The “Entire Agreement” Clause
19 Oct 2015
Most people entering into any type of agreement, be it an employment contract, a commercial lease or a partnership agreement, usually focus on provisions relating to the parties’ monetary obligations. Few care to read the "general" clauses usually found at the end of the document.
Normally, most people consider these provisions "boilerplate" and of lesser importance. However, all clauses matter and their significance – even if seldom tested – may prove relevant in the future. One such clause is the "entire agreement" clause found virtually in all contracts. The entire agreement clause is a provision which purpose is to limit the parties’ intentions to what is agreed to in writing and exclude spoken (or written) representations made in the course of negotiations. This was exemplified in the recent Ontario Court of Appeal decision of Soboczynski v. Beauchamp, 2015 ONCA 282 (CanLII) which took place in the context the sale of real property.
Normally the purchase and sale of real property must be completed in writing to be legally binding. This means that a written contract must be used whenever you purchase or sell a home. Typically in Ontario, such a contract is referred to as an "Agreement of Purchase and Sale." These agreements have become largely standardized and easily accessible with the advent of the Ontario Real Estate Association.
Agreements of Purchase and Sale regularly come with schedules and / or amendments prepared to reflect any specific intentions or promises of either the purchaser or the seller. Thus, there is a broad range of complexity and uniqueness even when it comes to something as standard as an Agreement of Purchase and Sale of real property.
Soboczynski v. Beauchamp is an important case for the development of contract law in that it clarifies the law in relation to entire agreement clauses, and more specifically pinpoints their role in the real estate context.
Don and Louise Beauchamp sold their home to Adam and Olga Soboczynski. The Agreement of Purchase and Sale was executed in good time, and was conditional upon the purchasers securing financing as well as a satisfactory home inspection. The day after the signing of the Purchase and Sale Agreement ("Agreement") the purchasers requested and the Beauchamps agreed to fill out and sign a document called a Seller Property Information Statement ("SPIS"). The SPIS is typically used as a type of additional warranty in that the sellers are given an opportunity to describe any pertinent information about the property and sign their names in promise that they have disclosed the truth, as they wholly know it.
The Soboczynskis went on to acquire the requisite financing, as well as a favourable home inspection. The conditions were waived and the sale closed.
Little did the purchasers know, nine days prior to closing the basement of the home had flooded. The Beauchamps believed it to be a one-time occurrence and simply repaired the damage, keeping silent about the incident.
The Soboczynskis eventually discovered the sellers’ omission after the basement flooded again under their ownership. The Soboczynskis had the problem assessed and spent over $20,000 dollars repairing the damage. They then sued the Beauchamps in tort for negligent misrepresentation, seeking to recover the money spent on repairs as well as other damages. The trial judge concluded that the entire agreement clause in the Agreement excluded any warranty given after the Agreement unless it was incorporated in the Agreement itself by way of a schedule or an amendment. Thus, since the SPIS was filled out after the Agreement was already signed, and wasn’t later incorporated into the Agreement, the trial judge dismissed the action, yet still chose to discuss costs leveling them at $25,000.
The Divisional Court revisited this case and overturned the trial judge’s decision stating that the SPIS was relevant to the transaction, and was not excluded by the entire agreement clause. The Divisional court chose to allow the Soboczynskis claim for the tort of negligence, and awarded costs based on the trial judge’s assessment.
The Court of Appeal’s Decision
The matter went on appeal to the Ontario Court of Appeal where the decision was closely reviewed and the law was clarified. The Court of Appeal relied on Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533 (C.A.), a case that concerned the effect of an entire agreement clause on warranties made after the execution of an agreement. The court insisted that an entire agreement clause does not prevent the parties from affecting changes to the agreement or from entering into further obligations. Furthermore, an entire agreement clause never applies prospectively unless explicitly indicated. It is to be used as a tool to clearly indicate that no party to the contract can rely on any previously made warranties that are not contained in the present agreement. The entire agreement clause effectively proclaims, "At this moment in time this is the complete contract and all its terms".
Although affirming the Divisional Court’s understanding of the law with regards to the operation of an entire agreement clause, the Ontario Court of Appeal ultimately rejected the Divisional Court’s decision by clarifying the test for negligent misrepresentation.
The Court turned its attention to Hedley Byrne & Co. v. Heller & Partners Ltd. (1963),  A.C. 465 (U.K. H.L.); Queen v. Cognos Inc., 1993 CanLII 146 (SCC),  1 S.C.R. 87, at p. 110 to illustrate the five elements of negligent misrepresentation: "(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."
The Court affirmed that the first three elements were met, however pointed out that the Soboczynskis case failed on the fourth element. To establish reasonable reliance, the Court explained, one must show that the misrepresentation caused them to act to their detriment. There was no reasonable reliance established because when the home inspection condition was waived the flooding in question did not occur, so there was no misrepresentation to rely on in the first place. Furthermore, the Court couldn’t find any evidence to support a claim that the inspector who completed the home inspection for the Soboczynskis had relied on the SPIS.
The Court also addressed the Soboczynskis reliance on the misrepresentation made in terms of their losing a choice for recourse under s. 14 of the Agreement of Purchase and Sale, which would allow them to rescind the offer amongst other remedies. Although in this formulation, the purchasers did indeed rely on an existent misrepresentation and unknowingly chose not to exercise their rights as afforded by s. 14 that reliance could not lead to any detriment. The Court explained that in accordance with the Agreement of Purchase and Sale the transaction had to go through; the SPIS was not incorporated into the Agreement and was thus a separate warranty; its non-satisfaction would not allow the purchasers the opportunity to exercise any s. 14 rights.
Words matter: contracts are legal documents which are signed to be relied upon in the future. It is our opinion that any individual involved in the purchase or sale of real property or in the execution of any contract must treat the document with the appropriate attention and respect. People engaged in the signing of agreements should also be mindful of the timing of when various documents are introduced and the representations made before and after a "deal" is made. In the context of this case, a single clause in an agreement (and a written statement that followed) was the subject of much litigation that included an appeal to the highest court in Ontario.
The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.