Whole Agreement Clause Upheld by Court of Appeal

A properly-worded whole agreement clause is effective to exclude liability for innocent and negligent misrepresentations, the Alberta Court of Appeal recently held in Houle v Knelsen Sand and Gravel Ltd, 2016 ABCA 247 [Houle].

In Houle, the appellants (the Houles) had obtained a written assessment that certain land contained approximately 500,000 tonnes of gravel. The assessment was given to the respondents, Knelsen Sand and Gravel Ltd, who came to a similar conclusion. On that basis, Knelsen and the Houles negotiated a price of $800,000 for Knelsen to excavate and take the gravel. This agreement was memorialized in a contract which, at the Houles' request, included the following "whole agreement" clause [at para 4]:

2. The Purchaser acknowledges that he has inspected the property and that he is purchasing the property as is and that there is no representation, warranty, collateral agreement or condition affecting the property or this offer other than as expressed herein in writing.

After purchase, Knelsen discovered the land only contained 74,000 tonnes of economically extractable gravel, and so withheld the final payment. The Houles sued and Knelsen counterclaimed for breach of an implied term of the contract and for both innocent and negligent misrepresentation. The trial judge found that the Houles had made an innocent misrepresentation by giving the assessment to Knelsen because the assessment was a representation of "fact" rather than an opinion, and granted rescission of the agreement.

On appeal, the Court of Appeal reversed the trial decision and gave judgment to the Houles, holding that Knelsen was not entitled to rescind on the basis of innocent misrepresentation. The Court noted an inconsistency in the trial judgment: while the lower Court found there was no implied covenant that the land contained at least 500,000 tonnes of gravel, it awarded a remedy that reflected just such a covenant. As well, the fact that the lower Court rejected the claim for negligent misrepresentation, but then provided relief for an innocent misrepresentation, offended the principle that "relief cannot be provided for an innocent misrepresentation which is inconsistent with the express covenants in the contract." The Court further noted that the alleged misrepresentation was an opinion rather than a representation of fact: neither the Houles nor the agency that prepared the assessment ever claimed to know how much gravel was actually present in the land. As such, a finding of innocent misrepresentation was not available.

The Court then went on to discuss the impact and importance of the "whole agreement" clause, noting that the clause would have resolved the entire matter if the trial judge had applied it. Such clauses, the Court noted, are not inherently objectionable, being "found in most commercial contracts". Instead, they serve the dual purpose of "confirming the scope of the agreement, and allocating the risks between the parties". The Houles had insisted on the inclusion of the whole agreement clause, which disclaimed "any 'representation affecting the property'"; this included both innocent and negligent misrepresentations. The whole agreement clause, like all other clauses, "must be interpreted in accordance with the intentions of the parties as reflected in the words used in their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract". The purpose of the clause was that parties' obligations would be "determined in accordance with the written terms of the contract, not extraneous negotiations and discussions that have not been reduced to writing, and thus formally acknowledged by the contracting parties." In this case, the Houles and Knelsen had agreed that there were no outside representations affecting the contract. Thus, properly applied, the whole agreement clause excluded any misrepresentation “ negligent or innocent.

Houle confirms that properly-worded whole agreement clauses are effective to exclude liability for innocent and negligent misrepresentations. If a party to a contract wishes to rely on a representation, it should ensure that the representation is memorialized within the contract itself, or more precariously, not include a whole agreement clause. Conversely, if a party wishes to ensure that an agreement sets out the entire agreement and excludes additional representations, a whole agreement clause should be included.

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