The British Columbia Court of Appeal’s decision in Roy v Kretschmer, 2014 BCCA 429 provides guidance on the element of reliance in the tort of deceit. It also holds that a contractual clause limiting liability is unenforceable even where the breaching party did not commit a criminal act or egregious fraud.

This decision is of interest to Canadian businesses because it suggests that where a contract has been breached, the breaching party can be sued in tort for hiding the circumstances of the breach if the non-breaching party relies on the breaching party’s fraudulent silence or misrepresentations. Further, in such circumstances, the breaching party may not be able to rely on the protection of a limitation of liability clause.

Background

What tangled webs we weave when first we practice to deceive. Such was the modus operandi of a real estate developer whose misconduct formed the basis for this lawsuit. In 2003, the developer, Mr. Kretschmer, sold a lot (“Lot 33”) in a development near Vernon, British Columbia to Mrs. and Mr. Adams (the “Adams”). In July 2004, the vendor tried to cancel the purchase agreement with the Adams, contrary to the terms of that agreement. The Adams immediately protested the purported cancellation. In December 2005, the Adams filed a lawsuit, and in January 2006 they registered a certificate of pending litigation (“CPL”) against Lot 33.

Meanwhile, in 2004, Mr. Kretschmer told Mr. and Mrs. Roy (the “Plaintiffs”) that Lot 33 was for sale. In August 2005, the Plaintiffs signed a contract (the “Purchase Agreement”) to purchase Lot 33 from a numbered company (the “Vendor”), for which Mr. Kretschmer acted as agent. The Purchase Agreement included a clause limiting the liability of the Vendor to the return of the Plaintiffs’ deposit. Completion of the Purchase Agreement was to occur within 10 days of the Vendor notifying the Plaintiffs that the subdivision plan for Lot 33 had been registered.

Mr. Kretschmer failed to tell the Plaintiffs about the prior sale of Lot 33 and the Adams dispute. Throughout 2006, Mr. Kretschmer told the Plaintiffs that they could not begin construction on Lot 33 because of issues with the subdivision approval. This was simply not true: the subdivision plan had been approved in December 2005 and registered in January 2006. The real reason for the holdup was the CPL on title.

In January 2007, the Plaintiffs discovered the CPL, and a few months later filed the present action. Due to the skyrocketing real estate market, the Plaintiffs did not try to purchase a new property in lieu of Lot 33.

Judgment of the B.C. Supreme Court

Nothing about Mr. Kretschmer’s conduct prior to the Purchase Agreement induced the Plaintiffs to enter it, and therefore this case was entirely about Mr. Kretschmer’s post-contract conduct.

The trial judge held that Mr. Kretschmer’s false representations were a material factor in the Plaintiffs’ decision not to abandon the Purchase Agreement and purchase another property in autumn 2005. The trial judge found Mr. Kretschmer liable for the tort of deceit and awarded damages of the difference in price of Lot 33 between August 2005 (when the Purchase Agreement was executed) and January 2007 (when the Plaintiffs discovered the Adams’ lawsuit and CPL).

The trial judge rejected the Plaintiffs’ argument that, in the circumstances, enforcement of the limitation of liability clause in the Purchase Agreement would be contrary to public policy. The trial judge held that Mr. Kretschmer’s conduct was not sufficiently egregious to void the limitation of liability clause, and limited the Plaintiffs’ damages in contract to the return of their deposit.

Judgment of the B.C. Court of Appeal

Breach of Contract and Limitation of Liability Clause

The Court of Appeal stated that there was an implied obligation on Mr. Kretschmer to inform the Plaintiffs of the subdivision plan being registered. Upon registration of the subdivision plan in January 2006, the Adams’ CPL became the sole reason for non-completion of the Purchase Agreement. After January 2006, therefore, Mr. Kretschmer’s representations to the Plaintiffs that subdivision issues were preventing completion of the Purchase Agreement were false, and the Vendor was in breach of the contractual duty to inform the Plaintiffs of the subdivision approval. This breach continued until the Plaintiffs learned the truth in January 2007. The Plaintiffs were entitled to the difference in price of Lot 33 in January 2007 minus the purchase price.

The Court of Appeal overturned the trial judge regarding the limitation of liability clause in the Purchase Agreement. The Court of Appeal held that Mr. Kretschmer’s conduct amounted to fraud that went directly to the contractual obligations of the Vendor. To enforce the limitation of liability clause would be contrary to public policy. Since Mr. Kretschmer was the Vendor’s agent, the Vendor could not rely on the limitation of liability clause.

Tort of Deceit and the Element of Reliance

The Court of Appeal overruled the trial judge’s finding that the Plaintiffs would have purchased another property had they learned the truth in autumn 2005, on the grounds that the Plaintiffs had provided conflicting evidence and that the Plaintiffs were still bound by the Purchase Agreement at that time. However, from January 2006 (when the subdivision plan was registered) to January 2007 (when the Plaintiffs learned the truth), the Plaintiffs could have insisted on completion of the Purchase Agreement.

The Court of Appeal noted that although detriment was not addressed specifically by the parties, detriment might be characterized as an aspect of reliance, which is a necessary element of the tort. In this case, Mr. Kretschmer’s false representations did not induce the Plaintiffs to act positively; rather, the representations kept them from pursuing some other hypothetical course of action. The Court of Appeal pointed to prior examples of a “failure to act” satisfying the element of reliance. The Court of Appeal held that Mr. Kretschmer’s representations induced the Plaintiffs not to insist on completion of the Purchase Agreement.

The Court of Appeal affirmed its earlier judgment in Roy v 1216393 Ontario Inc, 2011 BCCA 500 (in which the Court of Appeal ordered a new trial in this action). Once the plaintiff proves the intentional nature of the false statements, the materiality of the false statements in inducing the plaintiff to act, and the causation of the loss, then the onus shifts to the defendant to prove that the false statements did not induce the plaintiff to act.

The Plaintiffs were entitled to be put in the same position as if there had been no deceit, being the difference in price of Lot 33 in January 2007 minus the purchase price. The limitation of liability clause was not relevant to Mr. Kretschmer’s liability in deceit.

Comment

In order to successfully argue a claim in deceit, the plaintiff must establish that he or she relied upon the defendant’s misrepresentation. The Court of Appeal in Roy v Kretschmer provided guidance on this “reliance” element in two ways.

First, the Court of Appeal held, without providing a clear statement on the matter, that detriment may be considered an aspect of reliance. The Court of Appeal said that the fact that the Plaintiffs “did not seek to exercise their legal rights” during the period of the misrepresentation was sufficient to satisfy the necessary element of reliance. The Court of Appeal, however, also stated that speculation about what the Plaintiffs might have done had they known the truth was not relevant. The difficulty here is that the Court of Appeal effectively speculated that the Plaintiffs would have enforced their rights if not for the material factor of Mr. Kretschmer’s misrepresentations and omissions. But at the same time, the Court of Appeal also tried to avoid changing the “reliance” analysis to invite speculation as to all of the things that the Plaintiffs might have done but for the misrepresentations and omissions. The result is some uncertainty as to the evidentiary line that must be crossed in order to establish reliance, particularly where the misrepresentation may have induced inaction as opposed to a positive act.

Second, the Court of Appeal strengthened the preference of Canadian courts to shift the onus to the defendant to prove non-reliance after the plaintiff has shown that the fraudulent misrepresentation was prima faciematerial and likely to be an inducement for the plaintiff to act.[1]

The Supreme Court of Canada missed an opportunity to clarify the reliance element in its recent decision in Bruno Appliance and Furniture, Inc v Hryniak, 2014 SCC 8, which dealt with the elements of the tort of civil fraud (a.k.a. the tort of deceit). Roy v Kretschmer thus provides some useful and needed guidance.

With respect to limitation of liability clauses, the Court of Appeal extended the “public policy” exception to enforcement as outlined in Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4. The Court of Appeal cited several authorities to support the proposition that the impugned conduct need not “approach serious criminality or egregious fraud” to engage the public policy exception. It was sufficient that Mr. Kretschmer’s conduct was fraudulent and went to the very heart of the contractual obligations.

The decision in Roy v Kretschmer fits hand in glove with the subsequent Supreme Court of Canada decision in Bhasin v Hrynew, 2014 SCC 71 (discussed on this blog), which limits deceptive behaviour in the performance of contracts generally.

Conclusion

The Court of Appeal in Roy v Kretschmer provides guidance on the element of reliance in the tort of deceit. The decision also shows that the courts can refuse to uphold a limitation of liability clause even where the breaching party’s conduct does not approach criminality or egregious fraud.

In sum, when it is necessary to breach a contract, it is best to not, in the words of Walter Scott, weave a tangled web of deceit, but rather to follow the advice of Henry V and openly go “once more unto the breach”.

Case Information

Roy v Kretschmer, 2014 BCCA 429

Docket: CA040482

Date of Decision: November 7, 2014