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Contracts - Rescission. 1000425140 Ontario Inc. v. 1000176653 Ontario Inc.
In 1000425140 Ontario Inc. v. 1000176653 Ontario Inc. (Ont CA, 2024) the Ontario Court of Appeal considered rescission in a fraudulent real estate transaction context:[30] A finding of fraud in the context of a real estate transaction induced by misrepresentations is sufficient reason not to allow execution of the contract to constitute a barrier to rescission: Singh v. Trump, 2016 ONCA 747, 408 D.L.R. (4th) 235, at para. 157; Redican v. Nesbitt, 1923 CanLII 10 (SCC), [1924] S.C.R. 135. As such, rescission of the APS was warranted along with equitable damages for additional expenses related to the purchase and ownership. For these reasons, we would dismiss the first ground of appeal. . Royal Bank of Canada v. Everest Group Inc.
In Royal Bank of Canada v. Everest Group Inc. (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal of franchise-related rescission actions.
The court holds that the party claiming rescission bears the onus of proving it, here "where a franchisee primarily bases its claim for rescission on deficiencies in the franchise disclosure document":[4] First, the burden of proving that the franchisee is entitled to rescission and statutory compensation falls squarely on the franchisee, as it would for any claimant. As this court stated in Raibex Canada Ltd. v. ASWR Franchising Corp., 2018 ONCA 62, 419 D.L.R. (4th) 53, at para. 40, to justify rescission in circumstances where a franchisee primarily bases its claim for rescission on deficiencies in the franchise disclosure document (“FDD”), “the Franchisee must not only demonstrate that the FDD was deficient, but also show that it was so deficient that the Franchisor effectively ‘never provided [a] disclosure document.’” The trial judge stated and applied the law correctly.
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[11] Second, the trial judge made no error in finding that the franchisor’s termination of the franchise agreement because of a franchisee’s breach does not preclude the franchisee from exercising the statutory right to rescind the franchise agreement. The Wishart Act does not make the exercise of the s. 6 right of rescission conditional on non-termination. As a matter of principle, this makes sense. The lawful termination of a contract for breach absolves the non-breaching party from performing future obligations under the contract, but it does not render the contract void ab initio: see e.g., Pickering Square Inc. v. Trillium College Inc., 2016 ONCA 179, 395 D.L.R. (4th) 679, at paras. 28-29. Where the franchisor fails to meet its disclosure obligations to the franchisee, the franchisee is entitled to rescind the franchise agreement pursuant to the Wishart Act. The franchisor cannot negate the franchisee’s statutory right to rescind by pre-emptively terminating the agreement, even where there has been a breach by the franchisee. . Bernier v. Kinzinger
In Bernier v. Kinzinger (Div Court, 2023) the Divisional Court cites a leading authority on rescission:38. The application judge quoted Chitty on Contracts, 4th ed. (London: Sweet and Maxwell, 2021, para. 25-030, as follows:A recission of the contract will also be implied where the parties have effected such an alteration of its terms as to substitute a new contract in its place. The question whether a recission has been effected is frequently one of considerable difficulty, for it is necessary to distinguish a rescission of the contract from a variation which merely qualifies the existing rights and obligations. If a rescission is effected the contract is extinguished; if only a variation, it continues to exist in an altered form. The decision on this point will depend on the intention of the parties to be gathered from an examination of the terms of the subsequent agreement and from all the surrounding circumstances. Recission will be presumed when the parties enter into a new agreement which is entirely inconsistent with the old, or, if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it. [Footnotes omitted] (Decision, para. 50) This passage states the law correctly. . Urban Mechanical Contracting Ltd. v. Zurich
In Urban Mechanical Contracting Ltd. v. Zurich (Ont CA, 2022) the Court of Appeal extensively considered granting rescission where it may prejudice the rights of innocent third parties [paras 53-85].
. Urban Mechanical Contracting Ltd. v. Zurich
In Urban Mechanical Contracting Ltd. v. Zurich (Ont CA, 2022) the Court of Appeal considered rescission, an equitable remedy for mistake or misrepresentation:[33] The central issue on this appeal is whether, as a matter of law, an order for rescission can ever be made where an innocent party was induced to enter a contract by virtue of fraudulent misrepresentation and there are third parties who assert their rights. This is a question of law for which the standard of review is correctness.
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What is Rescission?
[35] Rescission is an equitable remedy that is meant to put the contracting parties back in the positions they were in before entering into the contract (restitutio in integrum): Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423, at para. 39; Place Concorde East Ltd. Partnership v. Shelter Corp. of Canada Ltd. (2006), 2006 CanLII 16346 (ON CA), 270 D.L.R. (4th) 181 (Ont. C.A.); and Gerald H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at p. 762.
[36] Rescission is available to a party that has been improperly induced to enter into a contract, for instance, by a fraudulent misrepresentation: Guarantee Co., at para. 39; Deschenes v. Lalonde, 2020 ONCA 304, 447 D.L.R. (4th) 132, at para. 29, leave to appeal to S.C.C. refused, 39288 (February 11, 2021); and Kingu v. Walmer Ventures Ltd. (1986), 1986 CanLII 142 (BC CA), 10 B.C.L.R. (2d) 15 (C.A.), at pp. 6-8. Indeed, as Lord Wright noted in Spence v. Crawford, [1939] 3 All E.R. 271, at p. 288, the court will be more willing to order rescission when the plaintiff was induced to enter the contract by fraud:[T]he court will be more drastic in exercising its discretionary powers in a case of fraud than in a case of innocent misrepresentation. … There is no doubt good reason for the distinction. A case of innocent misrepresentation may be regarded rather as one of misfortune than as one of moral obliquity. There is no deceit or intention to defraud. The court will be less ready to pull a transaction to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff. [37] Rescission requires proof that the misrepresentation was material and was relied on by the party seeking to rescind the contract: Deschenes, at para. 29; Barclays Bank v. Metcalfe & Mansfield, 2011 ONSC 5008, 82 C.B.R. (5th) 159, at paras. 156-59, aff’d 2013 ONCA 494, 365 D.L.R. (4th) 15, leave to appeal refused, [2013] S.C.C.A. No. 374.
[38] A “material misrepresentation” is one that a reasonable person would consider to be relevant to the decision to enter the agreement, though it need not be the only reason to enter into the agreement: York University v. Markicevic and Brown, 2016 ONSC 3718, 33 C.C.E.L. (4th) 26, at para. 145, aff’d 2018 ONCA 893, 51 C.C.E.L. (4th) 30, leave to appeal refused, [2019] S.C.C.A. No. 134.
[39] Whether a contracting party relied on the misrepresentation, at least in part, to enter into the agreement is a “question of fact to be inferred from all the circumstances of the case and evidence at trial”: Barclays Bank, at para. 159. . Fram Elgin Mills 90 Inc. v. Romandale Farms Limited
In Fram Elgin Mills 90 Inc. v. Romandale Farms Limited (Ont CA, 2021) the Court of Appeal sets out basics of rescission by common mistake:B. Governing Legal Principles
[246] At common law, a contract will be void for mistake when the parties were under a common mistake that changes the subject matter of the contract into something essentially different from what the parties believed it to be: Miller Paving Ltd. v. B. Gottardo Construction Ltd., 2007 ONCA 422, 86 O.R. (3d) 161, at paras. 22, 30. The mistake must have existed at the time the contract was made: Zeitel v. Ellscheid (1991), 1991 CanLII 7162 (ON CA), 85 D.L.R. (4th) 654 (Ont. C.A.), at para. 44, aff’d 1994 CanLII 82 (SCC), [1994] 2 S.C.R. 142.
[247] In equity, the court may relieve for common mistake when it would be “unconscientious”, in all the circumstances, to allow a contracting party to avail itself of the legal advantage it had obtained and granting relief can be done without injustice to third parties. The contract is liable to be set aside if the parties were under a common misapprehension as to the facts or their respective rights, provided the mistake was fundamental and the party seeking to set aside the contract was not at fault: Miller Paving, at para. 23. . Issa v. Wilson
In Issa v. Wilson (Ont CA, 2020) the Court of Appeal succinctly states the elements of rescission of a contract:[12] The remedy of rescission of a contract may be obtained on the basis of misrepresentation where the defendant made a false statement that was material and induced the plaintiff to enter into the contract: Panzer v. Zeifman et al. (1978), 1978 CanLII 1658 (ON CA), 20 O.R. (2d) 502 (C.A.), at p. 5; Singh v. Trump, 2016 ONCA 747, at para. 156. The court weighed age and inexperience of the plaintiff as a factor in the misrepresentation:[17] Fourth, the trial judge did not err by making reference to Mr. Issa’s age and inexperience in home buying. These can be, in appropriate cases, relevant contextual factors: Beer v. Townsgate I Limited (1997), 1997 CanLII 976 (ON CA), 36 O.R. (3d) 136 (C.A.), at para. 20. . Deschenes v. Lalonde
In Deschenes v. Lalonde (Ont CA, 2020) the Court of Appeal considered an appeal from a summary judgment of an action to set aside a settlement for historic sexual assault by a Catholic priest. On unilateral mistake and rescission the court stated:[29] The equitable remedy of rescission is available for a false or misleading representation that induces a contract: Guarantee Co. of North America, at para. 39. Rescission requires proof that the misrepresentation was material and was relied on by the party seeking to rescind the contract: 1323257 Ontario Ltd. o/a “Hyundai of Thornhill” v. Hyundai Auto Canada Corp. (2009), 2009 CanLII 494 (ON SC), 55 B.L.R. (4th) 265 (Ont. S.C.), at para. 71; Barclays Bank v. Metcalfe & Mansfield, 2011 ONSC 5008, 82 C.B.R. (5th) 159, at paras. 156-59, aff’d 2013 ONCA 494, 365 D.L.R. (4th) 15, leave to appeal refused, [2013] S.C.C.A. No. 374. To be material, a misrepresentation must relate to a matter that would be considered by a reasonable person to be relevant to the decision to enter the agreement, but it need not be the sole inducement for acting: York University v. Makicevic and Brown, 2016 ONSC 3718, 33 C.C.E.L. (4th) 26, at para. 145, aff’d 2018 ONCA 893, 51 C.C.E.L. (4th) 30, leave to appeal refused, [2019] S.C.C.A. No. 134. Whether a contracting party did in fact rely on the misrepresentation, at least in part, to enter into the agreement is a “question of fact to be inferred from all the circumstances of the case and evidence at trial”: Barclays Bank, at para. 159.
[30] The remedy of rescission is available even if the misrepresentation was made innocently, that is, by a party who believed it was true: “Where rescission is claimed it is only necessary to prove that there was misrepresentation. Then, however honestly it may have been made, however free from blame the person who made it, the contract, having been obtained by misrepresentation, cannot stand”: Derry v. Peek (1889), [1886-90] All E.R. Rep. 1 (H.L.), at p. 13, per Lord Herschell. In Kingu v. Walmar Ventures Ltd., 1986 CanLII 142 (BC CA), [1986] B.C.J. No. 597 (C.A.), McLachlin J.A. (as she then was) set out a list of requirements for rescission of a contract on the basis of innocent misrepresentation. In addition to the requirement of a positive misrepresentation of an existing fact that induced the plaintiff to enter into the contract, in order for rescission to be granted, the plaintiff must have acted promptly upon discovery of the misrepresentation to disaffirm the contract, no third party may have acquired rights for value as a result of the contract, and it must be possible to restore the parties substantially to their pre-contract position: Kingu, at para. 15.
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[32] As noted by Côté J.A. in Radhakrishnan, a settlement agreement may also be rescinded on the basis of unilateral mistake. I will explain why I reject the appellants’ submission that the motion judge, after finding a “unilateral mistake by the Diocese”, erred in this case in rescinding the settlement agreement on this basis. The law on rescission for unilateral mistake is that a party may seek rescission of a contract for its own unilateral mistake only where the mistake goes to a material term of the contract, where the other party knows or ought to know of the mistake, and where it would be unconscionable for the second contracting party to rely on the contract: 256593 B.C. Ltd. v. 456795 B.C. Ltd. (1999), 1999 BCCA 137 (CanLII), 171 D.L.R. (4th) 470 (B.C.C.A.), at p. 479. See also Gerald H. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Thomson Reuters Canada Limited, 2011), at pp. 252-54; Toronto Transit Commission v. Gottardo Construction Limited et al. (2005), 2005 CanLII 31293 (ON CA), 257 D.L.R. (4th) 539 (Ont. C.A.), at para. 30, leave to appeal refused, [2005] S.C.C.A. No. 491. The motion judge did not refer to these principles, and for good reason. Although the motion judge characterized the misrepresentation as a “unilateral mistake of the Diocese”, he did not, nor could he have, rescinded the settlement agreement for unilateral mistake, where the only mistake he found was that of the Diocese, not Ms. Deschenes. Rather, the framework he applied was that of rescission for innocent misrepresentation.
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[45] As I have previously noted, a contracting party may obtain rescission on the basis of its own unilateral mistake where the mistake goes to a material term of the contract (something that goes to the root of the contract, or is fundamental to the contract), where the other party knows or ought to know of the mistake, and where it would be unconscionable for the second contracting party to rely on the contract. Indeed, this is the law that the appellants rely on in this appeal. There is no question that where there has been a unilateral mistake by the innocent party to a contract, a contract can be rescinded only if the non-mistaken party knew, or ought to have known, of the innocent party’s mistake. The core element of knowledge, however, is that of the non-mistaken party. Professor Fridman makes this clear when he says, at pp. 252-54:If the party not in error knows or ought to know of the other’s mistake, any purported agreement between them may not be enforceable in equity … on the ground that equity will not permit a party to take advantage of the error in offering or accepting by the other party. The rationale of such cases is that equity penalizes unconscionable conduct, whether it actually constitutes fraud or involves something amounting to fraud in the view of equity. It must be unfair, unjust or unconscionable to enforce or uphold the contract.
It is not necessary for the party seeking to avoid the contract on the ground of mistake to prove that the other party caused or induced the mistake (although if such causation is established it might lead to rescission for fraud, or for innocent misrepresentation). As long as the unmistaken party knows of the mistake, without having caused it, that party cannot resist a suit for rectification on the grounds of mistake. The same will apply if the other party had good reason to know of the mistake and to know what was intended. The converse of the proposition as to the knowledge of the other party’s mistake is that if the unmistaken party is ignorant of the other’s mistake the contract will be valid and neither rescission nor rectification will be possible. [Footnotes omitted.] [46] The unilateral mistake analysis simply does not fit this case. Here, the mistake was that of the Diocese, not Ms. Deschenes. Indeed, as noted above, the motion judge characterized the misrepresentation at various points in his reasons as a “unilateral mistake by the Diocese” (emphasis added). To support an analysis based on rescission for unilateral mistake, the motion judge would have had to have found that Ms. Deschenes was the mistaken party and that the Diocese was trying to take advantage of her mistake. It may be that Ms. Deschenes was also “mistaken”, in which case, as Professor Fridman notes in the passage quoted above, rescission for innocent or fraudulent misrepresentation could follow on proof that the other party caused or induced the mistake.
[47] The proper characterization of what occurred here is that the Diocese made a representation that was false when it stated repeatedly, including under oath, that no one knew that there was any reason to be concerned about Father Sylvestre’s behaviour before Ms. Deschenes claimed to have been assaulted by him, and that there had been no prior complaints. In this sense, the Diocese made a “mistake”. Although the Diocese was mistaken when it made the representation, this was not a case of rescission for unilateral mistake. Rather, rescission of the settlement agreement was warranted on the basis of the law of innocent misrepresentation.
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