Entire Agreement Clause Doesn’t Trump Unconscionability

Donald Trump is estimated to have been involved in over 3,500 lawsuits, unprecedented for any presidential nominee. Most recently, he threatened to sue for defamation over further allegations of groping. Sources, however, indicate he hasn’t actually sued a news outlet in decades, and his threats may have a boomerang effect.

It’s clear that he has other legal disputes on this side of the border as well. Many of them involve the tower in downtown Toronto which bears his name. Only one of them has been reported though, and the Court of Appeal recently weighed in on this action in Singh v. Trump.

The dispute involves investment of two individuals into the Trump Tower. The case involves elements of conventional real estate litigation, with allegations of misrepresentations made by marketing materials projecting impressive profit margins that never materialized.

The case is complicated, by allegations that the use of profit estimates violated a breach of Ontario Securities Act and Condominium Act.

A partial summary judgment motion by the plaintiffs was dismissed by Justice Perell. The Court of Appeal set aside this order, rescinding the agreement of purchase and sale for one plaintiff, and awarding damages for negligent misrepresentation for the other.

The basis for the reversal was that the motions judge erred in the application of the claim of negligent misrepresentation, and the unconscionability of enforcing entire agreement and other exculpatory clauses that would bar the claims.

At para 203, Justice Perell correctly cited the elements for a claim of negligent misrepresentation from the Queen v. Cognos:

(1) duty of care based on a special relationship between the plaintiff and the defendant;

(2) an untrue, inaccurate, or misleading representation;

(3) the defendant making the representation negligently;

(4) the plaintiff having reasonably relied on the misrepresentation; and,

(5) the plaintiff suffering damages as a consequence of relying on the misrepresentation.

The Court of Appeal affirmed this test, but held that he erred in finding that the plaintiffs failed to reasonably rely on the misrepresentations.

Although estimates were provided to the investors they were intended to be for discussion only. The motions judge held this was objectively unreasonable, but the Court of Appeal indicated the hotel units were actually sold based on this information.

The Court of Appeal used the motion judge’s own findings that the estimates were not based on the best information available, or that the hotel would immediately be profitable. It was not reasonable, according to the Court, that the plaintiffs would have known that the expenses involved were not disclosed or were grossly understated.

The motions judge pointed to two clauses in the purchase and sale agreement and the Disclosure Document, respectively:

31. The Vendor and the Purchaser agree that there is no representation, warranty, collateral agreement or condition affecting this Agreement or the Property or supported hereby other than as expressed herein in writing.

Purchasers are advised that no representations are made with respect to expected or projected rental income. There is no assurance that Hotel Units will be able to be rented at any particular rate or for any particular period of time and the rates and the total income from each Hotel Unit will be affected by, among other things, competitions from other luxury hotels, guest preferences, economic conditions

The motions judge applied the 3-part test in the Supreme Court of Canada case of Tercon Contractors Ltd. v. British Columbia (Transportation and Highways). After finding an exculpatory clause to be valid, and if there is any unconscionable reason why it should not be applicable. Finally, the courts will look to matters of overriding public policy as to whether they should refuse to enforce a valid and applicable exclusion clause.

In combination with other clauses in other agreements, the motion judge concluded that these exculpatory provisions were not unconscionable, but failed to conduct any analysis as to why.

The Court highlighted that the entire agreement clause here essentially trapped these purchasers, who had limited investing experience, and would have known nothing about rental rates and occupancy. Neither plaintiff consulted a lawyer, and did not understand what this clause even meant. The clause was hidden in a 17 page contract, with 49 articles that had their own subclauses. The sales representative acknowledged that she never reviewed this particular clause with the plaintiffs.

The Disclosure Document was even worse. It was only provided to the plaintiffs after they had already signed the agreements of purchase and sale.

The Court held that it would be grossly unfair to enforce these clauses, and cited John D. McCamus, The Law of Contracts, 2nd ed. (Toronto: Irwin Law, 2012), at p. 365,

…[t]he trap has already been set and triggered. If the contract contains a disclaimer clause, it is simply a better trap..

Further support for failing to enforce these clauses came from the Court’s finding that the defendants had breached and evaded the typical protections which would be present in the Securities Act. The fact that a party would use an entire agreement or exculpatory clause to escape liability for any representations that were made in granting an exemption to the Act would be unconscionable and would “shock the conscience.”

In political elections it’s common for all candidates to claim the others are lying. As this action continues through the courts, on this side of the border the biggest lies here may be the misrepresentations at the root of this case.