Entire Agreement Clause Creates a Bottleneck for Negligent Misrepresentation Claim

Bottleneck

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The recent decision of the Court of Appeal for Ontario in Kapuskasing Plumbing and Heating Limited v. Fortier Beverages Limited, 2011 ONCA 558 [“Kapuskasing”] reinforces the principle that in lieu of an express warranty or evidence of detrimental reliance, an entire agreement clause forestalls a claim in negligent misrepresentation.

In Kapuskasing, the appellant, Kapuskasing Plumbing and Heating Limited (“Kapuskasing”), and the respondent, Fortier Beverages Limited (“Fortier”), were franchisees of Culligan for the distribution and sale of bottled water. In October, 2006, Fortier, located in Cochrane, purchased Kapuskasing’s business  for a total purchase price of $1,160,000. The first tranche of $600,000 of the purchase price pursuant to an asset purchase agreement was payable on closing. The balance of the purchase price was payable pursuant to a consulting agreement, which was to be paid in monthly instalments over six years.

Fortier stopped making payments under the consulting agreement when he discovered that the business he bought  was not selling an estimated 200,000 bottles of water per year as had been represented to Fortier in pre-contractual discussions.

Kapuskasing sued for the balance owing on the consulting agreement, while Fortier counter-claimed against both Kapuskasing and Gerald Villeneuve, the president of Kapuskasing, for breach of warranty and negligent misrepresentation. The trial judge dismissed Kapuskasing’s claim and Fortier’s claim for breach of warranty, but granted judgment for negligent misrepresentation and awarded Fortier damages in the amount of $70,258.32.

The asset purchase agreement contained an entire agreement clause, which contained no representation or warranty on volume of unit sales, and read as follows:

The Agreement constitutes the entire agreement between the parties and except as stated in it and in the instruments and documents to be executed and delivered, contains all the representations and warranties of the respective parties.  There are no oral representations or warranties or collateral agreements between the parties of any kind relating to the subject-matter herein.  This Agreement may not be amended or modified in any respect except by written instrument signed by both parties.

 Clause 4(1)(s) of the asset purchase agreement further provided:

No representation or warranty contained in this Section 4, and no statement contained in any Schedule, certificate, list, summary or other disclosure document provided or to be provided to the Purchaser pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact which is necessary in order to make the statements contained therein not misleading.

After closing but before discovery of the volume sales error, Culligan, the franchisor, advised the parties of a mutual mistake concerning the western boundary of the sales region for Kapuskasing, where both parties had been selling, had in fact been assigned to the Thunder Bay Culligan franchisee.  Consequently, on August 16, 2007, the parties entered into an amending agreement whereby Kapuskasing gave Fortier a credit adjustment of $150,000 for the mistake applied to the balance owing on the consulting agreement.

Armstrong, J.A. (Moldaver and Sharpe JJ.A. concurring) allowed the appeal, set aside the judgment below and granted judgment in favour of Kapuskasing for the amount owing under the consulting agreement. The Court of Appeal concludes:

[36]         In my view, the trial judge’s subsequent conclusion that it was reasonable for Mr. Fortier to rely on the misrepresentation is inconsistent with his finding that no warranty was requested.  This is particularly so when the solicitor for Fortier asked for and received the sales reports, which Kapuskasing sent to Culligan.  Although Mr. Fortier said he was unable to calculate the volume of sales from these reports, his long time accountant and controller testified that it was relatively easy to get a reasonable estimate of bottles sold by doing some simple arithmetic.  In spite of requesting and receiving the Culligan documentation, Mr. Fortier apparently made no effort to use it or to request assistance in interpreting it.  This was somewhat surprising given that Mr. Fortier was also a Culligan franchisee in the Cochrane area.  According to the lawyer’s letter of August 8, 2006, it was contemplated that Mr. Fortier would review the sales figures prior to signing the agreement and address any issues he might have directly with Mr. Villeneuve.  No such issues were raised by Mr. Fortier.

[37]         When the trial judge finished his analysis of the breach of warranty claim and turned to the claim for negligent misrepresentation, he focused on the pre-contractual negotiations and the misrepresentation concerning the number of bottles sold. He did so without reference to the evidence that he had accepted that Kapuskasing had refused “to adjust the amount due on closing to reflect the actual volume of jugs sold” and without reference to his conclusion that Fortier should have requested an express warranty.  The trial judge also appears to have ignored his finding in respect of the letter of August 3, 2006 and the correspondence following that the 200,000 bottle figure was “never again referred to in any of the pre-contractual correspondence.”  This finding, together with Fortier’s conduct in respect of the disclosed financial information, is inconsistent with the trial judge’s conclusion that “the one constant during those negotiations remained the representation that the volume was 200,000 18 litre jugs.”

[39] In summary, the case comes down to this: Kapuskasing refused to enter into a contract that was based on the number of bottles sold in the prior year. Mr. Fortier accepted that position and asked that he be supplied with documentation from which he could review the sales figures prior to signing the agreement and address any issues with Mr. Villeneuve. Mr. Fortier received the appropriate documentation and did nothing. If he had an issue in respect of his ability to calculate unit sales from the information provided, he could have raised it with Mr. Villeneuve or sought the assistance of Mr. Gravel. He did neither.

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