disclaimer provision which was incorporated in the form.

5The defendants bring this motion for summary judgment, requesting an order that the action be dismissed against them.

BACKGROUND

6Wilderness was a corporation which was in the business of providing maintenance services to owners of infrastructure assets in Northern Ontario. The company was an amalgamation of four related companies which had previously carried on a similar business under the name of Old Wilderness. According to the defendants, around December 2009 Northern discovered that the then-president of Old Wilderness had been “kiting cheques”¹ in respect of an account which Old Wilderness maintained at Northern. Northern determined that in addition to its $2.5 million authorized line of credit, which was fully utilized, Old Wilderness owed Northern a further $1.6 million due to the kiting, which amounted to an unauthorized overdraft.

7When Northern discovered the kiting, it responded by calling in the Old Wilderness group of companies’ loans and demanded full payment from the guarantors of these loans.

The New Financing Package with Northern (January 2010)

8In or about January 2010, and after consultation with the principals of the Old Wilderness companies, Northern agreed to a reorganization of Old Wilderness’s loan facilities, on the following terms:

(i) The business operations of the Old Wilderness companies would be amalgamated and the business would continue to operate as one corporation, Wilderness Vegetation Management Inc. The debts of the company would be cross-collateralized between the companies and their guarantors, which included Brewer.

(ii) The $1.6 million unauthorized overdraft would be converted into a term loan. The term loan was guaranteed by the principals and it was required to be repaid as soon as possible;

(iii) Northern would continue to advance an operating line of credit to Wilderness, in the sum of $2.4 million;

(iv) A monitor would be appointed by Northern to oversee Wilderness; and

(v) Northern and Wilderness would enter into a forbearance agreement.

9Following the re-organization of the business operations, the shareholders of Wilderness elected Brewer as President of the corporation. White was retained in her previous capacity as a bookkeeper/accounting assistant by Wilderness.

The Forbearance Agreement

10The Forbearance Agreement was signed by the parties on January 28, 2010. Generally, the agreement provided that so long as Wilderness continued to carry on business honestly and profitably, Northern would not demand immediate repayment of the line of credit or the term loan, and would allow Wilderness to pay down the line of credit and pay off the term loan over a period of time. The following information was included and set out in the Forbearance Agreement:

(i) Four companies had been amalgamated to form Wilderness. These predecessor companies were each in default of their loan obligations to Northern. Wilderness assumed all of the obligations of the predecessors;

(ii) Wilderness agreed that it was in default of its financing arrangements with Northern;

(iii) Cross default provisions meant that default by any of the predecessors or various guarantors under the Forbearance Agreement amounted to default by Wilderness;

(iv) In the event of default, Wilderness consented to judgment in the amount of $4,063,661.00 in favour of Northern;

(v) Demand had been made by Northern and all of the indebtedness was considered payable;

(vi) Bankruptcy and Insolvency Act Notices had been served on the predecessors of Wilderness;

(vii) Wilderness consented to the appointment of a monitor (KPMG) by Northern, and the monitor could decide which Wilderness debts were to be paid.

(viii) The Term Loan in the amount of $1,600,000.00, referred to by Northern as the “Segregated Debt” was to be repaid in its entirety by March 31, 2010.

The Credit Application

11Wilderness was interested in purchasing supplies from Engage. On February 2, 2010, Brewer requested a credit application from Engage for this purpose. Brewer requested that the form be forwarded to Paula White. On February 8, 2010, Engage forwarded to Wilderness its Credit Application Form, together with a Bank Release Authorization Form which would allow Wilderness’s lender to release information to Engage’s bank , T.D. Canada Trust.

12Upon receipt of the Credit Application, White filled out the Form in part and signed it “Paula White on behalf of Robert Brewer”. She then returned it to Engage which received it on or about March 29, 2010.

13The Credit Application Form received by Engage on March 29, 2010, (“White’s Credit Application”) included the following information:

(i) That Brewer was the President of the corporation;

(ii) That Wilderness had been in existence for 20 + years.

(iii) A question asking “Are you aware of a significant change in the business that could negatively impact business operations: YES or NO? (responded to with a “NO”).

(iv) A question asking whether the business had reported an operation loss in the prior two years (White responded with a comment that Brewer should be contacted with respect to this question).

(v) Sections dealing with annual revenues and credit limits (left blank).

(vi) Financial Statements (White noted that these were available for Engage to review); and

(vii) A section dealing with 2010 financial projections (not completed).

14Ms. White did not include a signed copy of the Bank Release Authorization Form when she returned the Credit Application.

15Shane Swantek (“Swantek”) was employed as the manager of legal and accounting services with Engage and was primarily responsible for considering the Credit Application of Wilderness. After he received the partially completed Application, he e-mailed Brewer on April 7, 2010, and advised him that the Credit Application could not be processed because the credit limits, the 2010 estimated annual revenues from operations and prior-year actual revenues had not been provided. In addition, the Bank Release Form had not been completed and returned.

16On April 8, 2010, Brewer e-mailed a completed Credit Application (“Brewer’s Credit Application”), a completed Bank Release Authorization Form signed by him, and a 2010 cash flow forecast to Engage.

17Brewer’s Credit Application was three pages in length. Brewer testified at his cross-examination that he could not recall whether he had read the entire Application and those portions which had been completed by White. In his reply affidavit he stated that he did review the question: “Are you aware of any change in business that could negatively impact the business operations?”

18Brewer indicated in his Credit Application that prior-year revenues of the business were $10,000,000.

19On April 16, 2010, Brewer had an eight minute conversation with Swantek regarding the Credit Application and the February Cash Flow Forecast. It is Swantek’ s evidence that during this conversation, Brewer expressed optimism about Wilderness’s financial situation and future.

20On April 23, 2010, Engage extended a $300,000 credit limit to Wilderness.

21According to Engage, at no time prior to granting credit to Wilderness was it advised by anyone on behalf of Wilderness that:

(i) Wilderness was a newly formed company (it had existed for four months at the time Engage agreed to extend credit to it);

(ii) Wilderness was formed as a result of an amalgamation of four companies, all which were in default of their loan obligations to Northern;

(iii) there was a forbearance agreement in effect with Northern; and

(iv) Northern had appointed a monitor who played a significant role in the decision making and operations of the business and who controlled which debts could be paid.

The Credit Inquiry (April 2010)

22In April 2010, Northern received a two page form entitled “Credit Inquiry” from T.D. Canada Trust, together with a request that Northern complete the form. The form, which was printed on T.D. Trust stationary, included the following:

(i) The completed “Bank Release Authorization Form” signed by Brewer authorizing Northern to release credit information to Engage pertaining to Wilderness;

(ii) A statement that the plaintiff, as “Requesting Client”, was making a “General Trade Credit Inquiry” in respect of Wilderness’s account with Northern;

(iii) A series of questions in respect of Wilderness’s operating line of credit and loans with Northern including the authorized limit of each, the amounts outstanding and whether they were secured;

(iv) A blank box marked “Comments”; and

(v) A written disclaimer (the “Disclaimer”) which reads as follows:

The information in this report is confidential and may not be disclosed to any person other than the Requesting Bank and the Requesting Client. Neither the Responding Bank nor the Requesting Bank, nor any of their employees, assumes any liability for the accuracy or completeness of the information in this report. Any person relying on this information does so entirely at their own risk. The Requesting Client confirms that it is legally entitled to the requested information and has the authorization of the Customer and indemnifies and saves harmless both the Requesting Bank and the Responding Bank and their employees from any liability incurred. If requesting the report for its own use, the Requesting Bank indemnifies and saves harmless the Responding Bank and its employees from any liability incurred as a result of this report.

23The Credit Inquiry was completed by Northern’s credit manager Terry McKnight (“McKnight”). He indicated on the form that the Wilderness’s account with Northern had been open for under one year and that Wilderness had repaid its loans as agreed during the previous 31 to 365 day period. He also checked off a box entitled “Repayment History for the Last 30 Days” indicating that the loans were “up to date”. He left the box on the form for “Comment’s” blank. Upon completion, the form was forwarded to Engage on April 15, 2010.

24The completed form comprised the only communication between TD Canada Trust and Northern prior to the commencement of this action. Northern was not paid for completing it.

Discovery of the Off Balance Sheet Leases (October-December 2010)

25It is the evidence of the defendants that around October 2010, Brewer discovered that the previous president of Old Wilderness had entered into a series of off balance sheet leasing transactions which had the effect of significantly reducing the cash flow and financial viability of Wilderness’s business operations. The president had maintained the documents and other records comprising these transactions off site and accordingly, Brewer, the remaining principals of Wilderness, as well as KPMG, had not been made privy to the existence of these transactions.

26Brewer viewed the discovery of these transactions as an ”Adverse Material Event” as described in the January financing package and notified Wilderness’s legal counsel who in turn notified Northern’s legal counsel.

27According to the defendants, the losses resulting from the lease transactions were so significant that Wilderness could no longer meet its financial obligations, including its debt to Engage, and accordingly Northern acted on its security agreement and placed Wilderness into receivership in October 2010. On January 5, 2011, Wilderness was petitioned into bankruptcy. At the time of the bankruptcy, Wilderness owed Engage $324, 863.74, the payment of which is the subject of this legal proceeding.

BASIS FOR CLAIM BY ENGAGE AGAINST THE DEFENDANTS

28Engage has pleaded that if it had been aware of the financial difficulties which had been experienced by Wilderness’s predecessor companies, and had been informed that the terms of the credit arrangements between Northern and Wilderness, it would not have extended credit to Wilderness.

29Engage argues that by omitting to include this relevant credit information on the Credit Inquiry Form, Northern painted an inaccurate picture of its customer’s credit worthiness. Engage agrees that there was no duty on Northern to complete and return the form, and it could have chosen not to do so. However, once it exercised its choice to complete the form, it was incumbent on Northern to complete it in a way that was fair and balanced, and in a manner which would not mislead those who Northern knew intended to rely on it.

30Engage submits that at the time Northern completed the Credit Inquiry Form, Northern had significant concerns regarding the ultimate recovery of its loans. Engage believes that Northern therefore wanted Wilderness to secure credit from the Plaintiff, which would enable Wilderness to continue its operations and pay down its loans from Northern. Engage points out that Northern had a pecuniary interest in presenting its customer’s credit worthiness in a positive light to Engage. Engage also argues that Northern’s decision to misrepresent the financial viability of its client, and thereby induce Engage to grant credit, was motivated by self-interest.

31Engage argues that much of the information it received from Brewer and White was untrue and intentionally misleading. It submits that Wilderness’s principals, including Brewer, were also motivated by self-interest and pecuniary gain because the loans to Northern were the subject of personal guarantees, and the repayment of any loans to Northern would reduce their potential liability under these guarantees.

32Engage argues that all of the essential elements necessary to make a finding of negligent misrepresentation have been met in the circumstances of this case. These elements are set out by Justice Iacobucci in the Supreme Court of Canada decision in Queen v Cognos² at para. 33:

The required elements for a successful Hedley Byrne claim have been stated in many authorities, sometimes in varying forms. The decisions of this Court cited above suggest five general requirements:

(1) there must be a duty of care based on a "special relationship" between the representor and the representee;

(2) the representation in question must be untrue, inaccurate, or misleading;

(3) the representor must have acted negligently in making said misrepresentation;

(4) the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and

(5) the reliance must have been detrimental to the representee in the sense that damages resulted.

33Engage submits that when Wilderness requested that Engage supply products to Wilderness and Engage responded by forwarding the Credit Application and the Credit Inquiry to the defendants, it entered into a special relationship with them which imposed on them a duty of care.

34Engage argues that Brewer and White owed a duty of care to the Plaintiff to complete the Credit Application truthfully and accurately and that they made false and misleading representations to Engage in relation to this application. The nature of their relationship with Engage required that they disclose any material information concerning the financial viability of Wilderness, and they knowingly or negligently failed in this duty, placing their own personal interests ahead of their obligation to Engage. Particulars of their failure to carry out this duty include the following:

(i) White and Brewer’s omission on the Credit Application of any reference to the arrangements under which Northern had extended credit to Wilderness;

(ii) Indicating on the Credit Application that prior year’s revenues were $10 million, when Wilderness had not even carried on business during the prior year; and

(iii) Indicating on the Credit Application that Wilderness had been in business for more than 20 years.

35Engage argues that Northern also knowingly or negligently failed in its duty to be candid with Engage about the true nature of its relationship with Wilderness, and it also made false and misleading statements and placed its own interests ahead of this duty. Particulars of its failure include the following:

(i) The failure by Northern to indicate to Engage on the Credit Inquiry that its relationship with Engage was such that Engage was compelled to operate under a manager appointed by Northern and that it was subject to a forbearance agreement;

(ii) The reference on the Credit Inquiry to the fact that the Wilderness loans were current, when in fact the term loan had not been repaid by March 31, 2010 as required by the terms of the Forbearance Agreement and that the parties had agreed in the Forbearance Agreement that the loans were in default.

THE SUMMARY JUDGMENT MOTIONS

The Test for Granting the Requested Relief under Rule 20 of the Rules of Civil Procedure

36The appropriate approach to be taken in applying the test for summary judgment under Rule 20 of the Ontario Rules of Civil Procedure is set out in the Ontario Court of Appeal decision in Combined Air Mechanical Services Inc. v. Flesch (“Combined Air").³

37The court in Combined Air referred to what is now generally referred to as the “Full Appreciation Test”. In applying this test, the court must consider whether the evidence available on the summary judgment motion is sufficiently compelling to allow the court to make a dispositive finding in favour of the moving party. In circumstances where such a finding cannot be made, the motion is to be dismissed in whole or in part and the parties are to be provided with an opportunity to hear and observe witnesses, to have the evidence presented by way of the trial narrative, and to experience the fact finding process firsthand.

38The court in Combined Air held that the application of the test does not change the evidentiary obligations imposed on parties; each side must put its “best foot forward” and the court is entitled to assume that the record contains all the evidence which the parties would present at trial.

Summary Judgment Motion by the Defendant, Northern Credit Union

(a) Voluntary Assumption of Responsibility…The Hedley Byrne Test

39Northern agrees that it made certain representations to Engage in the form of written responses on the face of Credit Inquiry Form but it maintains that the responses were factually true. It takes the position that since there was no contractual relationship between it and Engage, Engage’s only possible cause of action against Northern lies in the tort of negligent misrepresentation, as enunciated by the English House of Lords in Hedley Byrne v. Heller (“Hedley Byrne”).⁴

40Northern points out that the facts in Hedley Byrne were very similar to those in the present case. In both cases, the party which made the request for the credit information did so on the basis of an express promise that the responding party would bear no legal responsibility in connection with any reply. In the case before the court, that express promise is the Disclaimer which was drafted by the TD Bank and submitted to Northern as part of the Credit Inquiry Form.

41In Hedley Byrne, the House of Lords found that the responding bank in that case was sufficiently proximate to the plaintiff so that it owed a duty of care to it. Moreover, there had been material inaccuracies in the bank’s representations. However, the Court found that the issue of whether the bank’s statements were materially accurate was ultimately not relevant to liability. The House of Lords held that since the requesting bank had induced the bank to respond by promising that there could be no liability, no liability could ensue to the bank. The written disclaimer provided a complete defence to the defendant bank. In so finding, the court stated:

...in my judgment, the [Responding] bank in the present case, by the words which they employed, effectively disclaimed any assumption of a duty of care. They stated that they only responded to the inquiry on the basis that their reply was without responsibility. If the inquirers chose to receive and act upon the reply they cannot disregard the definite terms upon which it was given. They cannot accept a reply given with a stipulation and then reject the stipulation. Furthermore, within accepted principles... the words employed were apt to exclude any liability for negligence.⁵

42In summary, Northern argues that Engage paid nothing to Northern in exchange for receiving the Credit Inquiry Form and there was no contract between the parties. The form was submitted to Northern with an express promise that there was to be no responsibility on the part of Northern, and this promise induced Northern to respond. The form was drafted by the plaintiff’s bank in its capacity as agent for the plaintiff. The wording of the Disclaimer was very broad and could only possibly relate to Northern’s responses on the Credit Inquiry Form. Northern submits that it is plain and obvious that a reasonably prudent and sceptical person in the position of the plaintiff could not possibly have believed that in responding to the Credit Inquiry Form, Northern was accepting legal responsibility for any use which the plaintiff might have made of Northern’s responses. By inserting the Disclaimer, Engage held itself out as agreeing to voluntarily assume all risks associated with its use, risks which absent the Disclaimer would be assumed by Northern.

43In conclusion, Northern argues that the Disclaimer provides a complete defence to it and there is no genuine issue requiring a trial. In any event, Northern’s submissions on the form were materially accurate which also operates as a complete defence.

(b) No Duty to Disclose Where Questions Not Asked

44Northern argues that while the accuracy of its representations on the credit form has no bearing on the issue of the enforceability of the Disclaimer, it is nonetheless the case that the responses were materially accurate. Northern submits that by asking no follow-up questions of Northern, the plaintiff chose to advance credit to Wilderness at its own risk.

45Northern submits that the test for materiality in respect of a credit inquiry form should be no more onerous as with an insurance contract. It argues that generally speaking, the test for what is “material” on an insurance application is whether or not the insurer asked the question on the application. An insurer, who accepts the risk without requiring an answer to a question asked has been found to have waived the question. ⁶

46Northern points out that in an insurance contract, the parties owe one another a duty of utmost good faith, whereas no such higher duty exists in the context of a bank or credit union’s response to a credit inquiry where there is no contract.

47In summary, Northern argues that since the plaintiff did not see fit to ask certain questions on the Application, and since it chose not to ask follow-up questions in respect of Northern’s responses, or in respect of the blank “Comments” box, it cannot subsequently complain that Northern ought to have volunteered certain information.

Summary Judgment Motion by the Defendants, Brewer and White

(a) The Corporate Veil Argument

48Brewer and White argue that at all material times they were working as employees of Wilderness and that this is not a situation where the corporate veil should be lifted. Relying on Northwood Mortgage Ltd. v. Gensol Solutions Inc.,⁷ they submit that the corporate veil should only be pierced when the corporation is used by those who control it as an instrument of fraud or some other improper purpose akin to fraud. Even if the Credit Application was not filled in with complete accuracy, their actions are not akin to fraud.

(b) Lack of Particularity of the Pleadings

49Brewer and White argue that when it is alleged that a specific tortious act is committed by a defendant, such an act must be pleaded with particularity. They submit that in this case, the plaintiff’s case lacks such particularity, and that the plaintiff’s statement of claim makes only vague and ambiguous references to the legal concept of negligent misrepresentation.

(c) No Duty to Bargain in Good Faith

50Brewer and White agree that they did not volunteer any information other than what the form required. In defence of their decision not to volunteer any additional information, such as the fact that Wilderness was acting under a forbearance agreement, they argue that Canada’s judicial system emphasizes individual responsibility and self-reliance when parties negotiate a contract and parties can expect that each party will act entirely in their own interests. ⁸ Relying on Oz Optics Ltd. V. Timbercon Inc.,⁹ they submit that as the case law presently stands, the common law has not recognized a general duty to bargain in good faith in contract.

(d) Lack of Due Diligence by Engage

51Brewer and White argue that if it was sufficiently important for Engage to have additional information about Wilderness, it could have easily approached other sources of information. For example, if it would have requested a corporate search, the fact that Wilderness was formed as a result of the recent amalgamation of other companies would have come to its attention. According to these defendants, Engage should not be permitted to suddenly rely on tort law as an after-the-fact insurance plan against Engage’s own failure to conduct the appropriate due diligence regarding Wilderness.

(e) Absence of Essential Elements for a Finding of Negligent Misrepresentation.

52Brewer and White submit that not only was there no special relationship between them and Engage, but that the other necessary elements to establish a finding of negligent misrepresentation as set out by Justice Iacobucci in Queen v. Cognos have not been met.

53With respect to their alleged breach of duty, Brewer and White argue that even if Engage established that they were under a duty to Engage, they met this duty. They maintain that the representations they made in the Credit Application and in Brewer’s telephone discussion with Swantek were true and that there was no requirement on their part to disclose any additional information. Since their responses were accurate, there cannot be a finding that they were negligent.

54Brewer and White also deny that Engage relied on their representations.

55With respect to damages, Brewer and White submit that the damages as alleged by Engage did not result from any failure on their part to make full and accurate disclosure, but resulted from Brewer discovering the off balance sheet leasing transactions in the fall of 2010. According to Brewer and White, these transactions have no correlation to any alleged lack of disclosure on their part.

Engage’s Position

(a) The Disclaimer - The Reasonable Reliance Test

56Engage submits that there has been an evolution in the test relating to negligent misrepresentation and that the courts have moved from an “assumption of responsibility or risk” test to a “reasonable reliance” or “justifiable reliance” test.

57Engage submits that the Supreme Court of Canada rejected the voluntary assumption of liability approach in the 1997 case of Hercules Managements Ltd. v. Ernst and Young.¹⁰ According to Engage, the court in Hercules chose to follow the 1978 House of Lords decision in Anns v Merton London Borough Council¹¹ in which the steps followed by that court consisted firstly of a determination of whether a prima facie duty of care existed, followed by an analysis of whether there were any policy considerations sufficient to negate the existence of the duty.

58Engage points to Justice La Forest’s comments at par. 41 of the Hercules decision where he states:

[A] prima facie duty of care will arise on the part of a defendant in a negligent misrepresentation action when it can be said (a) that the Defendant ought reasonably to have foreseen that the Plaintiff would rely on his representation and (b) that reliance by the Plaintiff in the circumstances would be reasonable.

59According to Engage, the House of Lords decision in Smith v. Bush¹², a case where the effect of a disclaimer was in issue, marked an important milestone in this evolution. In that case, the House of Lords held that a disclaimer does not operate to deny the assumption of duty; however, in appropriate circumstances it can operate as an affirmative defence if a duty of care is found to exist. Engage argues that this represents a significant change in that a disclaimer may provide a defence but is not considered a denial of duty from the outset.

60Engage argues that the proper approach for dealing with the issue of negligent representation in this case is the approach articulated by Justice Esson in the British Columbia Court of Appeal decision in Keith Plumbing & Heating Co. v. Newport City Club Ltd.¹³ In that case, the defendant bank provided financing to the promoters of a large construction project. The bank’s loan officer provided a positive review of the viability of the project to the plaintiff which was a contractor on the project, by way of a letter. Later, when it became apparent that the promoters were unable to make payments on their loan or to pay the plaintiff and the other contractors, the plaintiff brought an action against the bank alleging misrepresentation.

61The trial judge found that even if there had been a misrepresentation on the part of the bank, the standard disclaimer paragraph in the bank’s letter negated any duty of care to the plaintiff.

62The Court of Appeal overturned the trial judgment after specifically adopting the approach set out in Hercules. The Court found that it was reasonable for the plaintiff to rely on the bank’s statement and that it was reasonably foreseeable that the plaintiff would rely on this information despite the disclaimer. After reviewing the evolution of the law dealing with negligent misrepresentations following Hedley Byrne the Court held at para. 76:

In view of the liberal approach which has been adopted to the imposition of liability , it may be doubted whether it is in accord with current principles of tort law to automatically give effect to boilerplate or rubber-stamped statements declining to take responsibility for the accuracy of one’s statements.

63In rejecting the “assumption of liability” approach articulated in Hedley Byrne and adopting the “reasonable reliance” approach set out in Hercules the court stated at para. 82:

Because of the aspects of the reasoning in Hedley Byrne to which I have referred, and the factual distinctions between that case and this, it is arguable that the disclaimer would not necessarily preclude liability in this case even if voluntary assumption of responsibility remains the basis for finding a duty of care. But that question need not be pursued because it is no longer the law in Canada that assumption of liability is the test.

64Engage argues that it was justified in relying on the representations of the defendants in the circumstances of this case. Wilderness was a new customer and was seeking credit from Engage. As Wilderness’s financial institution, Northern was privy to the information required by Engage to determine whether Wilderness was credit worthy. Similarly, Brewer as president of the company and White as bookkeeper had information which was necessary for Engage to make this determination. The information Engage ultimately received from the defendants was incomplete, untrue and misleading, and Engage relied on it to its detriment. Accordingly, Engage submits that it is entitled to its damages from these defendants.

(b) The Defendants’ Affirmative Duty to Disclose

65Engage argues that in the circumstances of this case, there was an affirmative duty on the part of the defendants to provide additional information. Also, it is submitted that this case should be distinguished from contract cases and cases involving an application for insurance. It submits that the jurisprudence supports its position that an omission to provide relevant and pertinent information can be a factor in determining whether a misrepresentation exists in the context of a case for negligent misrepresentation. In support of its position Engage relies on the dicta of Justice Iacobucci in Cognos where he states at para. 59:

There are many reported cases in which a failure to divulge highly relevant information is a pertinent consideration in determining whether a misrepresentation was negligently made: see, for example, Fine's Flowers Ltd. v. General Accident Assurance Co. (1974), 1974 493 (ON SC), 5 O.R. (2d) 137 (H.C.), aff'd (1977), 1977 1182 (ON CA), 17 O.R. (2d) 529 (C.A.); Grenier v. Timmins Board of Education, supra; H.B. Nickerson & Sons v. Wooldridge, supra; Hendrick v. De Marsh (1984), 1984 1839 (ON SC), 45 O.R. (2d) 463 (H.C.), aff'd on other grounds (1986), 1986 2528 (ON CA), 54 O.R. (2d) 185 (C.A.); Steer v. Aerovox, supra; W. B. Anderson & Sons Ltd. v. Rhodes (Liverpool), Ltd., [1967] 2 All E.R. 850 (Liverpool Assizes); and V.K. Mason Construction, supra. In the last case, Wilson J. said the following speaking for this Court (at p. 284):

The statement was negligent because it was made without revealing that the Bank was giving an assurance based solely on a loan arrangement which Mason had already said was insufficient assurance to it of the existence of adequate financing.

In so doing, these cases and the trial judgment in the case at bar are not applying a standard of uberrima fides to the transactions involved therein. Quite frankly, this notion is irrelevant to a determination of whether the representor has breached a common law duty of care in tort. These decisions simply reflect the applicable law by taking into account all relevant circumstances in deciding [page124] whether the representor's conduct was negligent. In some cases, this includes the failure to divulge highly pertinent information.

66At para. 76 of Cognos, Justice Iacobucci goes on to state:

In my opinion, a flexible approach to this issue is preferable. It is arbitrary and premature to declare as a general rule that nothing less than express or direct representations can succeed under the Hedley Byrne doctrine. Undoubtedly, there will be cases such as the present one where the surrounding circumstances are such that it makes little difference, if any, how one characterizes the manner in which the representation is made, and where it would be unjust to deny recovery simply because the representation relied on is said to be implied rather than express. It is unnecessary for me to set out in detail the circumstances in which so-called implied representations can be enough to sustain an action in tort for negligent misrepresentation. I prefer leaving this task to trial judges dealing with specific factual situations. Suffice it to say that the case at bar falls well within this category.

THE MOTION BY NORTHERN

Discussion and Analysis

67I accept that the law has evolved from an “assumption of responsibility” test to a “reasonable reliance” test in determining whether a duty exists in cases of negligent misrepresentation. Once a duty is found, it follows that the test to determine what effect is to be given to the disclaimer requires a contextual and policy based approach; an approach which demands a broader examination and appreciation of the relationship between the parties. The party making the representations can no longer rely exclusively or absolutely on a boilerplate disclaimer to avoid responsibility for untrue representations.

68With respect to determining whether the requisite duty exists in the case before the court, Engage’s position is that it relied on the information provided to it by Northern, notwithstanding the Disclaimer. It submits that it would not have extended credit to Wilderness if it had been informed by Northern that the client had a troubled credit history and that Northern had appointed a manager to oversee Wilderness’s business operations.

69In my view, an arguable if not compelling case can be put forward by Engage that it relied on Northern’s representations and, furthermore, that commercial realities dictate that it would have refused Wilderness’s request for credit if it had been provided with a more complete and balanced picture of Wilderness’s financial viability.

70In my view, any reliance by Engage on Northern’s representations cannot be dismissed on the basis that it was unreasonable either. Engage had no prior history of dealings with Wilderness and the information was being provided by Wilderness’s financial institution which would have been aware of the purposes for which the information was being provided.

71If Engage can establish that it has met the reliance test referred to by Justice La Forest in Hercules, it follows that a prima facie duty existed on the part of Northern once it agreed to complete and deliver the Credit Inquiry.

72In my view, Engage also has an arguable case that the remaining elements set out by Justice Iacobucci in Cognos are present.

73As to the existence of a “special relationship” between the parties, the relationship arose out of a request by Wilderness that Engage extend credit to it. Further thereto, it provided written authorization and instructions to its financial institution to provide credit information. I note that the existence of such a special relationship was found to exist between the defaulting customer’s bank and the complainant in Hedley Byrne.

74With respect to the issue of whether the representations were untrue, inaccurate or misleading, the dicta in Cognos referred to above is authority for the proposition that an omission to provide relevant and pertinent information can be a factor in determining whether a misrepresentation exists. In my view, Engage can present an arguable case that by limiting its responses to the specific questions asked and by failing to include any additional information in the section marked “Comments”, Northern did not provide a fair or balanced portrayal of its customer’s financial viability.

75Finally, with respect to the issue of damages, the events which unfolded following the extension of credit confirm that Engage suffered damages as a result of its decision to extend credit to Wilderness.

76Now that voluntary assumption of responsibility or risk is no longer the basis for finding a duty, it is incumbent on Northern to prove by affirmative defence that the Disclaimer relieves it of its duty of care.

77In my view, the determination of whether Northern can avail itself of the protection of the Disclaimer will require a consideration of a number of factors which will require a trial. Included in this consideration is evidence from Engage as to the degree to which it relied on the Credit Inquiry Form, and evidence from Wilderness as to what its reasonable expectations were when it completed the Credit Inquiry Form. The court will also require evidence from Northern as to why it failed to disclose the true nature of its relationship with Wilderness, which had evolved from the traditional banker/customer relationship to that of creditor, overseer and manager.

78These issues will also require the court to assess the credibility of the parties and their witnesses, and will require a more complete appreciation of the evidence than can be provided by way of a summary motion.

79In coming to the conclusion that a trial is required, I also take into consideration the fact that although McKnight submitted an affidavit in support of Northern’s motion, he was not available to be cross-examined. Apparently, at the time the cross examinations were arranged, McKnight was no longer employed with Northern and he had, as counsel put it, “gone off the grid”. The Credit Union representative who was available to be examined had no direct knowledge or involvement with the completion of the form.

80I understand that Mr. McKnight has been located and is now available to give evidence and to be cross examined. In my view, it would be unfair to Engage if this motion was decided without providing it with the opportunity to examine him.

Conclusion

81For the reasons stated above, I have come to the conclusion that Engage has presented a prima facie case that it could be entitled to damages from Northern. There are credibility issues which will require a fuller and more complete appreciation of the evidence, which in my view will require a trial. The motion by Northern is dismissed and I direct that the claim against it by Engage is to proceed to trial.

THE MOTION BY BREWER AND WHITE

Discussion and Analysis

(a) The Corporate Veil Argument

82Brewer and White argue that at all material times, they were working as employees of Wilderness and that this is not a situation where the corporate veil should be lifted. Relying on Northwood Mortgage Ltd. v. Gensol Solutions Inc. ¹⁴ they submit that the corporate veil should only be pierced when a corporation is used by those who control it as an instrument of fraud or some other improper purpose akin to fraud. Even if the Credit Application was not filled in with complete accuracy, their actions are not akin to fraud.

83The Ontario court of appeal in AGDA Systems International Ltd. v. Valcom Limited, et. al¹⁵ confirmed that employees can be held responsible in their personal capacity for tortious conduct even when they were acting on behalf of the corporation. It cited the Supreme Court of Canada in London Drugs Limited v. Kuehne & Nagel International Ltd.,¹⁶ and quoted Justice Iacobucci at paras. 23, 24 and 39 as follows:

There is no general rule in Canada to the effect that an employee acting in the course of his or her employment and performing the “very essence” of his or her employer’s contractual obligations with the customer does not owe a duty of care, whether one labels it “independent” or otherwise , to the employer’s customer…The mere fact that the employee is performing the “very essence” of a contract between the plaintiff and his or her employer does not, in itself , necessarily preclude a conclusion that a duty of care was present.

…Officers and directors or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the conduct t complained of their own.

84The plaintiff has not asked that the corporate veil be pierced, but rather has alleged a separate cause of action in tort against Brewer and White. As such and in this context, Brewer and White cannot avail themselves of the defence that they should not be held responsible for the actions of Wilderness.

(b) Lack of Particularity of the Pleadings

85Although the plaintiff has not included the term “negligent misrepresentation” in its pleadings, it has pleaded that these defendants “either knowingly or negligently completed the Credit Application providing materially inaccurate and misleading information knowing that the plaintiff was acting in reliance on the accuracy of the information”.

86In my view, the plaintiff has provided adequate particularity to support claims for both negligent and fraudulent misrepresentation.

(c) No Duty to Bargain in Good Faith

87Brewer and White rely on Oz Optics Ltd. supra in support of their argument that they did not owe Engage a duty to bargain in good faith. In Oz Optics Ltd., the Ontario Court of Appeal confirmed that it was not prepared to extend the doctrine of good faith beyond the context of certain contractual relationships. However, it allowed the plaintiff’s appeal with respect to its claim for negligent misrepresentation. In making this finding, the court stated at para. 71:

However, in light of the reluctance of the courts, in particular the Supreme Court of Canada, to extend the doctrine of good faith beyond the context of a contractual relationship (whether formal or implied) I would be hesitant to invoke the doctrine here given that recovery can be grounded in negligent misrepresentation. This approach is suggested by the Supreme Court in Martel¹⁷. Therefore, I do not find it necessary to consider this issue further.

88The claim by Engage against Brewer and White is not based on contract, but on the tort of negligent misrepresentation. The duty is based on the principles set out in Hedley Byrne and Cognos, supra, and not on any independent duty of good faith.

(d) Lack of Due Diligence by Engage

89Engage pleads that it relied on financial information from the president of Wilderness, from its bookkeeper/accounting assistant and from its financial institution. In my view it is not a very compelling argument by Wilderness that Engage did not exercise due diligence.

(e) Essential Elements for a Finding of Negligent Misrepresentation

90Brewer and White argue that the essential elements on which to base a finding of negligent misrepresentation, as set out in Hedley Byrne and Cognos are not present in this case. For the following reasons, I disagree.

91Firstly, White was employed by Wilderness as a bookkeeper/accounting assistant. Brewer was the president of the corporation and he was also a guarantor of the corporation’s debts to Northern. Brewer requested credit on behalf of Wilderness from Engage, and requested that the Credit Application be directed to Ms. White. Engage has pleaded that it relied on the information that it received from these two individuals. In my mind, this is sufficient to establish a "special relationship" between the representor and the representee.

92Secondly, Engage has an arguable case that the information it received from Brewer and White was inaccurate and/or misleading. The Credit Application as completed by Brewer and White indicated that Wilderness had been in existence for more than 20 years. If they had indicated on the form that the corporation had only been in existence for a number of months, this may have prompted further inquiries from Engage and revealed to Engage that Wilderness did not have a proven track record of financial stability.

93Brewer and White answered “No” with respect the question “Are you aware of a significant change in the business that could negatively impact business operations?” They argue that they understood this question as referring to changes in the future, not past changes. In my view, they would have been aware that a potential creditor would have been interested in any changes which could negatively impact the business operations, both past and future.

94Notwithstanding the fact that Brewer had an 8 minute conversation with Shane Swantek in relation to the Credit Application, he never revealed to Swantek that Northern had appointed a manager to oversee the operations of Wilderness and that Wilderness was operating under the terms of a forbearance agreement. Such facts would have influenced Engage’s decision as to whether to extend credit to Wilderness.

95In my view, Engage has established a prima facie case that the information it received from Brewer and White, when considered along with the very relevant information which Brewer and White omitted to disclose to it, was misleading and/or inaccurate.

96Thirdly, any claim by Brewer and White that their responses were inadvertent or innocent will require a trial in which the trier of fact can determine the credibility of the deponents.

97Fourthly, Brewer was the president of the company and White was the bookkeeper/accounting assistant. Clearly it was reasonable for Engage to rely on information received from them.

98Finally, Brewer and White argue that Engage’s losses are a result of an event which could not have been foreseen or predicted (i.e. the discovery of the off balance sheet lease arrangements entered into by the former president). In my view, if Engage can convince the court that it would not have extended credit to Wilderness absent its reliance on the information it received from Brewer and White, it has a compelling argument that its losses result from the alleged misrepresentation.

Conclusion

99For the reasons stated above, I have come to the conclusion that Engage has presented a prima facie case that it is entitled to damages from Brewer and White. There are credibility issues which will require a fuller and more complete appreciation of the evidence, which in my view will require a trial. The motion by Brewer and White is dismissed and I direct that the claim against it by Engage is to proceed to trial.

COSTS

100If the parties are unable to agree on the costs of the motion, they may file written submissions in relation thereto within 15 days of the release of the decision, with any replies to the submissions to be filed within 10 days thereafter. Submissions are to be no longer than three pages in length, not including enclosures, schedules and exhibits appended thereto.

E.J. Koke J.

Footnotes

1. 1Cheque kiting is a type of cheque fraud in which an account’s balance is made to appear higher than it really is by exploiting the time it takes for the bank to process a cheque that has been deposited, and subsequently issuing new cheques using the non-existent funds.
2. 2Queen v. Cognos Inc., 1993 146 (SCC), [1993] 1 S.C.R. 87
3. 3Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764
4. 4Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; [1963] 2 All E.R. 575
5. 5Hedley Bryne at P. 15 per Lord Morris of Borth-Y-Gest
6. 6Coulter v. Equity Fire Insurance Company , (1904) 9 O.L.R. 35 (CA); Sagl v. Cosburn, 2009 ONCA 388 at par. 59-60
7. 7Northwood Mortgage Ltd. v. Gensol Solutions Inc., [2004] O.J. No. 1140, affirmed by [2005] O.J. No. 143 (C.A)
8. 8978011 Ontario Ltd. v. Cornell Engineering Co. (“Cornell”), (2001), 2001 8522 (ON CA), 53 O.R. (3d) 783 see Para. 32,
9. 9Oz Optics Ltd. v. Timbercon Inc., 2011 ONCA 714, 107 O.R. (3d) 509 (“Oz Optics”), at paras. 61 -62
10. 10Hercules Managements Ltd. v. Ernst and Young, 1997 345 (SCC), [1997] 2 S.C.R. 165 (“Hercules”)
11. 11Anns v. Merton London borough Council, [1978] A.C. 728 (H.L.) (“Anns”)
12. 12Smith v. Bush, [1990] 1 A.C. 831
13. 13Keith Plumbing & Heating Co. v. Newport City Club Ltd., 2000 BCCA 141, 184 D.L.R. (4th) 75 (“Keith Plumbing”)
14. 14Northwood Mortgage Ltd. v. Gensol Solutions Inc., supra no. 6
15. 15AGDA Systems International Ltd. v. Valcom Ltd., 1999 1527 (ON CA), [1999] O.J. No. 27 (C.A.)
16. 16London Drugs Limited v. Kuehne &Nagel International Ltd., 1992 41 (SCC), [1992] 3 S.C.R. 299
17. 17Referring to Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860