Taking Entire Agreement Clauses Seriously

January 7, 2023

By Mark Mikulasik

Chances are that at some time you have signed a contract containing an “entire agreement” clause. Entire agreement clauses are found in all sorts of contracts ranging from residential real estate to multimillion dollar commercial transactions, typically found at or near the end of legal documents.

Lawyers call this sort of clause “boilerplate”. Most people not indoctrinated in 19th century British slang call it “fine print.” Very few people read the fine print. Although the law presumes that anybody who signs a contract has read it, that is a legal fiction. Other than the most sophisticated businesspeople, most people signing contracts do so without understanding the effect of the entire agreement clause.

THE ISSUE

Frequently asked questions include “does that mean what it says?” or “Will the courts really enforce that?”

Judges tend to be very interested in the intention or purpose of words in contracts. First year law students risk injury from carrying fat contracts texts. There are no simple answers to these straightforward questions. The best answers are “it depends” or “only a judge can decide that”.

The purpose of the clause is to prevent evidence coming in about negotiations prior to the signing of the contract, which would confuse the interpretation of the document rather than assist. A lot of things are said during negotiations that are not necessarily reflected in the final document. That is one of the objectives of bargaining. To end up with the best possible deal. To get there, trade-offs and give backs may have occurred.

Although the wording may vary slightly, a typical clause will read something like:

This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and supersedes all previous written or oral representations, agreements and understandings between the parties, whether expressed or implied.

You may be surprised to learn that generally courts take these clauses very seriously even though most people do not read them. This serves a useful purpose in keeping the dispute focused on the actual agreement, which reduces court time and eliminates a lot of unreliable evidence. Sometimes, however, unscrupulous parties will try to take advantage of the entire agreement clause where the agreement truly does not reflect the negotiations.

There has been a lot of litigation over the years about entire agreement clauses. Despite this, some areas of the law still are not clear. Over the last 25 years or so, the Ontario Court of Appeal has decided several cases about whether entire agreement clauses apply in the face of fraudulent misrepresentation during the negotiations. They have concluded that fraud is an exception to the entire agreement clause being valid because it would be unjust and inequitable for the innocent party to be victimized.

In a 2021 decision involving Royal Bank, the Court of Appeal summarized their views on entire agreement clauses in general, and you might think that that would be the end of the matter for a while. And yet in 2022, there was the Court of Appeal deciding another case about the effectiveness of entire agreement clauses.

THE CASE

10443204 Canada Inc. v. 2701835 Ontario Inc. is a case involving the sale of a laundromat which did not close. The seller sued the proposed buyer for the unpaid purchase price. The buyer defended on the basis that the seller had allegedly made a fraudulent misrepresentation prior to the signing of the contract about the volume of business that the laundromat enjoyed. The seller then replied that a precontractual misrepresentation, if there was one, should not be considered because of the entire agreement clause.

On a motion for summary judgment, a Superior Court judge had found in favor of the seller. Off the parties went to the Court of Appeal.

THE RESULT

The Court of Appeal reviewed several of the cases over the last 25 years, focusing on the 2021 Royal Bank case, in which the clause was held not to apply due to fraud. The motions judge had also considered Royal Bank but had said that the facts were different because in Royal Bank there was unequal bargaining power, unlike the laundromat dispute.

The Court rejected this distinction, clarifying that the “policy of the law to discourage fraud is applicable to cases of equal and unequal bargaining power.”

The case was sent back to the Superior Court where it may eventually go to trial.

TAKEAWAYS

  • This case illustrates how incrementally the law moves – taking a single step at a time.
  • This means that not every trial judge will reach a decision that will agree with what the Court of Appeal might later decide. The last statistics that we saw showed that about 1/3 of appeals are successful.
  • Each successive decision from the Court of Appeal does clarify the law slightly and reduces the chance that a Superior Court judge will get it wrong.
  • The laundromat case, therefore, is a good review of the effectiveness of entire agreement clauses and does advance the clarity of the law when there are no allegations of unequal bargaining power between the parties.
  • This case further emphasizes how strongly the courts want to discourage fraud in business transactions.
  • We have seen that trend in other areas. The obvious and easy solution is for the seller to simply not make misrepresentations in negotiations, particularly dishonestly.
  • One of the things not decided by the laundromat case was whether or not a negligent misrepresentation would be enough to cancel out the entire agreement clause.
  • So, the incremental approach of the Court of Appeal continues, and we will have to wait and see about future cases.
  • Until then, we know that if your defence is based on the Plaintiff’s fraud, and you can prove the fraud, an entire agreement clause will not stand in your way.
  • For that reason, you need lawyers who know the importance of proving facts, and the evidence needed.

HOW WEILERS LLP CAN HELP YOU

The real estate and commercial transactions lawyers at Weilers LLP carry on our proud tradition of advising clients about the risks and obligations that they are undertaking before they sign a contract.

If difficulties arise, we work with our clients and their other advisors to attempt to resolve the problems. Fraud though is a particularly tough issue to compromise on.

If the problems cannot be resolved on a friendly basis, then our litigation lawyers may be able to assist with damage control. They understand the importance of facts, the law of evidence, and how to prove fraud.

If you find yourself needing advice about your risks or obligations under a real estate or commercial contract, it is best to seek the advice early. Feel free to give Weilers LLP a call and see if we are the right lawyers for you.