a ia) MISREPRESENTATION A. INTRODUCTION When one party has induced another party to enter into an agreement by making a material statement of fact that is false, a variety of reme- dies may be available to the misrepresentee, both at common law and in equity. The principal remedy is that of rescission, which, if available, has the effect of unwinding or setting aside the agreement. The remedy of rescission is available only if the parties to the agreement can be restored to their initial position in the sense that there must be possi- ble a giving back and a taking back of benefits received by both parties. In this sense, the remedy is restitutionary in nature. The setting aside of the agreement will be accompanied by restitutionary relief for both parties. If the misrepresentation was made fraudulently, in the sense that either the misrepresentor knew that the statement was false or made the statement “recklessly and without care, whether it was true or false, and not with the belief that it was true,” the resulting agree- ment could be rescinded at common law. In equity, however, a decree of rescission could be granted even in a case where the misrepresenta- tion was innocently false in the sense that the misrepresentor did not make the statement with fraudulent intent. The availability of rescis- sion, however, is curtailed by the existence of a number of traditional 1 Redgrave v Hurd (1881), 20 Ch D 1 at 13 (CA) [Redgrave v Hurd], Jessel MR. 359360 THE LAW OF CONTRACTS limitations or defences and, where such limitations apply, the misrep- resentee may wish to pursue other forms of relief. As well as or as an alternative to rescissionary relief, the misrepre- sentee may in certain circumstances pursue claims for compensation in tort. Where an agreement has been induced by a fraudulent misstate- ment, the tort of deceit has been committed and the misrepresentee will be entitled to recover compensatory damages. Although tortious liability for fraudulent inducement of agreements has a lengthy history,” it was not until the latter part of the twentieth century that the tort of negligence was extended to cover economic loss sustained as a result of negligent misstatements.’ This form of liability was, in due course, extended to embrace claims for injuries sustained as a result of enter- ing into unattractive agreements induced by negligent misstatement.’ The measure of relief in tort extends to compensation for all losses occasioned by the tortious misconduct and is thus more comprehen- sive than the restitutionary relief that accompanies rescission of the agreement.° Before considering the various remedial alternatives available in the context of misrepresentation, we turn to an account of the ele- ments of operative misrepresentation and a consideration of the extent to which non-disclosure of a fact may constitute misrepresentation in the requisite sense. We will also consider the suggestion made by some that a duty to disclose facts might be imposed where a standard of good-faith conduct so requires. B. THE ELEMENTS OF MISREPRESENTATION In order to provide a basis for rescissionary relief, the misrepresenta- tion must be a statement of present or past fact that is false. For these purposes, statements of fact are distinguished from mere “sales talk,” from statements of opinion or belief, from statements of intention or promises and, under traditional doctrine at least, from statements of law. Further, the fact that is misstated must be material to the decision 2 See, for example, Derry v Peek (1889), 14 AC 337 (HL) [Derry]. 3 Hedley Byrne & Co v Heller & Partners Ltd, [1964] AC 465, [1963] 2 All ER 575 (HL) [Hedley Byrne]. 4 Esso Petroleum Co v Mardon, {1976] QB 801 (CA) [Mardon]; Sodd Corporation v Tessis (197), 17 OR (2d) 158, 79 DLR (3d) 632 (CA) [Sodd v Tessis]. For discussion of the difference between the restitutionary and tort measures of relief, see Chapter 1, Section C.Misrepresentation 361 of the misrepresentee to enter the agreement and the misstatement must serve as an inducement to the making of that decision. 1) Sales Talk Vague and imprecise expressions or statements puffing or aggrandizing the virtues of, for example, a seller's product are not relied upon by a reasonable purchaser. Such statements are mere sales talk, “puffery” or “dealer's talk” and not statements of fact that, if false, provide a founda- tion for legal remedies. Thus, statements by a seller of land that the land is “improved” or is an “uncommonly rich” water meadow" or “fertile and improvable at moderate cost”® or an exaggerated estimate of the value of a crop produced by the land to be sold? have all been held to be mere sales talk that affords no ground for relief. In some cases, how- ever, vague commendatory language from a seller who has privileged information concerning the subject matter of the sale may be taken to include an implicit statement of fact. Thus, the statement by a seller of a used car that it was a “good little bus” was characterized as an implicit statement of fact that the vehicle met a minimum standard of road- worthiness.'” Similarly, the seller of a house who had acted as his own contractor in building the home and who was aware of serious defects in the construction was held to have made a misrepresentation when describing the house as “well built." 2) Opinion The distinction between statements of fact and statements of opinion is similarly intended to exclude, as a basis for relief, statements upon which the misrepresentee would not reasonably rely. Thus, where an opinion is offered by someone who has no particular expertise in the matter in question, the statement would be considered to be one of opinion rather than one of fact. A reasonable person would not rely on such an opinion. Thus, an estimate by a vendor of land who estimated the sheep-bearing capacity of the land was held to have been a mere 6 — Andronyk v Williams (1985), 21 DLR (4th) 557 (Man CA), leave to appeal to SCC refused (1986), 42 Man R (24) 242n (SCC). 7 — Scotty Hanson (1829), 1 Russ & M 128, 39 ER 49 (Ch). 8 — Dimmock v Hallett (1866), LR 2 Ch App 21. 9 Rasch v Horne, [1930] 3 DLR 647 (Man CA) [Rasch y Horne] 10 Andrews v Hopkinson, [1957] 1 QB 229. 11 Mariani v Lemsira, [2003] OJ No 750 (SCJ).362 THE LAW OF CONTRACTS opinion on the matter.’? Similarly, estimates of the value of assets by non-experts are classified as matters of opinion.'* If an opinion con- cerns matters over which the representor obviously has no control, it is unlikely that the statement would be characterized as one of fact.'* How- ever, one who possesses superior knowledge or expertise with respect to the opinion offered may be held to have made an implicit statement concerning the nature of the information upon which the opinion is based. Thus, where the seller of a hotel indicated that the current les- see was “a most desirable tenant,” it was held that this amounted to a tacit assertion “that the facts peculiarly within his knowledge are such as to render that opinion reasonable.” Similarly, an oil company that induced a tenant to enter a lease of a service station on the basis of an inaccurate estimate of the likely volume of business at a particular intersection was held to have tacitly asserted that the study had been carefully executed.1© 3) Intention A representation that something will occur in the future is simply nota statement of fact. Promises are thus distinguishable from statements of fact and, if they are to bind the promisor, must meet the requirements for the enforceability of undertakings.” Accordingly, one who seeks to rely on a promise with respect to the future must seek a contrac- tual undertaking in order to do so. On the other hand, a promise with respect to the future may be characterized as an implicit statement of fact concerning one’s present intention. If a false statement of present intention is made either intentionally or carelessly, the statement is 12 Bisset v Wilkinson, [1927] AC 177 (PC). And see, for example, Trethewey v Girard (1983), 149 DLR (3d) 359 (BCSC) (private seller of boat represented to be sound). 13 See, for example, Knox v Bunch (1913), 11 DLR 377 (Alta SCTD); Burns v Brouse (1923), 24 OWN 585 (SCAD); Canada West Loan Co Ltd v Virtue, [1921] 1 WWR 730 (BCSO). 14 Rasch v Horne, above note 9 at 651, Robson JA. 15 Smith y Land and House Property Corp (1884), 28 Ch Div 7 at 15 (CA), Bowen LJ; Northern & Central Gas Co Ltd v Hillcrest Collieries Ltd, [1976] 1 WWR 481 at 529-32, Lieberman J 16 Mardon, above note 4. See also Rainbow Industrial Caterers Ltd v Canadian National Railway Co (1988), 54 DLR (4th) 43 (BCCA). 17 See generally Chapter 7.Misrepresentation 363 fraudulently or negligently false, and therefore gives rise to the normal remedies for misstatement." 4) Law Under traditional doctrine, statements of fact are distinguished from statements of law. This may, in part, be an application to the legal con- text of the distinction between statements of fact and statements of opinion. If so, one would expect that a statement of opinion as to law by one who has no expertise in the subject may, in appropriate cireum- stances, constitute an opinion on which one ought not to reasonably rely, Thus, a vendor of a land warrant who misrepresented the legal effect of the document because he was unaware of recent legislative change was held to have made a statement of law rather than fact.’° The distinction between statements of fact and law, however, is not typically explained as an application of the fact/opinion distinction. Perhaps this is because statements by a non-lawyer with respect to, for example, the lawfulness of certain conduct or the legal effect of a particular docu- ment would not normally be considered a legal opinion. Rather, such statements would be understood as statements of fact about the law, presumably gleaned from some reliable source. From this perspective, there appears to be little reason to distinguish between statements of fact and statements of law, and it is not surprising, therefore, that the distinction between fact and law has been notoriously difficult to apply in this and in other legal contexts. Thus, for example, statements with respect to “private rights” have been treated as statements of fact.”” Similarly, an inaccurate representation that nothing in a deed of con- veyance precluded the purchaser from carrying on his business was held to be a statement of fact.” In the context of restitutionary recovery 18 See Edgington v Fitzmaurice (1885), 29 Ch Div 459 at 483 (CA), Bowen L] (“the state of a man’s mind is as much a fact as the state of his digestion”); Prather v King Resources Co (1972), 33 DLR (3d) 112 at 118 (Alta SCAD), Allen JA. The fact that the representor’s plans change alter the contract has been entered into does not render an initial accurate representation of current intent tortious. See Intrawest Corp v No 2002 Taurus Ventures Ltd, 2007 BCCA 228 at paras 65-66 [Intrawest]. 19 See McKenzie v Dwight (1885), 11 OAR 381 (CA). See also Rule v Pals, [1928] 3 DLR 295 (Sask CA) [Rule v Pals]. A different result would be possible, presumably, if the representor possessed expertise with respect to the matter in question, on the basis that the legal opinion contained an implicit statement that it rested on a sound foundation. 20 MacKenzie v Royal Bank of Canada, [1934] AC 468 (PO. 21 Wauton v Coppard, [1889] 1 Ch 92.364 THE LAW OF CONTRACTS of money paid under a mistake, the traditional distinction between the rule permitting recovery of money paid under mistake of fact and that denying relief where the money was paid under mistake of law, has more recently been abolished.”? The underlying rationale for the denial of relief for representations of law has often been said to be the propo- sition that everyone should be taken to be cognizant of the law.» This is not a convincing justification for the doctrine. While the assumed legal knowledge principle is evidently pertinent to the determination of guilt in a criminal proceeding or of liability in a tort claim, it appears to be singularly inapt in the present context. It is one thing to hold that accuseds cannot defend themselves on the basis that they were unaware of the offence in question, quite another to suggest that since everyone is assumed to know the law, individuals who have entered into agreements on the faith of another party’s false statement concern- ing a material aspect of the law, cannot be heard to have relied on the statement. Indeed, the latter proposition is the opposite of common sense. The victim of the misstatement of law is as surely harmed as the victim of a misstatement of fact. It thus seems likely that, in due course, the distinction will be considered to be abolished in the present context as well.?> 5) Materiality The requirement that the misstatement of fact be material means that the misrepresentation must relate to a matter that would be consid- ered by a reasonable person to be relevant to the decision to enter the agreement in question. Thus, statements made by the solicitor in Red- grave v Hurd’ to a prospective purchaser of his practice that the income 22. See Canadian Pacific Airlines Ltd v British Columbia, [1989] 1 SCR 1133. And see generally PD Maddaugh & JD McCamus, The Law of Restitution, 2d ed (Toronto: Canada Law Book, 2004) ch 11 [Maddaugh & McCamus] 23 See, for example, Rule v Pals, above note 19. 24 See Ontario Law Reform Commission, Report on Amendment of the Law of Contract (Toronto: Ministry of the Attorney General, 1987) at 242 (recommending abolition of the distinction in this context for this reason). 25 Where the misrepresentation of law is made in the context of negotiating a settlement of a dispute, however, different considerations prevail, and the misrepresentee may reasonably be taken to have assumed the risk of failing to make appropriate inquiries. With respect to the role of mistake in the context of agreements of compromise, see generally Chapter 13, Section C. 26 See above note 1. And see, for example, Sanitary Refuse Collectors v Ottawa (City), [1972] 1 OR 296 (HJ) (misleading information re tender); F & B Transport Lid v White Truck Motor Sales Manitoba Ltd (1965), 51 WWR 124 (Man CA) (incorrectMisrepresentation 365 yielded annually was a certain amount was obviously material to the decision of the purchaser to acquire the practice. On the other hand, where the misrepresentation relates to a factual matter that is not of great consequence, the materiality threshold will not be met. Ina case where the vendors of property misrepresented the income yield of the property by a factor of less than 1 percent, the misrepresentation was not considered to be material.” 6) Inducement In addition to being shown to be material, the misrepresentation must have constituted an inducement to enter the agreement upon which the misrepresentee relied. Thus, a representee who undertakes his or her own separate investigation of the facts would not be held to have relied on the misrepresentation.”* On the other hand, it is clearly established that the representee has no obligation to engage in “due diligence” and make such an independent investigation, even where the means of doing so are made available by the misrepresentor.” Further, it is clearly established that the misrepresentation need not be the exclu- sive or even a predominant inducement for entering the agreement.*? It must be established, simply, that it was an inducement. Moreover, once it is established that a misrepresentation is of such a nature that it is liable to induce the misrepresentee to enter the contract, it would be presumed against the misrepresentor that such inducement did occur.’ Although, in Redgrave v Hurd,” Jessel MR suggested that an inference of law that inducement occurred arises in such circumstances, this view has not been accepted,* and it appears to be that the inference is one of fact rather than law.** model year of truck); Southwood Mall Ltd v Scardina, [1981] 6 WWR 569 (Man Co Ct) (shopping mall—misleading estimate of “tenant’s work” inducing lease). 27 Hinchey v Gonda, [1955] OWN 125 (HC)). 28 Attwood v Small (1838), 6 Cl & F 232, 7 ER 684 (HL). 29° See Redgrave v Hurd, above note 1 at 13. 30. See McCallum v Proctor (1914), 26 OWR 481 (SCAD); Fleming v Boulthee (1929), 37 OWN 293 (HC) 31 Mathias v Yetts (1882), 46 LT (NS) 497 (CA); Baker v Guaranty Savings & Loan Association, [1931] SCR 199 at 208. 32 Above note 1 at 21. 33. See, for example, Smith v Chadwick (1884), 9 App Cas 187 at 196 (HL), Lord Blackburn (rejecting this view). 34. See, for example, LK Oil & Gas Ltd v Canalands Energy Corp (1989), 60 DLR (4th) 490 (CA), leave to appeal to SCC refused, [1990] 1 WWR lxxin (SCC).366 THE LAW OF CONTRACTS C. NON-DISCLOSURE AS MISREPRESENTATION The traditional doctrine concerning contract formation holds that a party negotiating an agreement is not subject to a duty to disclose material facts to the other party.» Nonetheless, there are exceptional circumstances in which silence or non-disclosure is treated, in effect, as misrepresenta- tion and provides a basis for rescission of the ultimate agreement. First, misrepresentation has been found in the context of half-truths, that is, partial disclosure of true facts that creates a misleading impression. In a leading case,” the plaintiffs were purchasers of a property that they intended to use for a brickyard. The vendor himself had indicated to the purchaser that he thought there were restrictive covenants that might prevent the property's use for that purpose. The plaintiffs asked the ven- dor's solicitors if there were any restrictions on the use of the property. The solicitor replied that he was not aware of any. This was literally true. Unfortunately, however, the solicitor did not go on to explain that he had not checked to determine whether this was so. In fact, the land could not be used lawfully for these purposes. This half-truth made on the vendor's behalf provided a basis for rescission. A second exception to the traditional rule relates to conduct typ- ically referred to as “active concealment” of the truth. In a Manitoba case,® for example, the owner of a small apartment block who intended to put it up for sale noticed a crack in one wall that appeared to be rather serious. He sought advice from a structural engineer who recom- mended substantial and expensive repairs. Rather than repair the build- ing, the owner concealed the crack by covering it over with matching bricks. The property was then placed on the market. The eventual sale was rescinded for misrepresentation. Similarly, it has been held that refusal to grant a purchaser of real estate access to the premises for fear 35 Smith v Hughes (1871), LR 6 QB 597 (Div Ct). And see Chapter 13, Section B. 36 See generally SM Waddams, “Pre-contractual Duties of Disclosure” in P Cane & J Stapleton, eds, Essays for Patrick Atiyah (Oxford: Clarendon Press, 1991) at 237-56; S O'Byrne, “Culpable Silence: Liability for Non-disclosure in the Contractual Arena” (1998) 30 Can Bus LJ 239. And see EA Farnsworth, “Comment on Waddams” (1991) 19 Can Bus LJ 351 37 Nottingham Patent Brick and Tile Co v Butler (1886), 16 QBD 778 (CA). See also Doon v Wills (1996), 5 RPR (3d) 282 (BCSC); MacLeod v Ruck (1985), 3 BCLR (2d) 35 (CA). See also Xerex Exploration v Petro-Canada, 2005 ABCA 224. A similar explanation may be offered for Souder v Wereschule (2004), 245 DLR (4th) 385 (Alta CA) [Souder v Wereschuk] (separation agreement —non-disclosure of lottery winnings in husband's statement of assets) 38 Gronau v Schlamp Investments Ltd (1974), 52 DLR (34) 631 (Man QB) [Gronau].Misrepresentation 367 that a visit would reveal a significant defect in the property constituted fraudulent concealment.” A third exception imposes a duty to disclose where changing cir- cumstances affect the truth of an earlier statement. In a leading case,° O'Flanagan, a medical doctor, accurately advised a prospective pur- chaser of his practice that it was bringing in £2,000 a year. Before the contract was entered into, however, O’Flanagan became ill and his prac- tice became worthless. Failure to disclose this fact provided a ground for rescission. Apart from these exceptional cases involving misleading conduct, there are a few categories of contractual relationships that are consid- ered to be uberrima fides (that is, requiring the utmost good faith), with respect to which active duties to disclose are imposed. Insurance con- tracts are considered to be uberrima fides and both parties are required to disclose material facts to the other, failing which the contract is unenforceable.” Similarly, certain types of family arrangements involy- ing, for example, agreements to settle disputes concerning entitlements to family assets," are placed in this category. Contracts between parties who have a fiduciary relationship” are also classified as requiring the utmost good faith. Beyond these traditional exemptions and contracts uberrima fides, however, there are cases that cannot be easily explained within the traditional doctrine. Consider, for example, Bank of British Columbia y Wren. In this case, the bank sued to enforce certain written guar- antees given by the defendant to the bank as security for a loan made to a corporate party. Before signing the last guarantee, the defendant asked the credit manager of the bank about the current status of the collateral pledged by the borrower to secure the loan. The cre ager honestly answered that he did not know but would make inquiries. man- 39 See Abel vy McDonald (1964), 45 DLR (2d) 198 (Ont CA). 40. With v Olanagan, [1936] Ch 575 (CA). See also Hogar Estates in Trust v Shebron Holdings Ltd (1979), 101 DLR (3d) 509 (Ont HJ). 41 London Assurance v Mansel (1879), 11 Ch D 303; Joel v Law Union and Insurance Co, [1908] 2 KB 863 (CA). And see RA Hasson, “The Doctrine of Uberrima Fides in Insurance Law—A Critical Evaluation” (1969) 32 Mod L Rev 615. 42. Greenwood v Greenwood (1863), 2 De G. J & S 28, 46 ER 285; Gordon v Gordon (1819), 3 Swans 400, 36 ER 910. But not a separation agreement entered into by spouses. See also, however, Souder v Wereschuk, above note 37 (rescission of separation agreement on the basis of non-disclosure of lottery winnings). 43. See S(E) v HC) (1994), 120 DLR (th) 432 (Ont Gen Div), aff'd on other grounds (1996), 133 DLR (4th) 767 (Ont Ca). 44 (1973), 38 DLR (Gd) 759 (BCSC) [Wren]. See also Souder v Wereschuk, above note 37.368 THE LAW OF CONTRACTS Thereupon, the defendant signed the guarantee, not realizing that the collateral had previously been released by the bank. The court held, in these circumstances, that the plaintiff “in failing to disclose material facts”? had made a misrepresentation to the defendant and the guar- antee was rescinded. The Wren case cannot easily be explained within the established categories of cases requiring disclosure. Neither can the decision of the Ontario Court of Appeal in McGrath v MacLean*® in which it was held that a vendor of land may be under a duty to disclose the existence of latent defects that render the premises “unsafe for human habitation.” In an attempt to explain Wren, it might be argued that guarantees are a type of transaction that could or should be classified as uberrima fides. At the present time, however, it appears that contracts of guaran- tee are not so characterized.” It seems unlikely, moreover, that courts will consider that the negotiation of a guarantee imposes a duty on the principal creditor to disclose all material facts. Further, no such solu- tion appears available with respect to real estate transactions. It may be then, that the Wren and McGrath decisions may be considered to be harbingers of the adoption of a more generalized exception to the tra- ditional rule permitting non-disclosure of material facts in the context of contractual negotiations. D. NON-DISCLOSURE AND GOOD FAITH Under American law, an exception to the traditional rule that parties negotiating agreements have no duty to disclose material facts to one another is more “open-textured” than the more limited exceptions thus recognized to date in Canadian common law. In the American juris- prudence, the duty to disclose is often linked with a duty to act in good faith. Thus, Restatement (Second) of the Law of Contracts* provides in section 161(b) that a representor’s non-disclosure of a known fact will be treated as equivalent to a misrepresentation in the following circumstances: 45. Wren, ibid at 762. 46 (1979), 05 DLR (3d) 144 (Ont CA), leave to appeal to SCC refused, 7 April 1979, 47 See Hamilton v Watson (1845), 12 Cl & F 109 (HL); Royal Bank of Canada v Hislop (1990), 62 DLR (4th) 228 (BCCA); Royal Bank of Scotland ple v Etridge (No 2), [2001] 3 WLR 1021 at 1059 and 1082; J Cartwright, Misrepresentation, Mistake and Non-Disclosure (London: Sweet & Maxwell, 2012) at 809-10 [Cartwright]. 48 American Law Institute, Restatement (Second) of the Law of Contracts (St Paul American Law Institute, 1981) [Restatement of Contracts 2d).Misrepresentation 369 where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is mak- ing a contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing” The American cases” reflected in the Restatement of Contracts 2d rule include cases rather similar to the decisions in Wren and McGrath, dis- cussed above. More generally, the American cases appear to deal with situations where the information relates to a fundamental matter that, if disclosed, would cause the other party to refrain from entering the agreement and where the non-disclosure could not be justified on the ground that the informed party should be able to take advantage of his or her superior knowledge in the particular bargaining context. Thus, where a prospective employee indicated concerns about job security, the employer's failure to disclose the insecurity surrounding the posi- tion offered constituted misrepresentation by non-disclosure.* Simi- larly, an apostate priest was held required to disclose his status when applying for appointment to the faculty of a Catholic university.” Although no equivalent doctrine has yet been plainly recognized in Canadian common law, the Court of Appeal for Ontario, in a decision, has expressed support for the recognition of a similar duty to disclose where non-disclosure would constitute a failure to act in good faith. The disclosure issue in 978011 Ontario Ltd v Cornell Engineering Co”* arose in the unusual context of a services agreement that had been drafted by the prospective employee. Stevens, the president and prin- cipal owner of the employer, Cornell Engineering, had been a mentor and advisor of the prospective employee, Macdonald. When recruiting Macdonald, Stevens invited him to draft a services contract. Macdonald included in the draft a rather generous termination provision. When Macdonald presented the agreement to Stevens for signature, Stevens 49° hid at 431 50. See, for example, Obde v Schlemeyer, 353 P2d 672 (Wash 1960) (sale of property infested by termites); Federal Deposit Insurance Corporation v WR Grace & Co, 877 F2d 61+ (7th Cir 1989) (borrower obliged to disclose circumstances rendering the proposed collateral worthless). 51 Pearson v Simmonds Precision Products, 624 A2d 1134 (Vt 1993), 52. Fuller v DePaul University, 12 NE2d 213 (III App 1938). Compare with Courtwright v CP Ltd (1983), 5 DLR (4th) 488 (Ont HO), aff'd (1985), 18 DLR (4th) 639 (Ont CA) (similar result on basis of strained application of fiduciary duty doctrine), 53 (2001), 198 DLR (4th) 615 (Ont CA) [978011 Ontario]. See also GMAC Leasco Lid v 1348259 Ontario Inc, 2005 CanLII 3369 (Ont SCJ). Compare with Peel Condominium Corp No 505 v Cam-Valley Homes Ltd (2001), 53 OR (3d) 1 (CA).370 THE LAW OF CONTRACTS declined to read the agreement and simply asked whether Macdonald was satisfied with the terms of the agreement. Upon the eventual ter- mination of the employment, Macdonald sought to enforce the termi- nation arrangement. Cornell Engineering argued that it should have been made aware by Macdonald of the unusual nature of the termina- tion provision of the agreement. Thus, the issue raised for the court's consideration was whether a duty to disclose the nature of the term existed, notwithstanding the election of Stevens to forego a reading of the terms of the agreement. Although the Court of Appeal held that, in the circumstances, an individual who declined to examine the agree- ment was simply bound by its terms, the court nonetheless went on to consider whether, in other circumstances, a duty to disclose the nature of the term might arise. Although the court conceded that in the absence of a special rela- tionship “the common law in Canada has yet to recognize that in the negotiation of a contract, there is a duty to have regard to the other person's interests, namely, to act in good faith,”** the court went on to observe that there are, in fact, “circumstances where the law requires more than self-interested dealing on the part of a party.”*° Such cir- cumstances arise where, firstly, one party “relies on the other for infor- mation necessary to make an informed choice and, secondly, the party in possession of the information has an opportunity, by withholding (or concealing) information, to bring about the choice made by the other party.” In refining this analysis, the court placed reliance on an article by Finn” in which the author advocated recognition of a duty to disclose where required by a good-faith standard. More particularly, the court adopted the suggestion by Finn that the following five factors would indicate situations where the duty to disclose should be imposed: ()) A past course of dealing between the parties in which reliance for advice, etc., has been an accepted feature; 2) The explicit assumption by one party of advisory responsibilities; (3) The relevant positions of the parties particularly in their access to information and in their understanding of possible demands of the dealing; ) The manner in which the parties were brought together, and the expectations that could create in the relying parties; and 54 978011 Ontario, ibid at 625, Weiler JA. 55 Ibid at 626. 56 Ibid. 57 See P Finn, “The Fiduciary Principle” in T Youdan, ed, Equity, Fiduciaries and Trusts (Toronto: Carswell, 1989) 1 at 10-24 [Finn].Misrepresentation 371 (5) [Whether “trust and confidence knowingly [has] been reposed by one party or the other.”® The court then applied these factors to the circumstances of this case and found that in each instance, the factors weighed against, rather than in favour, of the imposition of a duty to disclose. In essence, the relative seniority of Stevens, the mentoring relationship he had over the years with Macdonald, and his decision not to read a rather straight- forward document, weighed against imposing a duty of disclosure on Macdonald. If Macdonald had been aware that Stevens was mistaken as to the terms of the agreement, an error of this kind would, on trad- itional principles, prevent formation of the agreement.” This point was not pursued by the court, however, and the discussion thus appears to suggest that even in the absence of an awareness of the other party's error, the party with superior knowledge of material facts, including the terms of the agreement to be signed, could be subject to a duty to disclose on the basis of the five-factor test articulated by Finn. If such a duty is to be recognized, of course, it will require the drawing of a somewhat delicate line between situations where a party negotiating an agreement ought to be able to profit from superior knowledge and situations where such behaviour is considered inappropriate. Amer- ican experience suggests that a possible guideline in making this dis- tinction would be to consider whether the information in question was acquired intentionally by the bargainor with superior knowledge and, perhaps, where it can be argued that the financial incentive of being able to profit from the acquisition of such knowledge provides a useful stimulus to commercial activity of the kind in issue. Although this criterion would, no doubt, be difficult to apply, it does usefully sig- nal the importance of avoiding the imposition of disclosure obligations that will both surprise commercial actors and reduce unattractively the incentives for investing in the acquisition of superior knowledge. In considering whether a duty of good-faith disclosure might arise in the context of contractual negotiations, it is important to distin- guish this issue from the question of whether parties to an agreement have a duty to perform their contractual obligations in good faith. In its leading decision in Bhasin v Hrynew,” the Supreme Court of Canada 58 Above note 53 at 626-27, quoting Finn, ibid at 20. 59. See Smith v Hughes, above note 35, for discussion of which, see Chapter 13, Section B, 60 See AT Kronman, “Mistake, Disclosure, Information, and the Law of Contracts” (1978) 7 J Legal Stud 1; EA Farnsworth, Farnsworth on Contracts, 2d ed (New York: Aspen, 1998) at 453-56. 61 2014 SCC 71, [2014] 3 SCR 494.372 THE LAW OF CONTRACTS recognized the existence of an underlying principle requiring good-faith contractual performance that provides a foundation for a series of four rules requiring specific types of good-faith performance —controlling, the proper exercise of contractual discretionary powers, requiring cooperation in the achievement of contractual objectives, refraining from devious evasion of contractual obligations, and being truthful in the course of performance. These duties come into effect once an agree- ment has been entered and are thus not relevant in the present context of pre-contractual negotiations. However, these duties do come into effect and are relevant where contractual negotiations are required by a particular contractual provision. A common example arises where an existing contract stipulates an obligation imposed on both parties to negotiate or to negotiate in good faith the arrangements for a renewal of the existing contract. A contractual duty to negotiate would be sub- ject to the rules set forth in Bhasin. We consider elsewhere the general duties to perform contracts in good faith,” and their application to contractual obligations to negotiate." E. RESCISSION AND RESTITUTION A party who is able to establish that an agreement was induced by an operative misrepresentation may seek the remedy of rescission. In essence, the remedy of rescission involves an unwinding or setting aside of the contractual relationship between the parties. Upon rescis- sion, the as yet unperformed obligations of the party become unen- forceable. With respect to obligations that have been performed, an agreement that is subject to the remedy of rescission is voidable rather than void ab initio, with the consequence that the agreement is con- sidered to be an enforceable one until a rescission of the agreement is achieved. Upon rescission, however, the parties are to be restored to their initial pre-contractual position by requiring restoration of bene- fits transferred under the agreement. In this sense, then, the rescission of the contract in question has a retrospective or ab initio effect. Thus, in the case of a rescission of a simple contract for the purchase and sale of goods, rescission will be coupled with return of the goods to the seller and a return of the purchase price to the buyer. During the period prior to rescission of the agreement, however, the fact that the agreement is voidable rather than void has the effect that property in 62 Chapter 21 63 Chapter 5, Section C.Misrepresentation 373 the goods in question would pass to the buyer in the manner intended by the parties until such time as rescission has the effect of revesting the property in the goods in the seller. There are a number of limitations or “bars” to rescissionary relief. The most important of these is that relief will not be available if it is not possible to effect a mutual restoration of the benefits conferred by the parties, one upon another, or, as is sometimes said, a restoration of the status quo ante or a restitutio in integrum. Upon an equitable decree of rescission, then, any orders required to effect a mutual restoration of benefits conferred would be issued. Indeed, courts of equity possessed a greater ability than courts of common law to tailor orders with this objective in mind. Hence, even in the case of fraudulent misrepresen- tation, the misrepresentee might choose to seek a decree of rescission in equity. Although the remedy of rescission for misrepresentation developed initially in equity, it ultimately came to be recognized that in cases of fraudulent misrepresentation, the courts of common law would also treat agreements induced by fraud as voidable.“ In equity, however, the remedy was not limited to cases of fraud. Equitable rescis- sion is available for agreements induced by merely non-fraudulent or innocent misrepresentations. Equitable rescission of an agreement would normally be accom- plished by the obtaining of a judicial decree to this effect. Nonetheless, the action of a misrepresentee in giving notice of an election to rescind the agreement to the misrepresentor may have the practical effect of achieving rescission because the ultimate decree of rescission would normally treat the rescission as effective on the date of giving notice of the election to rescind. In this limited sense, then, rescission may be considered to be a “self-help” remedy.” Indeed, if a mutual restoration of the parties can be achieved without judicial intervention, the elec- tion to rescind coupled with restoration could render a judicial pro- ceeding unnecessary. If, however, either the misrepresentor brought an action to enforce the agreement against the misrepresentee or the misrepresentee required judicial intervention in order to effect a resto- ration of the status quo ante, the misrepresentee would be required to seek a rescissionary decree in order to achieve an effective rescission of the agreement. 64 Erlanger v New Sombrero Phosphate Co (1878), 3 App Cas 1218 (HL). Thus, courts of common law would not allow relief to a misrepresentee who had received but not restored an asset, thus forcing the misrepresentee to seek rescission in equity, which could be achieved only by restoring the asset to the transferee. 65. See generally J O'Sullivan, “Rescission as a Self-Help Remedy: A Critical Analysis” (2000) 59 Cambridge LJ 509; Cartwright, above note 47 at 121-23.374 THE LAW OF CONTRACTS Although notice of an election to rescind would normally be effective upon communication of the election to the misrepresentor,*° communication of the election to rescind may not be required in all circumstances. Thus, in Car & Universal Finance Co Ltd v Caldwell,” the seller of a car was held to have effectively rescinded the agreement of sale even though no communication with the misrepresentor had taken place. In this case, a buyer, acting fraudulently, purchased the car from the seller in return for a cheque that was subsequently dishon- oured. When the seller discovered the fraud, he was unable to find the purchaser but he immediately contacted the police and the automobile association. Subsequently, the buyer sold the car to a good-faith pur- chaser. It was held by the Court of Appeal that the seller had effectively rescinded the agreement by contacting the police and the automobile association, this being all that the seller could reasonably do in the cir- cumstances. Accordingly, title to the car did not pass to the third-party purchaser. This exception to the general requirement that notice of the election to rescind be communicated to the misrepresentor is not likely to be extended, however, beyond the circumstances of this case.®* Thus, in the absence of fraud or, perhaps, of a situation in which the misrep- resentor has made the giving of notice impossible, the requirement of actual notice of the election to rescind is very likely to obtain. 1) Restoration of the Status Quo Ante Under traditional doctrine, the decree of rescission will not be made available in a case where a restoration of the status quo ante is not pos- sible. Such a restoration is obviously possible where the benefits that have passed between the parties can be restored in specie. The more difficult question, however, is whether rescission can be granted in cir- cumstances where this is not literally true—for example, where goods that have been transferred have perished. Similarly, in the case of the sale of a business, the possible deterioration in the value of the busi- ness and the profits made by the purchaser while in possession of the 66 Abram Steamship Co v Westville Shipping Co, (1923] AC 773 at 781, Lord Atkinson, See also Guarantee Co of North America v Gordon Capital (1999), 178 DLR (4th) 1 at para 39, Bastarache J. 67 [1965] 1 QB 525 [Car & Universal Finance} 68 For criticism and suggested reform of the doctrine so as to require notice, see Ontario Law Reform Commission, Report on Sale of Goods, vol 2. (Toronto: Attorney General, 1979) at 276. 69 See, for example, Morin v Anger (1930), 66 OLR 327 (SCAD); Lowe v Suburban Developers Ltd, [1962] OR 1029 (CA); Blanchette v Shabatowski (1981), 29 AR 158 (QB); Kingu v Walmar Ventures Ltd (1986), 10 BCLR (2d) 15 (CA) [Kingu].Misrepresentation 375 business may complicate the exercise effecting a restitutio in integrum. Courts of equity were able to achieve practical justice in such cases by coupling a decree of rescission with orders for an accounting of profits or an indemnity. As Lord Blackburn observed in Erlanger v New Som- brero Phosphate Co? “But a court of equity could not give damages, and, unless it can rescind the contract, can give no relief. And on the other hand, it can take accounts of profits, and make allowance for deteriora- tion. And I think the practice has always been for a court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.””" The objective of such awards is restitutionary in nature, however, rather than providing a more comprehensive award of damages for injuries sustained as a result of entering into the agreement.” In Whit- tington v Seale-Hayne,”* for example, the plaintiff had entered into an agreement to lease a farm on the faith of a false representation that the property was in a sanitary condition. The plaintiff lessee took posses- sion of the property and incurred various expenses in the course of conducting a poultry business. The plaintiff purchased poultry stock, made certain improvements to the premises in the form of repairs required by the local municipality and paid taxes on the property. The plaintiff sought, in addition to rescission of the agreement, compensa- tion for the poultry stock that died as a result of the unsanitary condi- tions, for the improvements made to the premises, and for the municipal taxes paid on the property. As well, the plaintiff claimed for the profits that could have been made on the poultry business were it not for the unsanitary condition of the premises. In the result, the plaintiff recov- ered only the cost of the improvements and the municipal rates, both of which expenditures had conferred value on the misrepresentor. The other items of loss required compensation of a kind that was not avail- able in equity. The courts are more prepared to exercise their discretionary pow- ers to unwind a transaction in a case of fraud than in a case of inno- cent misrepresentation. This proposition was relied upon by the British Columbia Court of Appeal in rescinding an agreement for the pur- chase of a motel company in Kupchak v Dayson Holdings Co Ltd.* The 10 Above note 64. TL Ibid at 1278. See also Wandinger v Lake (1977), 78 DLR (3d) 305 at 315 (Ont HC)), Lerner J 72 Newbigging v Adam (1886), 34 Ch D 582 (CA). 73 (1900), 82 LT 49 (Ch). 74 (1965), 53 DLR (2d) 482 (BCCA) [Kupchak].376 THE LAW OF CONTRACTS Kupchaks had purchased the shares of a motel company from Dayson Holdings in return for two properties conveyed to the holding company and mortgages taken back by the holding company on the assets of the motel company securing payment of the remainder of the purchase price. The Kupchaks took possession of the business and operated it for only a few months before discovering that Dayson Holdings’ represen- tations with respect to the profitability of the business were fraudulent falschoods. This discovery led to an exchange between the lawyers rep- resenting each party and a threat by the Kupchaks to withhold mort- gage payments until the dispute was resolved. Subsequently, Dayson Holdings sold an undivided half-interest in one of the properties that it had acquired from the Kupchaks and erected an apartment building on the premises. More than one year later, the holding company unsuc- cessfully sought foreclosure of the mortgage and the Kupchaks, who remained in possession of the premises and continued operating the business, sought rescission of the agreement. In defending the rescis- sion claim, the holding company relied on its inability to restore to the Kupchaks the now-jointly owned premises upon which the apartment building was located. The Court of Appeal held that Dayson Holdings could not resist rescission on the basis of its own dealing with prop- erty it had acquired by fraud and granted rescission of the transaction. In lieu of requiring restoration of the effected property, however, the court substituted an order requiring Dayson Holdings to compensate the Kupchaks for the value of that property at the time of the initial transfer to the holding company. Although it had been submitted by Dayson Holdings that such compensation is “more like damages” than an account or indemnity, the court held that it had the jurisdiction to order a compensation that was designed to “effect substantial restitu- tion”” under a decree for rescission. We will return later in this chap- ter to a consideration of whether such monetary restitutionary awards might be made even in the absence of a decree of rescission. 2) Affirmation Just as a party may elect to rescind an agreement on the basis of mis- representation, so too a party may elect to affirm the transaction. Such an affirmation will be irrevocable. The affirmation can arise, however, only after the misrepresentee becomes aware of the nature of the mis- representation. Further, to be effective, the affirmation must constitute an informed choice in the sense that it requires knowledge that the 75 Ibid at 486,Misrepresentation 377 falsehood gives rise to a right to terminate the transaction. Thus, an English case” holds that, in circumstances where the misrepresentee obtained legal advice but was not made aware of the right to rescind for misrepresentation until he retained the services of a second solic- itor, the misrepresentee retained the right to rescind until he became aware of its existence. The affirmation may be communicated by words or inferred from conduct. Thus, affirmation may be inferred from the fact that after learning of the misrepresentation, the misrepresentee continued with’ or demanded performance of the contract.” Similarly, where a manufacturer was induced to lease machines on the faith of a misrepresentation, continued use of the machines after learning of the misrepresentation has been held to preclude rescission for misrep- resentation.” The possibility of affirmation by conduct was at issue in Kupchak." After learning of the misrepresentation, the Kupchaks remained in possession of and operated the hotel business for more than a year. The British Columbia court held that the conduct of the Kupchaks did not amount to affirmation. Shortly after learning of the misrepresentation, their solicitors had communicated the Kupchaks’s concerns to Dayson Holdings in such a manner as to signal an inten- tion to repudiate. Moreover, as it was not feasible for the Kupchaks to force a restoration of the hotel business upon Dayson Holdings, their conduct in continuing to manage the business was reasonable in all the circumstances. Conduct that leads the misrepresentator to reasonably believe that affirmation has occurred, however, will communicate affir- mation and, alternatively, may give rise to the application of estoppel doctrine.’ 3) Intervention of Third-Party Rights It follows from the proposition that transactions induced by misrep- resentation are voidable rather than void that the title to any property 76 Peyman v Lanjani, [1984] 3 All ER 703. And see Coastal States Pty Ltd v Melevende, [1965] VR 433. See also Barron Estate v Kelly, [1918] 2 WWR 131 (Sco). TT Grant Campbell & Cov Devon Lumber Co Ltd (1914), 7 OWN 209 (SCAD). 78 Panzer v Zeifman (1978), 88 DLR (3d) 131 (Ont CA), 79 United Shoe Machinery of Canada v Brunet, [1909] AC 330 (PC). See also Long v Lloyd, (1958] 1 WLR 753 (CA) (continued use of lorry) 80 Above note 74. See also Kellogg Brown & Root Inc v Aerotech Herman Nelson Inc (2004), 238 DLR (4th) 594 (Man CA) [Kellogg Brown & Root] 81 See, for example, Peyman v Lanjani, above note 76. A subjective intent to affirm would not be necessary to ground an estoppel. See Cartwright, above note 47 at 150. And see generally Chapter 8.378 THE LAW OF CONTRACTS acquired under the agreement by the misrepresentor is a voidable one. Until such time as the title is avoided, however, the misrepresentor holds legal title and can pass title in the asset to a bona fide purchaser for value without notice of the underlying equity or difficulty with the title. The policy underlying this equitable principle is evidently that if a choice must be made between favouring the interests of one who has been induced into a contract by misrepresentation and has either not discovered the problem or, if the problem has been discovered, has not taken action to effect a rescission of the contract and another party who has purchased the property in good faith from the misrepresen- tor, the interests of the latter should be preferred. Once the election to rescind has been taken, however, equity avoids the title of the trans- feror and in the contest between the misrepresentee and a subsequent purchaser of the asset, the rights of the misrepresentee are preferred. Under this approach, then, one who, albeit innocently, gives up pos- session of assets on the faith of a misrepresentation is at risk of the intervention of third-party rights until such time as the misrepresenta- tion is discovered and reasonable steps have been taken to unwind the transaction. Generally, the misrepresentee who has elected to rescind must notify the misrepresentor of that election. As we have seen, how- ever, in exceptional circumstances, where such communication is not possible, other reasonable steps may be held to constitute an effective election to rescind.** 4) Execution of the Agreement Execution or performance of the agreement has been held to constitute a barrier to rescission in a variety of contexts. In the context of real estate transactions induced by innocent misrepresentation, for example, the execution doctrine has been applied rather rigidly to the effect that once that transaction closes by transfer of the purchase price in exchange for a conveyance of the property in question, the transaction can no longer be rescinded for misrepresentation. The rigidity of the doctrine is well illustrated by the decision of the Supreme Court of Canada in Redican v Nesbitt? This case involved the purchase of a leasehold property. The transaction closed with the exchange of an assignment of the lease and a cheque for the purchase money. A few days later, upon learning that the premises had been misdescribed in material respects—this being alleged by the purchaser to be the first opportunity to discover these 82 See Car & Universal Finance, above note 67. 83 [1924] SCR 135.Misrepresentation 379 problems—the purchaser stopped payment on the cheque and sought rescission of the agreement. In response to the argument that the exe- cution of the contract precluded rescission, the purchaser argued that the payment by cheque was merely conditional and, as payment had not been achieved, execution had not yet occurred. The Supreme Court held that although the failure of the cheque to clear would give rise to a right of action on the part of the vendor, the parties had intended the transaction to close and the contract was therefore executed. Rescis- sion was therefore no longer available. The Court emphasized, however, that execution of the contract would not constitute a bar to rescission in a case of fraudulent misrepresentation.** Presumably, the somewhat rigid approach taken to the execution bar in the real estate context may rest on a perception that it is a customary practice for purchasers to investigate title and examine the subject premises prior to the closing of the transaction. As Redican v Nesbitt illustrates, however, the rule is capable of having a harsh effect in circumstances where an inspection on the premises cannot, as a practical matter, precede closing. Accord- ingly, the better view appears to be that execution should be consid- ered to be a material but not dispositive factor in determining whether rescission should remain available and there exists some judicial sup- port for this approach. Traditionally, the execution bar has also been applied in the contexts of sale of securities* and sale of goods so as to preclude rescission. In the latter context, however, this limitation has been applied more flex- ibly in the modern cases. In Leaf v International Galleries,” Denning LJ suggested that innocent misrepresentation might provide a ground for rescission even after execution. Lord Justice Denning reasoned, how- ever, that the right to rescind for misrepresentation could not survive beyond the point in time when the right to terminate the contract for breach of contract would expire, on the ground that “an innocent 84 In this context, the Court indicated, rescission would be barred only by an inability to make restitutio in integrum. Where that inability results from the conduct of the wrongdoer, however, it will not constitute a bar to rescissionary relief. See ibid at 152; Kupchak, above note 74. 85. S-244 Holdings Ltd v Seamore Building Systems Ltd, [1994] 8 WWR 185 at 190 (BCCA), Cumming JA [5-244 Holdings] 86 Seddon v North Eastern Salt Co Ltd, [1905] 1 Ch 326, 87 [1950] 2 KB 86 (CA) [Leaf]. 88 Under the applicable provisions of sale of goods legislation, that right would expire when, after the lapse of a reasonable period of time he retains the goods without intimating to the seller that he has rejected them, See, for example, Sale of Goods Act, RSO 1990, ¢ $.1, 5340.380 THE LAW OF CONTRACTS misrepresentation is much less potent than a breach of contract.”* In the circumstances of this case, the time was well past for either form of relief and it was therefore not necessary for Denning LJ to offer guidance on the nature of the limitation to be applied to rescission. It appears rather likely, however, that the courts will permit rescission until there has occurred, as the Manitoba Court of Appeal has observed, “the passage of a reasonable period of time for the purchaser to determine whether representations are true.”*° Moreover, special circumstances may arise where a seller, after discovering the misrepresentation, makes reason- able effort to use the goods for the stated purpose—especially in the face of the seller's assurances that the goods are fit—without losing the right to rescind.®*! The modern trend of permitting a more relaxed approach to the application of the execution bar has also been applied in the context of an agreement to supply services. In S-244 Holdings,” the British Columbia Court of Appeal granted rescission of a building contract in which the general contractor had, by its conduct, induced the subcontractor into a mistaken understanding of the scope of the work. The subcontractor completed the lesser scope of the work pursu- ant to this misunderstanding. Rescission of the agreement on the basis of the general contractor's innocent misrepresentation was granted subject to an order requiring the general contractor to pay the subcon- tractor the value of the work performed. As noted, the execution bar does not apply where the misrepresen- tation in issue is fraudulent. As well, Canadian courts have developed a doctrine to the effect that execution will not bar rescission in cases of “error in substantialibus.” This exception to the rule is of dubious pedi- gree—it appears to rest on a confusion of mistake doctrine with that of misrepresentation®’—but it nonetheless provides an attractive means of escape from what may appear to be harsh results occasioned by strict application of the execution bar. In O'Flaherty v McKinlay, Walsh CJ observed that execution would preclude rescission in a case of inno- cent misrepresentation, “unless it is such as to show that there is a complete difference in substance between that which was supposed to 89 Leaf, above note 87 at 90-91. Compare, however, the opinion of Lord Evershed MR, favouring retention of the traditional execution bar (see ibid at 94-95). 90 Ennis v Klassen (1990), 70 DLR (4th) 321 at 331 (Man CA), Huband JA 91 Kellogg Brown & Root, above note 80, 92. Above note 85. 93 GHL Fridman, “Error in Substantialibus, a Canadian Comedy of Errors” (1978) 56 Can Bar Rey 603. For discussion of mistake doctrine, see Chapter 13, Section C. 94 [1953] 2 DLR 514 (Nfld TD). See also Freear v Gilders (1921), 64 DLR 274 (Ont CA) at 276.Misrepresentation 381 be and what was taken, so as to constitute a failure of consideration.””” Although this test appears to apply only to misrepresentations involv- ing rather extreme consequences (whereas the ordinary test for oper- ative misrepresentation requires merely a material inducement), the “complete difference in substance” test is vulnerable to a liberal inter- pretation. Thus, in O'Flaherty itself, the problem concerned an inno- cent misrepresentation by a car dealer that a second-hand car being offered for sale to the defendant was a 1950 Hillman, whereas it was, in truth, a 1949 model. This unfortunate fact was discovered by the pur- chaser only after driving the car for 7,000 miles and effecting certain repairs. Notwithstanding the fact that there was very little difference between the two model years, the court held that the model year of a used car is a highly material matter and provided a basis for rescission of the transaction.” The error in substantialibus doctrine has often been applied in the context of fully executed real estate transactions.” 5) Laches Unreasonable delay in bringing a claim for rescission also constitutes an equitable defence to the claim. In an influential articulation of the defence in Lindsay Petroleum Oil Co v Hurd,® Sir Barnes Peacock stressed that mere delay alone would not constitute the defence. The delay must be such as to indicate that the misrepresentee has essen- tially waived the remedy or it must have created a situation in which the granting of relief would be unfairly prejudicial to the misrepresen- tor. He further explained: But in every case, if an argument against relief, which otherwise would be just, is founded upon mere delay, the delay of course not amounting to a bar by any statute of limitations, the validity of that defence must be tried upon principles substantially equitable. Two circumstances, always important in such cases, are the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy.” 95 Ibid at para 8. 96 Compare Hudson v Watson Motor Co, [1931] 3 WWR 621 (Man CA). 97. See, for example, Alessio v Jovica (1973), 42 DLR (3d) 242 (Alta CA); Hyrsky v Smith, [1969] 2 OR 360 (HCJ); Gronau, above note 38. Compare John Bosworth Ltd v Professional Syndicated Developments Ltd (1979), 97 DLR (3d) 112 (Ont HC). 98 (1874), LR 5 PC 221 99 Ibid at 240.382 THE LAW OF CONTRACTS The view that the availability of this defence rests on the weighing of the appropriateness of the relief from the misrepresentee’s perspective against the length of the delay and any resulting prejudice to the mis- representor is well accepted in Canadian cases.' 6) Merger in a Subsequent Warranty In the drafting of commercial agreements, it is not uncommon for the parties to repeat in the agreement itself representations that have been made during the course of the negotiation of the agreement. Often such provisions will take the form that the promissor “represents and warrants” that certain statements are truc.' When the former repre- sentation now becomes a term of the agreement, the falsity of the rep- resentation becomes a breach of contract, entitling the misrepresentee to the normal remedies for breach of contract.’ In the present con- text, however, we may consider whether the rescissionary remedy for the pre-contractual misrepresentation remains available. Although the point is not free from difficulty, the traditional position at common law appears to be that once the misrepresentation becomes repeated as a term of the contract, the rescissionary remedy is no longer available. In Pennsylvania Shipping Co v Compagnie Nationale de Navigation, a case concerning a time charter of a tanker, the charterer had asked, during the course of negotiating the agreement, for quite detailed informa- tion concerning the specifications of the vessel. The information was provided and then made the subject of explicit guarantees in the char- terparty agreement. The statements were not correct with the result that the vessel was unsuitable for the charterer’s purpose. The court held that rescission for pre-contractual misrepresentation was unavail- able to the charterer as the pre-contractual representations had merged with the warranties or guarantees in the agreement. Thus, the char- terer’s rights to terminate the contract rested on the proper analysis of his remedies under the agreement. This approach was justified by the English Court of Appeal in Leaf v International Galleries! on the basis that once the representation becomes a contractual term, sufficient 100 See, for example, Consolidated Investments Ltd v Acres (1917), 32 DLR 579 (Alta SC) and Kupchak, above note 74 101 See Chapter 18, Section D. 102 See chapters 22-24. 103 [1936] 2 All ER 1167 (KB). See also Woods v Borstel (1962), 34 DLR (2d) 68 (Alta SCAD) (sale of goods). Compare with Compagnie Francaise de Chemins de Fer Paris-Orleans v Leeston Shipping Co Ltd (1919), 1 LILR 235 at 237-38 104 Leaf, above note 87. See Section E(4), above in this chapter.Misrepresentation 383 remedies are available at common law for breach of contract and thus, the intervention of equity, with a rescission decree, is either unneces- sary or inappropriate. In England, this merger doctrine has been abol- ished by statute." In Canadian common law, however, it is likely that the traditional common law persists. As a practical matter, however, the point is not likely to arise with great frequency as the kinds of com- mercial agreements that contain explicit contractual representations are also likely to include contractual provisions precluding remedies for pre-contractual misrepresentations.!° 7) Restitution Without Rescission As we have seen," where a partial restoration of the properties trans- ferred to the other party remains possible, monetary compensation for that portion that cannot be restored may be substituted. A more diffi- cult question is whether monetary restitutionary awards might be made in a case where restoration of the property transferred is completely impossible. In principle, there does not appear to be a convincing rea- son against allowing such relief. Under traditional equitable doctrine, however, if restitution could not be granted, no relief whatsoever could be allowed. Granting pure monetary compensation appeared to imper- missibly trench on the compensatory jurisdiction of common law. The unattractive effect of this proposition, however, is that in such cireum- stances, the misrepresentor is simply allowed to retain the ill-gotten gain. A more satisfactory solution would be to allow, in appropriate circumstances, a monetary restitutionary claim for the benefit acquired through misrepresentation. In recent years, Canadian and English courts have, indeed, begun to recognize the availability of a monetary restitutionary claim in such circumstances in the context of transactions affected by unconscionability'* and undue influence’ and, indeed, of those induced by misrepresentation. Thus, the British Columbia Court of Appeal observed in Bank of Montreal v Murphy" that courts are not “confined to the remedy of rescission where a contract is induced by a misrepresentation and the awarding of a remedy of rescission does not do justice between the parties. In some cases, a money award may be given instead of rescission. In other cases, a money award may be given 105 See Misrepresentation Act 1967 (UK), ¢ 7, s l(a). 106 See Section G, below in this chapter. 107 Kupchak, above note 74. 108 See Chapter 11, Section D. 109 See Chapter 11, Section C. 110 [1986] 6 WWR 610 (BCCA).384 THE LAW OF CONTRACTS as well as rescission.”'"' In 2009, in Rick v Brandsema,'” the Supreme Court of Canada applied this approach in the context of a separation agreement voidable on the basis of unconscionability. The agreement could not be rescinded, but the husband was required to pay a monetary award equivalent to the unfair advantage gained through the unconscio- nable bargain. The Court did not consider whether a similar award of monetary restitution could be available in a case where rescission for misrepresentation is barred. In principle, however, there seems to be no reason why this form of relief would not also be potentially appli- cable in this context. An innovative approach of this kind would do much to mitigate the harsh results that may otherwise flow from strict application of the various bars to rescission. F. LIABILITY IN TORT One who is induced to enter into an agreement on the basis of a false statement of fact made by the other contracting party may be able to pursue a claim in tort. If the statement was fraudulently false, a claim may lie in the tort of deceit. If the statement was made negligently or carelessly, a claim may lie in the tort of negligence. The claim in deceit has a longer history."? In the leading case of Derry v Peek! Lord Her- schell set out the requisite intention for establishing the tort of deceit in the following terms: First, in order to sustain an action of deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) know- ingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an incident of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth." The claim in Derry v Peek was brought on the basis of an allegation that the directors of a corporation had made fraudulently false statements 111 Ibid at 615-16. See also 5-244 Holdings, above note 85. 112 2009 SCC 10. And see Chapter 24, Section D. 113 See Pasley v Freeman (1789), 3 TR 51 (KB). 114 Derry, above note 2. 115 Ibid at 374.Misrepresentation 385 in a prospectus that had induced the plaintiff to subscribe for shares in the company. A successful defence of honest belief was raised. The claim was thus one brought against a defendant whose fraud had allegedly induced the plaintiff to enter into an agreement with a third party, the company. It is well established, however, and indeed, it is the paradigm case, that recovery is possible where the injury suffered from the defendant's fraud is to have been induced by the fraud to enter into an agreement with the defendant.!'* Recognition of liability in negligence for carelessly made pre-con- tractual misstatements is, however, a more recent phenomenon. Indeed, liability for economic loss resulting from negligently false statements as a more general matter was established only in the latter half of the twentieth century. In 1963, in the leading case of Hedley Byrne & Co v Heller & Partners,'"’ the House of Lords recognized for the first time that liability in negligence for economic loss could be attracted by a carelessly false statement. The defendant bank had been approached by the plaintiff for gratuitous advice concerning the creditworthiness of one of the bank’s customers, with whom the plaintiff proposed to deal. The defendant gave a positive reference although, at the same time, it clearly disclaimed any liability for the accuracy of its advice. Relying on this advice, the plaintiff entered into dealings with the customer and suffered economic loss. Although the disclaimer led to the dismissal of the claim, the House of Lords nonetheless indicated that, in its absence, a claim could lie for negligent misrepresentation foreseeably relied upon with resulting economic loss. Canadian courts quickly followed the House of Lords in recognizing this new liability in tort.''* In the immediate wake of the decision in Hedley Byrne, however, it was not immediately apparent that this form of tort liability would be applica- ble in the context of pre-contractual misstatements inducing contracts with the misrepresentor. Initial resistance to the idea that it might so apply rested on an assumption that once the parties have entered into a contract, the contract itself ought to be the exclusive source of their mutual rights and responsibilities. Thus, in Hedley Byrne itself, Lord Reid observed: “[w]here there is a contract there is no difficulty as 116 See, for example, Archer v Brown, [1985] QB 401; Saunders v Edwards, [1987] 1 WLR 1116 (CA). A further alternative claim may be to “waive the tort” of deceit and sue for restitution of the benefits acquired by the tortfeasor through fraud. See, for example, Amertek Inc v Canadian Commercial Corp (2003), 229 DLR (4th) 419 (Ont SCJ), rev'd on other grounds [2005] OJ No 2789 (CA). And see Maddaugh & McCamus, above note 22, ch 24. LI7 Hedley Byrne, see above note 3. 18 See, for example, The Pas v Porky Packers Lid (1976), 65 DLR (3d) 1 (SCC).386 THE LAW OF CONTRACTS regards the contracting parties: the question is whether there is a war- ranty.”'? It seemed likely, however, that the Hedley Byrne form of lia- bility would be extended into the pre-contractual sphere. Hedley Byrne itself, after all, was a case in which it was accepted that a negligently false statement made by A, which induced B to enter into a contract with C, could expose A to tort liability in a suit brought by B. It would not be a dramatic extension of the doctrine then to impose liability ina case where the careless inducement is uttered by C rather than A. This step was first taken by the English Court of Appeal in Esso Petroleum Co v Mardon.”° In that case, a prospective tenant of an Esso service station was given a forecast by Esso of the estimated annual consumption of petrol at the particular location, which induced Mardon to enter into the service station lease. In the event, however, the volume of sales was much lower than had been predicted and Mardon, therefore, lost large sums of money. Ina claim brought by Esso to enforce the lease, Mardon successfully counterclaimed for damages on the alternative grounds of negligent misrepresentation and collateral contract.’*! With respect to the former claim, Lord Denning MR observed as follows: [If a man, who has or professes to have special knowledge or skill makes a representation by virtue thereof to another—be it advice, information or opinion —with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and the advice, informa- tion or opinion is reliable, If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side into a contract with him, he is liable for damages. Two years later, the new doctrine was applied by the Ontario Court of Appeal in Sodd v Tessis."”* In that case, the plaintiff was the purchaser of the stock of a bankrupt furniture business. In preparing its tender, 119 Hedley Byrne, above note 3 at 581 (All ER). See also J Nunes Diamonds Ltd v Dominion Electric Protection Co, [1972] SCR 769 at 777-78, Pigeon J. See generally S Schwartz, “Hedley Byrne and the Pre-contractual Misrepresentations: Tort Law to the Aid of Contract?” (1978) 10 Ottawa LR 581; CR Symmons, “The Problem of Affability of Tort Liability to Negligent Mis-statements in Contractual Situations: A Critique on the Nunes Diamonds and Sealand Cases” (1975) 21 McGill LJ 79; GHL Fridman, “The Interaction of Tort in Contract” (1977) 93 Law Q Rev 422; N Rafferty, “Liability for Pre-contractual Misstatements” (1984) 14 Man LJ 63. 120 See Mardon, above note 4. 121 With respect to this latter claim, see the discussion in Chapter 18, Section B. 122 Mardon, above note 4 at 820 123 Sodd v Tessis, above note 4.Misrepresentation 387 the plaintiff had relied on statements made by the defendant trustee in bankruptcy as to the proper method of calculating the retail value of the goods in question. The defendant’s method resulted in an overes- timate of approximately twice the real value of the goods. The defen- dant’s advice on this point was held to be a negligent misstatement, giving rise to liability for the plaintiff's loss. In the years following the decision in Sodd v Tessis, the doctrine has been applied or its existence has been recognized in numerous decisions of Canadian courts, including the Supreme Court of Canada.” In order to establish liability in negligence for pre-contractual state- ments, it is often said that there must be a “special relationship” between the parties. Indeed, in the immediate period following the decision of Hedley Byrne, it was widely assumed that in order to be held liable, the defendant must be engaged in the business of providing the advice in question. The defendant in Hedley Byrne was a banker. In another of the leading English cases," and in Sodd v Tessis, the defendants were accountants. Though it is true that the defendants in many cases were engaged in the business of providing the advice in question, this is far from true of all the Hedley Byrne cases.’ As Iacobucci ] observed in Queen v Cognos Inc: “The question of whether a duty of care with respect to representations exists depends on a number of consider- ations including, but not limited to, the representor’s profession. While this factor may provide a good indication as to whether a ‘special rela- tionship’ exists between the parties, it should not be treated in all cases as a threshold requirement.” As a general proposition, it appears to be sufficient to establish a ‘special relationship” if the reliance of the representee on the represen- tor’s statement was both foreseeable by the representor and reasonable 124 See, for example, Sealand of the Pacific Ltd v Ocean Cement Ltd (1973), 33 DLR (3d) 625 (BCSC), var'd (1974), 51 DLR (3d) 703 (BCCA); Peters v Parkway Mercury Sales Ltd (1975), 58 DLR (3d) 128 (NBCA); Nelson Lumber Co Ltd v Koch (1980), 111 DLR (3d) 140 (Sask CA) [Nelson Lumber]; Krawchuk v Scherbak (2011), 332 DLR (4th) 310 (Ont CA) (carelessly false statements in Seller Property Information Sheet provided in connection with sale of real estate—vendor and real estate agent held jointly and severally liable to purchaser), 125 See Central & Eastern Trust Co v Rafuse, [1986] 2 SCR 147; Rainbow Industrial Caterers Lid v Canadian National Railway, [1991] 3 SCR 3 [Rainbow Industrial]; Queen v Cognos Inc (1993), 99 DLR (4th) 626 (SCC) [Queen v Cognos]. 126 Mutual Life Assurance v Evatt, [1971] 1 All ER 150 (PC). 127 See, for example, RH Peden Construction Ltd v Resolute Construction (197) Ltd (1980), 31 AR 453 (QB); Nelson Lumber, above note 124. 128 See Queen v Cognos, above note 125. 129 Ibid at 648-49.388 THE LAW OF CONTRACTS on the part of the representee.'®” Where the misrepresentor does not possess any particular expertise or access to superior skill and knowl- edge, reliance may well be unreasonable and the special relationship will be held not to exist.!" Although the definition of “misrepresentation” or the elements of misrepresentation for purposes of tort liability are fundamentally sim- ilar to the elements of misrepresentation for purposes of a decree of rescission, there are differences between them.'” Thus, for example, it has been said that to engage the tort of deceit, the representation must be an “active” one, thus suggesting a reduced role for non-disclosure as misrepresentation.!” At the same time, it is accepted that “half-truths” can amount to deceit.!* Further, it is accepted in the tort context that a misleading opinion will count as a misrepresentation for purposes of the torts of deceit and negligence, whereas opinions are distinguished from statements of fact in the rescission context. The requirement of material inducement in the rescission context has no precise parallel in the tort jurisprudence, though the requirement that the tortious mis- statement caused the loss and that the misrepresentee reasonably relies on the misrepresentation may achieve a similar, if not precisely identical, analysis. The potential role of negligence on the part of the misrepresentee may also be different in the two contexts. As we have seen, the mis- representee who seeks rescission is under no obligation to engage in “due diligence.” The plaintiff in Redgrave v Hurd'®> would not be denied rescission simply because the purchasing solicitor had failed to take advantage of a means of knowledge readily available to him. Similarly, in the tort context, it is unlikely that negligence on the part of the misrepresentee would preclude or reduce the representor’s liability for fraudulent misstatement. Although the defence of contributory negli- gence may be broadly available under modern apportionment legisla- tion, it is unlikely that it would be applied in such fashion as to reduce 130 Queen v Cognos, ibid at 648, Iacobucci J; Hercules Managements Ltd v Ernst & Young (1997), 146 DLR (4th) 577 at para 24. 131 Sce Kingu, above note 69. 132 See generally Cartwright, above note 47, ch 3 and 5; B MacDougall, ‘Misrepresentation (Toronto: LexisNexis, 2016) ch 2 and 5. 133 Peek v Gurney (1873), LR 6 HL 377 at 391 and 403. 134 Ibid. See also Smith Newcourt Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd, [1997] AC 254 at 274, Lord Steyn; Alevizos v Nirula (2003), 234 DLR (4th) 352 (Man CA). 135 Above note 1.Misrepresentation 389 liability for fraud.'*° Ina tort claim for negligent misstatement, however, the negligence of the misrepresentee may well give rise to apportion- ment on the basis of contributory negligence. In Avco Financial Ser- vices Realty Ltd v Norman,” for example, the Ontario Court of Appeal applied the doctrine in a negligent misstatement claim. A husband and wife had given a mortgage and, at the same time, purchased creditors’ insurance policies to cover the debt in the event of death, accident or sickness. Although the mortgage was renewed for successive terms, it proved to be impossible for the mortgagors to renew the insurance pol- icies. In the interim, the wife had become ill. Upon reapplication for the insurance, the application for renewal of the insurance was rejected on grounds of her illness. The couple had not been advised by the insur- ance company that the life insurance policy would not be automatically renewed whenever the mortgage was renewed. Accordingly, when the mortgagee brought an action to enforce the mortgage covenant against the husband, he counterclaimed against the insurance company for damages suffered as a result of a negligent failure to inform him that the policy was not automatically renewable. This claim against the insurer succeeded, but the claim was reduced on the basis that the husband’s failure to make appropriate inquiries amounted to contribu- tory negligence. At first impression, as the Court of Appeal observed, it may appear inconsistent to hold that, in such circumstances, the hus- band has reasonably relied on the insurer with respect to the negligent misrepresentation but that his reliance was sufficiently careless as to engage the doctrine of contributory negligence."* In the court's view, however, the issue as to whether or not the reliance on the statement was reasonable from the point of view of establishing liability in neg- ligence was not the same as whether the misrepresentee’s carelessness should be taken into account in determining the extent of recovery. The first issue involves a determination as to whether a “special rela- tionship” exists and the test of reasonable reliance, arguably, does not equate to a negligence test. When one turns to consider contributory negligence, the issue becomes one of negligence and a broader range of factors become relevant. Thus, it may be reasonable to rely on someone 136 For discussion of modern apportionment legislation and its potential application to intentional torts, see L Klar, Tort Law, 5th ed (Toronto: Thomson Carswell, 2012) at 572-84 [Klar] 137 (2003), 226 DLR (4th) 175 (Ont CA). See also Grand Restaurants of Canada Ltd v Toronto (City) (1981), 32 OR (2d) 757 (HCD). 138 See Klar, above note 136 at 258-59, for the suggestion that the doctrine of contributory negligence should be inapplicable in this context on the theory that if the reliance was careless, it could not have been reasonable and, accordingly, the claim should be dismissed.390 THE LAW OF CONTRACTS with whom one has a “special relationship,” but one could still do so without taking reasonable precautions to protect oneself. To be sure, in the court's view, it would be unlikely to find that a misrepresentee who behaved negligently could also be held to have reasonably relied on the misrepresentation. Nonetheless, such findings could, at law, co-exist even though, on the facts of Avco, the court took the view that the neg- ligent conduct of the husband was such that it precluded a finding in his favour on the issue of reasonable reliance. The measure of damages in a tort claim is obviously different from the restitutionary relief awarded in the context of rescission. The plain- tiff in tort is allowed to recover out-of-pocket losses or compensatory damages, with the objective of placing the plaintiff in the position the plaintiff was in prior to the occurrence of the tort. In the typical case where the value of the consideration being supplied is misrepresented, the normal measure would be the difference between the price being paid and the market value of the consideration supplied. More generally, however, the plaintiff is entitled to recover consequential losses. Thus, in Mardon,!*° Mardon was entitled to recover his entire lost investment in the service station business." G. ENTIRE AGREEMENT AND EXEMPTION CLAUSES As we have seen, misrepresentations of fact that induce agreements may give rise to a variety of remedies, including equitable rescission for misrepresentation and damages in tort where the misrepresentation is 139 Mardon, above note 4. 140 In Rainbow Industrial, above note 125, it was assumed, in unusual circumstances, that the measure of relief in tort may exceed the measure of relief in a contract claim. The plaintiff claimed that it had been induced into a food catering contract on the basis of a negligent misstatement estimating the number of meals to be supplied. The Court held that as the plaintiff would not have entered into the agreement if it had been correctly advised, it was entitled to recover its lost investment, including losses that could not be attributable to the misrepresentation. If the plaintiff had sued in contract, however, it would be awarded damages that would place it in as good a position as it would have been in if the representation had been true and therefore it would not have recovered losses that could not be related to the misrepresentation itself. See also Wiebe y Gunderson (2004), 243 DLR (4th) 1 (BCCA) (sale of business induced by seller’s misrepresentations—role of lost profits in calculating tort damages).Misrepresentation 391 fraudulent or negligent. As we shall see,'*' if the representation can be characterized as a binding collateral warranty, the various remedies for breach of contract become available. Understandably, drafters of agree- ments exhibit an inclination to include provisions that seek to limit or exchide these types of liabilities. The success of such provisions in achieving these objectives will require a careful construction of the actual language of the provision. Further, however, in the interpreta- tion of such clauses, courts appear to be influenced by a consideration as to whether the particular clause has been drawn to the attention of the representee. Thus, in Hedley Byrne! itself, the defendant was excused from liability by virtue of the fact that the defendant bank had, when rendering the advice in question, explicitly stated that the advice was “for your private use and without responsibility on the part of the bank or its officials.”"? The arguments for excusing the defen- dants in such circumstances are obviously compelling. It is reasonable for the representor to assume that he will not be held responsible for the veracity of the statement and unreasonable for the representee to attempt to impose liability. The significance of the disclaimer becomes much more difficult, however, if it is to be found only in the subsequent agreement entered into between the parties. Indeed, one commentator has suggested that a disclaimer found in the ultimate contract arrives too late to be of any assistance to the defendant inasmuch as the rep- resentation has already had the desired effect of inducing the buyer to enter into the agreement.“ The trap has already been set and triggered. If the contract contains a disclaimer clause, it is simply a better trap. It seems rather more likely, however, that the courts will simply construe the contractual disclaimer with a view to determining whether it truly operates as a release of the representor’s liability for the prior tort and there is some evidence for this in the recent caselaw. Where the disclaimer is found in the subsequent agreement, the courts evince a concern to determine whether the representee has had adequate actual notice of the significance of the representor’s dis- claimer. In Roberts v Montex Development Corporation,” for example, the condominium purchase agreement included a clause to the effect 141 See Chapter 18. 142 Hedley Byrne, above note 3 at 468. 143 Ibid. 144 DW Greig, “Misrepresentation and Sales of Goods” (1971) 87 Law Q Rev 179 at 201-2. 145 (1979), 100 DLR (3d) 660 (BCSC) [Roberts]. See generally P Perell, “A Riddle inside an Enigma: The Entire Agreement Clause (1998) 20 Advocates’ Q 287; MH Ogilvie, “Entire Agreement Clauses: Neither Riddle nor Enigma” (2008) 87 Can Bar Rev 625 [Ogilvie].