Canada: Special Relationships May Not Be So Special

Last Updated: November 22 2011
Article by Jeffrey Levine and Stevie O'Brien

The Ontario Court of Appeal's decision in Krawchuk v Scherbak1 provides a helpful reminder of how the elements of a claim for negligent misrepresentation are established.

Background

Zoriana Krawchuk bought a house from the Scherbaks. Wendy Weddell acted as agent for both parties in the transaction. After the transaction closed, Ms. Krawchuk discovered significant latent defects in the property. It cost Ms. Krawchuk more to repair the defects than she had paid for the house. She sued the Scherbaks and Ms. Weddell for negligence, and the Scherbaks and Ms. Weddell cross-claimed against each other for contribution and indemnity.

The trial judge found that the Scherbaks negligently misrepresented the condition of the property in a form they filled out and provided to Ms. Krawchuk called the seller property information sheet ("SPIS"). Ms. Krawchuk was awarded damages for the cost of repairs to the property. However, the trial judge dismissed Ms. Krawchuk's claim against Ms. Weddell and the competing cross-claims. The Scherbaks appealed the decision, and Ms. Krawchuk cross-appealed the dismissal of her claim against Ms. Weddell.

The Court of Appeal's decision

In considering the Scherbaks' appeal, the Court restated the test for negligent misrepresentation in Ontario. Justice Epstein held that to succeed in her action against the Scherbaks, Ms. Krawchuk had to prove:

  • a duty of care based on a 'special relationship';
  • that the Scherbaks made statements to her that were untrue, inaccurate or misleading;
  • that the Scherbaks acted negligently in making the statements;
  • the statements were relied upon reasonably; and
  • that she sustained damages as a result of her reliance.

The Court of Appeal determined that negligent misrepresentation had been established. The Scherbaks representations in their SPIS were intended to be disclosed to Ms. Krawchuk and it was reasonable to expect that she would rely on them. This was sufficient to establish a 'special relationship' between the Scherbaks and Ms. Krawchuk, a potential purchaser.

The second and third elements of the test were made out because the information provided in the SPIS was clearly untrue, and despite the trial judge's finding that the Scherbaks had honest intentions, a reasonable person in similar circumstances to the Scherbaks would have disclosed more in the SPIS. The Scherbaks knew that their house had significant structural and plumbing problems, but failed to mention them on the SPIS.

Fourth, it was reasonable for Ms. Krawchuk to rely on the information in the SPIS, because the structural and plumbing defects were latent and not readily apparent. Finally, the evidence at trial showed that Ms. Krawchuk relied on the statements in the SPIS when making the decision to purchase the property, and she suffered damages as a result.

The Court noted that the Scherbaks were not liable because their personal knowledge of the condition of the property was incomplete. Rather, they were liable because they failed to disclose their full knowledge of the condition of the property.

The Court of Appeal also overturned the trial judge's decision, allowing Ms. Krawchuk's claim against Ms. Weddell, her agent. The trial judge had refused to admit expert evidence on the issue of a real estate agent's standard of care, and then also failed to actually identify the standard. The Court of Appeal explained that the exclusion of expert evidence to establish a standard of care for a professional was only appropriate for non-technical matters or for cases where the conduct was so egregious that a breach of the relevant standard was obvious. The Court of Appeal, while lamenting the lack of expert evidence, found that Ms. Weddell was required to either verify the information provided by the Scherbaks or strongly recommend Ms. Krawchuk have the property inspected, given the obvious defects in the house. Failure to do so was considered an egregious lapse in the standard of care.

As for Ms. Weddell and the Scherbaks' cross-claims against each other for contribution and indemnity, while the Court of Appeal found that Ms. Weddell was negligent in acting as agent for the Scherbaks, the Scherbaks were not entitled to indemnification because they were also negligent. The Court of Appeal accepted that a party asserting the right to indemnity must have clean hands. Also, since it was not practical to determine the degrees of fault of the negligent parties, the Court of Appeal applied the default position and deemed the parties equally liable.

Representations and special relationships

In this case, the Scherbaks unsuccessfully argued that their representations on the SPIS were not warranties to be relied upon by potential buyers, and so should not have been enough to create the special relationship required to establish a duty of care. The result in Krawchuk serves as a reminder that any representation can have legal consequences when the party making the representation ought to know that the representation will be relied upon by the other party to a transaction. A representation does not have to be all that special to lead to a 'special relationship'.

Footnote

1. 2011 ONCA 352.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2011 McMillan LLP

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