When Will a Court Refuse To Enforce a Contract As Unconscionable?

In certain circumstances, the Court will refuse to enforce the written terms of a contract. The recent case of Singh v. Trump, 2016 ONCA 747 provides one such example. In that case, which I’ve written about in more detail here, two condo buyers alleged that they had been induced to buy ‘Hotel Units’ in Trump International Hotel based on misrepresentations, including inaccurate estimates as to their projected returns on investments. In characterizing the estimates provided, the Court stated they were little more than:

“uninformed and ill-informed opinions, and his figures were essentially just pick-a-number speculation about what might be charged and what might happen in the marketplace.”[1]

The Entire Agreement Clause:

As is typical of contracts generally, the closing documents contained various ‘entire agreement’ (also sometimes referred to as an integration clause or merger clause) and other exclusionary provisions. Generally, those provisions provide that a written contract sets forth the full and final agreement of the parties (and disregards all statements and promises leading up to that point). In this instance, the developer of Trump International Hotel sought to rely upon such clauses to escape liability. The buyers argued that the Court should refuse to enforce such clauses, as their attention had not been brought to them and they were otherwise buried in the documents.

The Applicable Test:

To determine whether to enforce the exclusionary clauses, the Court adopted the following test:

  1. Firstly, whether the exclusionary clause even applies to the facts of the case. To determine this, the Court will look at the intent of the parties, as set forth in the written contract itself. If the Court finds the exclusionary clause does not apply, the inquiry is finished (and the clause cannot succeed as a defence).
  2. If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, “as might arise from situations of unequal bargaining power between the parties”. This second issue has to do with contract formation, not breach of contract.
  3. If the exclusion clause is held to be valid and applicable, the Court may undertake a third enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.

In the Trump case, the Court of Appeal noted that a

“general exclusion clause will not override a specific representation on a point of substance which was intended to induce the making of the agreement unless the intended effect of the exclusion clause can be shown to have been brought home to the party to whom the representation was made by being specifically drawn to the attention of that party, or by being specifically acknowledged by that party, or in some other way.”

Accordingly, the Court of Appeal ruled that it “would be grossly unfair to enforce these clauses to deny Talon’s (the seller’s) tort duty not to make negligent misrepresentations to the plaintiffs.”[2] Moreover, the Court held that it:

“would be unconscionable and would shock the conscience to allow a party to use an entire agreement or other exculpatory clause to escape liability for misrepresentations made in breach of the OSC’s (Ontario Securities Commission) terms for granting an exemption from the Securities Act requirements. The entire agreement and other exculpatory clauses would operate to negate a negligent misrepresentation claim and the misrepresentation itself was only possible in this case because Talon evaded protective requirements under the Securities Act by obtaining the exemption and then breaching that exemption.”[3]

The Trump case illustrates several important features of contract law. Initially, it serves as a reminder to have a lawyer review important documents before you sign them. Secondly, it illustrates that simply because something is written into a contract, that doesn’t make it enforceable or necessarily determine how a matter will later be handled.

If you’re having problems with a contract you signed or a business deal that isn’t working out, call our Ontario litigation lawyers in Toronto and Hamilton at 647-495-8995 to see how we can help you.

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