Canada: Court Of Appeal Clarifies Enforceability Of Entire Agreement Clauses

It is not uncommon to see a written contract include a clause that says:

This agreement shall constitute the entire agreement between the parties.  There is no representation, warranty, collateral agreement or condition which effects this agreement other than as expressed therein. 

This clause is typically described as an "entire agreement clause".  These clauses are found in complex commercial agreements as well as in simple consumer contracts including in agreements of purchase and sale of real estate.  Frequently, when disputes arise between parties to a contract, one party or the other will seek to rely upon what the other party said during negotiations or after the contract was signed.

Historically, the Courts focused the analysis of contractual obligations on the written language of the contract.  Over the years, contract law has developed to allow the Courts to consider the pre-contractual discussions, looking beyond the written words to consider the factual matrix surrounding the formation of the contract.  The law of contract has also developed to permit Courts to consider the post contractual conduct of the parties in order to shed light on what the parties intended the words in the written contract to mean.  The examination of the conduct of the parties to a contract may support the conclusion that they intended the contract to have a specific meaning or create certain obligations.

Entire agreement clauses were designed to provide clarity to the contractual obligations agreed to by the parties by restricting the obligations to only what was specifically included in the written agreement.  The Court of Appeal described recently that:

An entire agreement clause is generally intended to lift and distill the parties' bargain from the muck of negotiations¹

While entire agreement clauses are common, there has been some uncertainty as to their enforceability as the law of contract evolved to permit the consideration of actions and comments outside of the written agreement.  Do entire agreement clauses apply to prevent consideration of representations made in the course of negotiations?  Do they apply to prevent enforceability of representations made after the written contract has been signed?  In a decision that has not received much public attention, the Court of Appeal for Ontario recently gave some very helpful answers to these questions. 

In Soboczynski v. Beauchamp, 2015 ONCA 282, the Court of Appeal commented upon the impact of an entire agreement clause contained in an agreement of purchase and sale (APS) of a home.  The particular clause provided as follows:

[The APS] including any Schedule attached hereto, shall constitute the entire Agreement between Buyer and Seller.  There is no representation, warranty, collateral agreement or condition, which affects [the APS] other than as expressed herein.

After the execution of the APS but prior to the transaction closing, the purchaser requested that the seller complete and sign a Seller Property Information Statement (SPIS).  The seller, on the advice of legal counsel, voluntarily completed the SPIS form which contained a statement that the property was not subject to flooding and that the sellers would advise of any important changes to the information based on events that may take place prior to closing. 

After delivery of the SPIS, the basement of the house flooded with minor damage which was repaired, but not disclosed to the purchaser.  Prior to closing, the basement flooded again.  The purchaser, learning of the pre-closing flood, sued the seller for damages based on negligent misrepresentation arguing that the SPIS required the seller to disclose the flood. 

The trial judge dismissed the lawsuit holding that the entire agreement clause in the APS acted as a bar to the claim as the SPIS was outside of the agreement.  On appeal, the Divisional Court disagreed and held that the SPIS required the seller to advise of the pre-closing flood, despite the entire agreement clause in the APS.  The failure to advise of the flood amounted to negligent misrepresentation according to the Divisional Court and damages were awarded.  The Court of Appeal allowed the appeal and dismissed the lawsuit.  The Court of Appeal agreed with the Divisional Court that entire agreement clause did not apply to any post contractual representation, but dismissed the action because the elements required to establish the negligent misrepresentation had not been proven by the purchaser. 

In the decision written by Epstein JA for the Court of Appeal, there is a helpful overview of the enforceability of the entire agreement clauses.  While the decision was made in the context of a real estate transaction, Justice Epstein's analysis would appear to apply to a much wider context.  Justice Epstein observed that an entire agreement clause is essentially a codification of the parole evidence rule which provides that a contract may not be contradicted by evidence of oral and written statements made by the parties before the signing of the contract.²  Justice Epstein noted that there was very little jurisprudence on the issue, but referred to one decision of the Court in Shelanu. ³

According to Justice Epstein, Shelanu clarified that an entire agreement clause does not prevent the parties from amending their agreement such that post contract events can "affect both the enforceability of the obligations in the agreement and add new obligations to those imposed by its terms."⁴  Furthermore, entire agreement clauses do not apply prospectively unless the wording expressly so provides.⁵  Epstein JA made it clear that the specific wording of the entire agreement clause is critical to the analysis.  If the entire agreement clause is intended to preclude an action for negligent misrepresentation based on a post contractual representation, the language of the clause must expressly say so. 

Applying these general principles to the entire agreement clause in the APS, the Court of Appeal held that the entire agreement clause in that APS, properly interpreted, did not preclude a claim for damages based on negligent misrepresentation in respect of the SPIS.  As noted by the Court of Appeal, in this real estate transaction, "to conclude otherwise would render the entire SPIS exchange meaningless."  The entire agreement clause did not expressly say that post contract events could not amend or change the obligations between the parties. 

It appears clear now from Soboczynski that an entire agreement clause will apply only to pre-contractual representations unless the clause clearly sets out that it is intended to capture events after the signing of the contract.

Footnotes

1 Soboczynski v. Beauchamp, 2015 ONCA 282 at para 43

2 Paragraph 46

3 Shelanu Inc. vs. Print Three Franchising Corp. (2003) , 64 O.R. (3d) 533 (C.A.),

4 Paragraph 51

5 Paragraph 52

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