



COURT OF APPEAL FOR ONTARIO

CITATION: Beatty v. Wei, 2018 ONCA 479

DATE: 20180524

DOCKET: C64023

Pepall, Hourigan and Brown JJ.A.

BETWEEN

Jonathan Beatty and Jacqueline Beatty

Applicants (Appellants)

and

Zhong Wei and Re/Max Premier Inc.

Respondents (Respondents)

AND BETWEEN

Zhong Wei

Applicant (Respondent)

and

Jonathan Beatty
,
Jacqueline Beatty
,
    Harold Balchand and Re/Max Premier Inc.

Respondents (
Appellants
)

John Lo Faso and David Morawetz, for the
    appellants Jonathan Beatty and Jacqueline Beatty

Patrick
    Bakos and Shida Azari, for the respondent Zhong Wei

Heard: January 26, 2018

On appeal from the judgment of Justice Peter J. Cavanagh of
    the Superior Court of Justice, dated June 5, 2017, with reasons reported at
    2017 ONSC 3478, and from the costs order, dated August 25, 2017, with reasons
    reported at 2017 ONSC 5086.


BROWN J.A.:

I.

OVERVIEW

[1]

This appeal puts into question the interpretation of an illegal
    substances clause commonly used in the Ontario Real Estate Association/Toronto
    Real Estate Board Agreement of Purchase and Sale. At issue is the second part
    of the clause where the seller represents and warrants that to the best of the
    Sellers knowledge and belief, the use of the property and the buildings and
    structures thereon has never been for the growth or manufacture of illegal
    substances.

[2]

In the present case, after the parties had entered into their agreement
    of purchase and sale, the purchaser, through his own inquiries, discovered that
    the property had been used as a marijuana grow-op before the sellers had
    acquired it. The purchaser took the position that he was entitled to terminate
    the agreement; the sellers disagreed. Competing applications ensued. The application
    judge held that the purchasers discovery of information about the propertys
    prior use amounted to a breach by the sellers of their representation and
    warranty in the clause. The application judge held the purchaser was entitled
    to rescind the agreement and obtain the return of the deposit.

[3]

For the reasons set out below, I conclude the application judge erred in
    reaching that conclusion. I would allow the appeal.


II.

THE TRANSACTION

[4]

The parties entered into a standard form Ontario Real Estate
    Association/Toronto Real Estate Board Agreement of Purchase and Sale dated May
    15, 2016 (the APS) under which Zhong Wei (the Purchaser) agreed to purchase
    from Jonathan and Jacqueline Beatty (the Sellers) a residential property at
    39 Stainforth Drive, Toronto, for the purchase price of $916,000. The Purchaser
    submitted a deposit of $30,000. Closing was scheduled for August 22, 2016.

[5]

The APS consisted of a standard, pre-printed section, to which were
    attached two schedules. The Purchaser added to his offer a Schedule A, which
    contained additional terms he proposed. The Purchaser was also directed to
    attach a Schedule B, which contained additional terms. Schedule B originated
    with the Sellers real estate agent, and any purchaser who wished to submit an
    offer for the property was directed to include the Sellers Schedule B in his
    offer.

[6]

The Purchaser did so. Although the record is not clear about the precise
    sequence of events that followed, some of the additional terms proposed by the
    Purchaser on his Schedule A, including a home inspection clause, were deleted.
    In the result, the Purchaser accepted those deletions and the parties executed
    the APS.

[7]

Schedules A and B formed part of the APS. Both contained, as an
    additional term, an identical illegal substances clause (the Illegal
    Substances Clause or the Clause), which stated:

The Seller represents and warrants that during the time the
    Seller has owned the property, the use of the property and the buildings and
    structures thereon has not been for the growth or manufacture of any illegal
    substances, and that to the best of the Sellers knowledge and belief, the use
    of the property and the buildings and structures thereon has never been for the
    growth or manufacture of illegal substances. This warranty shall survive and
    not merge on the completion of this transaction.

[8]

About a month after the execution of the APS, the Purchasers real
    estate agent conducted internet searches and came across information that
    suggested the property had been used as a grow-op before being purchased by
    Jonathan Beatty. Subsequently, the Toronto Police Services confirmed to the
    Purchaser that in 2004 the property had been used to produce marijuana. By
    letter dated July 8, 2016, Purchasers counsel conveyed this information to the
    Sellers counsel and stated: As a result of the stigma from the fact the home
    was a previous marijuana facility, my client is not willing to complete the
    transaction and demands return of his deposit.

[9]

The Sellers refused to terminate the APS. Instead, they commenced a July
    26, 2016 application seeking: declarations that the Purchaser had breached a
    binding APS by refusing to close; the forfeiture of the deposit to them; and
    damages for any loss they might suffer as a result of the delayed re-sale of
    the property.

[10]

The
    Purchaser commenced a competing application on September 14, 2016 seeking a
    declaration that he was not required to complete the purchase of the property,
    together with the return of the deposit and damages resulting from the Sellers
    breach of the APS.

[11]

The
    Sellers ultimately sold the property to another purchaser for $86,100 less than
    the price stipulated in the APS.


III.

THE REASONS OF THE APPLICATION JUDGE

[12]

The
    applications were heard together. The application judge dismissed the Sellers
    application but granted the Purchasers. The application judge held that the
    Purchaser was entitled to rescind the APS and to the return of the deposit. The
    application judge directed that the Purchasers claim for damages proceed to
    trial.

[13]

In
    his analysis, the application judge divided the Illegal Substances Clause into
    a separate representation and warranty.

[14]

When
    he considered the warranty, the application judge accepted that the words to
    the best of the Sellers knowledge and belief meant that the Sellers did not
    warrant the absolute truth of the statement that the Property has never been
    used for the growth or manufacture of illegal substances: para. 18.

[15]

However,
    he viewed the effect of those words differently when considering the
    representation in the Clause. He treated those words as a statement of a
    present fact, to the best of the Sellers knowledge and belief, that was
    intended to be relied upon when made and one upon which the Purchaser was
    entitled to continue to rely, at least until closing, while the APS was an
    executory contract: para. 20.

[16]

As
    a result, he found that the Purchasers discovery after the execution of the
    APS that the property previously had been used to grow marijuana and the
    Purchasers communication of that information to the Sellers meant the Sellers
    representation was false. He reasoned that since the Sellers would be obliged
    to disclose such information if they discovered it after signing the APS, then
    upon acquiring the information from the Purchaser, the Sellers could no longer
    honestly give the representation in the Illegal Substances Clause. The
    application judge found that the Purchaser was induced to enter into the APS on
    the basis of the Sellers misrepresentation, as a result of which the Purchaser
    could rescind the APS.

[17]

By
    order dated August 25, 2017, the application judge awarded the Purchaser costs
    in the amount of $26,436.43.


IV.

POSITIONS OF THE PARTIES

The Appellant Sellers

[18]

The
    Sellers submit the correctness standard applies to the interpretation of the
    Illegal Substances Clause because it forms part of a standard form contact
    widely used in Ontario residential real estate transactions.

[19]

They
    contend that whether the Illegal Substances Clause is regarded as a warranty or
    representation, under its language the relevant state of knowledge and belief
    of the Sellers was that existing at the date of the execution of the APS, not
    at the date of closing as found by the application judge. At the date of
    execution, the Sellers did not know about the propertys prior use as a marijuana
    grow-op, so no breach of the Illegal Substances Clause occurred.

The Respondent Purchaser

[20]

The
    Purchaser contends a deferential standard of review applies to the application
    judges interpretation of the Illegal Substances Clause because facts regarding
    his reliance on the Clause and its materiality are essential to the
    interpretive exercise. As well, the provisions contained in Schedules A and B
    were the subject of extensive negotiations between the parties, thereby taking
    those provisions out of the category of standard form contractual terms. The
    dispute is of little precedential value and the interpretation depends on a
    unique set of facts that would not give rise to a broader precedent. In any
    event, the Purchaser submits the application judge arrived at the correct
    interpretation.

[21]

In
    the Purchasers submission, the application judges conclusion that the
    representation in the Illegal Substances Clause continued through to closing
    was supported by the language in the clause that the warranty survived and did
    not merge on the completion of the transaction. To interpret the clause in the
    manner suggested by the Sellers would render it almost meaningless. Once the
    Sellers were made aware of the marijuana grow operation by the Purchaser, they
    could no longer honestly make the representation and warranty.


V.

STANDARD OF REVIEW

[22]

In
Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co
., 2016
    SCC 37, [2016] 2 S.C.R. 23, the Supreme Court recognized an exception to the
    principle in
Sattva Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53, [2014]
    2 S.C.R. 633, that contractual interpretation is a question of mixed fact and
    law subject to deferential review on appeal: [W]here an appeal involves the
    interpretation of a standard form contract, the interpretation at issue is of
    precedential value, and there is no meaningful factual matrix that is specific
    to the parties to assist the interpretation process, this interpretation is
    better characterized as a question of law subject to correctness review: para.
    24.

[23]

Such
    is the case with the Illegal Substances Clause in the APS. The pre-set portion
    of the APS indisputably constitutes a standard form contract. The evidence
    discloses that the Illegal Substances Clause is a standard provision commonly
    used in residential agreements of purchase and sale in the Toronto region: the
    Purchasers Schedule A, and the Sellers Schedule B, each contained an
    identical Illegal Substances Clause; an identical clause was found in the 2009
    agreement under which Jonathan Beatty had acquired the property; and the other
    two 2016 offers entertained by the Sellers also contained identical Illegal
    Substances Clauses.

[24]

There
    is no meaningful factual matrix specific to the parties that could assist
    interpreting the Illegal Substances Clause: the Purchaser included the clause
    in Schedule A to his offer and attached the Sellers Schedule B that contained the
    identical clause.

[25]

Finally,
    given that the Illegal Substances Clause is commonly used as an additional term
    in the Ontario Real Estate Association/Toronto Real Estate Board Agreement of
    Purchase and Sale, the interpretation of the clause has precedential value.
    Regardless of whether the pending decriminalization of the possession of
    marijuana in certain circumstances will necessitate modifications to the
    clause, until that time there is precedential value in interpreting this
    widely-used clause.

[26]

In
    those circumstances, I conclude the interpretation of the Illegal Substances
    Clause is best characterized as a question of law subject to correctness
    review.


VI.

INTERPRETATION OF THE ILLEGAL SUBSTANCES CLAUSE

[27]

I
    shall consider the issues concerning the interpretation of the Illegal
    Substances Clause in the following order:

(i)       The
    application judges differentiation of the representation from the warranty
    in the Clause;

(ii)      The
    application judges reliance on a duty to disclose to inform his interpretation
    of the Clause;

(iii)     The
    guidance other provisions in the APS offer to the interpretation of the Clause;
    and

(iv)     The
    effect of the survives closing language at the end of the Clause.

(i)

The application judges differentiation of the representation from the
    warranty in the Clause

[28]

In
    the Illegal Substances Clause, the Sellers both represent and warrant two
    state of affairs: (i) the property was not used to grow or manufacture illegal
    substances while owned by them; and (ii) to the best of the Sellers knowledge
    and belief, the property had never been used for those purposes.

[29]

The
    application judge concluded the Sellers had not breached their warranty
    because the contractual language did not disclose an intent that the content
    of the warranty could change with changing circumstances after the date of the
    APS when the warranty was given: para. 19. By contrast, he treated the
    Clauses representation as a material representation that induced the
    Purchaser to enter into the contract which, if ultimately shown to be false,
    entitled the Purchaser to rescind.

[30]

In
    other words, when he considered the legal effect of the Clause, the application
    judge applied different analytical approaches to the same contractual term: he
    interpreted the warranty language as a term of the contract, while he looked
    at the representation language through the lens of the principles concerning
    pre-contractual representations. That approach contained several errors.

[31]

First,
    the application judge failed to take into account the inter-related nature of
    the representation and the warranty in this particular contract. They were
    not stand-alone statements. They worked together since, generally speaking, a
    contractual representation is a statement of present or past fact, while a warranty
    is a contractual undertaking or guarantee that the fact is true: John D. McCamus,
The Law of Contracts
, 2d ed. (Toronto: Irwin Law, 2012), at pp. 336
    and 729.

[32]

Second,
    by focusing on the availability of the remedy of rescission in some cases of
    misrepresentation, the application judge did not address the real interpretive
    issue: What did the Sellers representation in the Illegal Substances Clause
    mean? Were the Sellers making a statement about the state of affairs as they
    existed, to their knowledge, at the time the parties executed the APS? Or, were
    the Sellers representing that their knowledge of a state of affairs would
    continue until closing? The application judge first had to decide what the
    representation meant before turning to the question of what remedies would be
    available in the event the representation was breached.

[33]

Third,
    it is problematic to view, as the application judge did, the representation
    in the Illegal Substances Clause as some kind of pre-contractual or collateral
    representation. In the present case, the Purchaser made an offer to buy the
    property. His offer included the Illegal Substances Clause in Schedule A and
    attached the Sellers Schedule B additional terms, which included the Clause.
    The Purchaser either accepted a modified sign-back of his offer or the Sellers
    accepted a modified Purchasers offer  the record is not clear about the
    precise sequence of events. In either case, both parties treated the Illegal
    Substances Clause as an integral term of the contract they concluded.

[34]

The
    principles concerning pre-contractual representations have little role to play
    in those circumstances. Instead, as Professor McCamus notes, at p. 736, the use
    of the verb represents in contractual provisions does not lead to the
    conclusion that the representations are mere representations and not proper
    terms (that is, undertakings) of the contract. Such representations are terms
    of the contract in the sense that that they are the subject of a promise that
    they are true, and accordingly, when the statements prove to be false, they
    give rise to the normal remedies for breach of contract: See also:
Benedek
    v. Dorian Homes
(1986), 43 R.P.R. 16 (Ont. H.C.), at para. 35;
Zien v.
    Field
(1963), 41 D.L.R. (2d) 394, at paras. 50-52, revd on other grounds,
    [1963] S.C.R. 632; and G.H.L. Fridman,
The Law of Contract in Canada
, 6th
    ed. (Toronto: Carswell, 2011), at p. 434.

[35]

Finally,
    to treat the representation contained in the Illegal Substances Clause as
    something other than a term of the contract would ignore the language of the
    entire agreement clause in the APS. Section 26 states: This Agreement
    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 this Agreement other than as expressed herein (emphasis
    added).

[36]

Accordingly,
    the application judge erred by removing the representation from the contract
    and treating it as akin to a pre-contractual misrepresentation. Instead, he
    should have interpreted the Illegal Substances Clause as a term of the parties
    contract in accordance with the standard rules of contractual interpretation,
    as summarized, for example, in
Weyerhaeuser Company Limited v. Ontario
    (Attorney General)
, 2017 ONCA 1007, 13 C.E.L.R. (4th) 28, at para. 65,
    leave to appeal to SCC requested.

(ii)

The application judges reliance on a duty to disclose to inform his
    interpretation of the Clause

[37]

The
    application judge made a related error. To arrive at his conclusion that the
    Sellers representation in the Illegal Substances Clause covered information
    about the past use of the premises unknown to them but discovered by the
    Purchaser between the date of execution of the APS and closing, the application
    judge reasoned in the following way. He posited that if the Sellers had
    discovered, after the execution of the APS, that the property had been used as
    a marijuana grow-op before they acquired it, their silence  or failure to
    disclose such information to the Purchaser  could found an action for
    misrepresentation. From this he concluded, at para. 22, that the Purchasers
    rights are not affected by the fact that he was the one who discovered this
    information and communicated it to the Sellers.

[38]

The
    application judges reasoning does not persuade me. The representation and
    warranty the Sellers gave about the use of the premises was limited, not
    absolute. It was a representation and warranty to the best of [their]
    knowledge and belief. On the record before the application judge, it appears
    that the Purchasers discovery that a previous owner of the house had used it
    for a grow-op came as a complete surprise to the Sellers.

[39]

Certainly,
    liability may attach where a vendor knew about a major latent defect but
    concealed the information from the Purchaser: see, for example,
McGrath v.
    MacLean
(1979), 22 O.R. (2d) 784 (C.A.), at pp. 791-92. Silence about such
    a major latent defect can amount to fraud:
Empire Communities Ltd. v. Her
    Majesty the Queen
, 2015 ONSC 4355, 46 B.L.R. (5th) 235, at para. 37. But
    the present case does not involve vendors who concealed material information
    about the condition of the property from the purchaser. Here, it appears the
    Sellers did not know about the premises past use as a grow-op until told by
    the Purchaser.

[40]

As
    well, the application judges reliance on the decision in
Sevidal v. Chopra
(1987), 64 O.R. (2d) 169 (H.C.), at pp. 187-89, was misplaced. I do not
    quarrel with the application judges statement, at para. 21 of his reasons, that
    silence which follows a representation can found an action for
    misrepresentation where the silence continues after the representor learns that
    the representation is no longer true or was never true. However, I take issue
    with what the application judge, relying on
Sevidal
, said next: This
    principle applies
even where a representation
    made at the time a contract is signed
becomes untrue before or at the
    time of completion:  para. 21 (emphasis added).

[41]

With
    respect, that principle cannot be teased out of the decision in
Sevidal
because that case did not involve a claim for breach of a
contractual
representation. In
Sevidal
, the
    vendors of a residential property were found liable for deceit in part because
    they did not disclose to the purchaser information they received after signing
    the contract about the presence of radioactive material on the property. The
    court held that the failure to disclose such information before closing
    amounted to a fraud on the purchaser.

[42]

This
    misunderstanding of the jurisprudence led the application judge to conclude,
    erroneously, that [u]pon acquiring knowledge that the Property had been used
    to grow marijuana, the Sellers could no longer honestly give the representation
    in the Illegal Substances Clause: para. 22. In fact they could, if the
    representation was limited to their knowledge and belief about the prior use of
    the property at the time they executed the APS. Instead of addressing the key
    interpretive question about what the representation meant, the application
    judge improperly applied principles concerning a vendors concealment of
    material information about the condition of a property to a situation where no
    such concealment had occurred.

(iii)

The meaning of the Illegal Substances Clause

[43]

Applying
    the general principles of contractual interpretation to the Illegal Substances
    Clause, what is the meaning of the representation and warranty given by the
    Sellers in the second part of the Clause: [T]o the best of the Sellers
    knowledge and belief, the use of the property and the buildings and structures
    thereon has never been for the growth or manufacture of illegal substances?

[44]

In
    my view, the Sellers representation and warranty that the use of the property
    had never been for the growth or manufacture of illegal substances was limited
    to their knowledge and belief as it existed when they executed the APS. I reach
    that conclusion for three reasons.

[45]

First,
    that interpretation flows from the plain language used in the Clause.

[46]

Second,
    the interpretation is supported by the absence of any language in the Clause
    that speaks of the Sellers knowledge and belief at the date of closing, in
    contrast to the use of such language in other provisions of the APS.

[47]

A
    fundamental precept of contractual interpretation is that a contract is to be
    construed as a whole with meaning given to all of its parts: Geoff R. Hall,
Canadian
    Contractual Interpretation Law
, 3d ed. (Toronto: LexisNexis Canada, 2016),
    at p. 16. A provision in a contract should not be read as standing alone, but
    in light of the agreement as a whole and its other provisions:
Hillis Oil
    and Sales Limited v. Wynn's Canada, Ltd.
, [1986] 1 S.C.R. 57, at p. 66.
    See also Hall, at p. 21.

[48]

In
    the APS, section 17 states: [T]he Seller represents and warrants that the
    Seller
is not and on completion will not be
a non-resident under the non-residency provisions of the Income Tax Act which
    representation and warranty shall survive and not merge upon the completion of
    this transaction (emphasis added).

[49]

Schedule
    A contains two provisions that make clear the Sellers representation or
    warranty operates at the time of closing:

(i)

The Seller warrants that there are no work orders or deficiency notices
    outstanding against the property, and if so will be complied with at his
    expense,
on or before closing
; and

(ii)

The Seller warrants and represents that all electrical, plumbing,
    mechanical components, all existing appliances and chattels included in the
    purchase price shall be in normal working condition
on closing
. [Emphasis added.]

[50]

That
    other provisions of the APS use language signifying that the Sellers
    representation or warranty operates at the time of closing suggests that the
    absence of similar language in the Illegal Substances Clause reflects the
    parties intention to limit its operation to the state of affairs known at the
    time of the APS execution.
[1]
Put another way, it was open to the parties to craft the representation and
    warranty so that it either spoke to the Sellers state of knowledge and belief
    on closing, or required the Sellers to give some sort of declaration or
    bring-down certificate about the state of their knowledge on closing. The
    Purchaser did neither.

(iv)    The effect of the survives closing language at the
    end of the Clause

[51]

Third,
    the Illegal Substances Clause concludes with the following sentence: This
    warranty shall survive and not merge on the completion of this transaction. I
    do not regard this language as meaning that the representation and warranty
    about the Sellers knowledge and belief refers to that held at the date of
    closing, as the respondent submits. Instead, the language reflects the debate
    that took place in the jurisprudence some time ago about whether a purchaser
    could sue on a warranty or condition contained in a contract for the sale of
    land following the completion of the transaction and the conveyance of the land
    by deed.

[52]

An
    older line of cases held that a purchaser could only bring an action on conditions
    and warranties contained in the deed of conveyance, unless the parties stipulated
    at an earlier stage of their dealings that any conditions and warranties in the
    agreement of purchase and sale were not to be superseded by the deed: see, for
    example,
Redican v. Nesbitt
, [1924] S.C.R. 135, at pp. 146-47.

[53]

Later
    cases took a different approach. In
Fraser-Reid v. Droumtsekas
, [1980]
    1 S.C.R. 720, at pp. 734-735, the Supreme Court stated:

Where the sale agreement creates rights or imposes obligations
    or stipulations collateral to, or independent of, the conveyance, the question
    of whether those stipulations are extinguished by merger is to be treated as
    one of intention. In the absence of evidence on the point, there is no
    presumption that the purchaser intended to surrender or abandon the rights
    acquired by him under the sale agreement. [Citations omitted.]

[54]

In
    my view, the survives closing language at the end of the Illegal Substances
    Clause does nothing more than clarify that whatever the content of the
    representation or warranty given by the Sellers, it did not merge with the deed
    on closing. The representation and warranty survived closing to offer a basis
    for a post-closing action for breach. However, that language does not assist in
    ascertaining the content or meaning of the representation or warranty given.

[55]

For
    these reasons, I conclude that the Sellers representation and warranty in the
    Illegal Substances Clause that the use of the property had never been for the
    growth or manufacture of illegal substances was limited to their knowledge and
    belief as it existed when they executed the APS. At that time, they did not
    know about the propertys prior use as a grow-op. In those circumstances, I
    conclude the application judge erred in finding the Sellers breached the
    Clause. They did not.


VII.

DISPOSITION

[56]

For
    the reasons set out above, I would set aside the judgment dated June 5, 2017
    and the costs order dated August 25, 2017.

[57]

In
    their place, I would substitute an order allowing the Sellers application to
    the extent of declaring that: (i) the Purchaser breached the APS by failing to
    close; and (ii) the Sellers are entitled to the deposit in the amount of
    $30,000.

[58]

I
    would remit to the Superior Court of Justice the determination of the following
    issues, in accordance with these reasons: (i) the entitlement of the Sellers to
    their costs of the proceeding before the application judge; (ii) the costs of
    Re/Max Premier Inc. and Harold Balchand arising out of the Purchasers
    application (as referenced in para. 2 of the August 25, 2017 order); and (iii)
    the Sellers claim for damages.

[59]

I
    would award the Sellers their partial indemnity costs of the appeal fixed at
    $15,000, inclusive of disbursements and all taxes.

Released: CWH May 24, 2018

David Brown J.A.
I agree. S.E. Pepall J.A.

I agree. C.W.
    Hourigan J.A.





[1]
Section 23 of the APS contains a representation and
    warranty concerning ureaformaldehyde that is very similar in structure and
    content to the Illegal Substances Clause. Unfortunately, there does not appear
    to be any reported case that has considered this precise clause, which might
    have provided some guidance on interpreting the Illegal Substances Clause.


