Canada: Failure To Disclose: In Finding Negligent Misrepresentation, BC Supreme Court Holds That Potential Contamination On A Property Gives Rise To Stigma

Last Updated: August 30 2017
Article by Canadian ERA Perspectives, Selina Lee-Andersen and Paul R. Cassidy

Most Read Contributor in Canada, September 2018

In a recent decision of the BC Supreme Court (the Court), the purchasers of a residential property in Victoria were awarded damages when the Court found that the seller made negligent misrepresentations in the property disclosure statement (PDS) regarding the possible migration of contaminants onto the property. In their claim, the plaintiffs alleged that the defendant was liable for damages for fraudulent misrepresentation, negligent misrepresentation or breach of contract. While the plaintiffs were unable to meet the test for fraudulent misrepresentation (the Court found no intent by the seller to deceive the purchasers), the Court said that a misrepresentation in a PDS can give rise to a claim for damages for negligent misrepresentation. The Court's judgment in Ban v. Keleher (2017 BCSC 1132, 30 June 2017) confirms that a much higher standard of evidence is required in order to make out a claim of fraudulent as opposed to negligent misrepresentation, which means that what might seem to be fraudulent based on a common sense interpretation is not necessarily what will be found in court. In assessing the damages payable to the plaintiffs, the Court found that the potential presence of contamination and ongoing testing for contaminants on the property created a stigma in respect of the property and as such, the stigma negatively affected the fair market value (FMV) of the property on the date of sale in May 2013. The Court awarded damages in the amount of $95,000, which took into account a reduction in purchase price (as the plaintiffs paid more for the property than it was worth) and a discount for stigma, as well as the loss of enjoyment and use of the property.

Background

The defendant, Mr. Keleher, sold his property to the plaintiffs, Mr. and Mrs. Ban, for $687,500 in May 2013. Subsequent to the purchase and closing, the plaintiffs discovered that their property was potentially affected by chemical contaminants, which were likely to have migrated onto the property from a nearby dry-cleaning business. The plaintiffs had not retained a lawyer to carry out the conveyance of the property, and had not ordered a search of the BC Contaminated Site Registry (the Site Registry). On the PDS however, there was a question for the vendor which stated: "Have you received any other notice or claim affecting the Premises from any person or public body?", to which Mr. Keleher answered "No". At no time did Mr. Keleher tell the plaintiffs that he had received two notices from an environmental consulting company in August and September 2012 indicating that there was likely or actual offsite migration of contaminants onto his property (the Notices). Further, Mr. Keleher did not disclose to the plaintiffs that (i) environmental consultants had conducted drilling and/or installed wells in the backyard of his neighbour's property in the summer of 2012, (ii) five monitoring wells had been installed in the backyard of the property in October 2012, and (iii) new sod had been placed over the monitoring wells installed in the backyard of the property.

At trial, Mr. Keleher testified that he did not disclose the Notices on the PDS because that issue was not "at the forefront of his mind" at the time. He also testified that after signing the PDS, he later sought advice from his realtor as to whether he ought to notify the plaintiffs about the Notices or the presence of the monitoring wells. He stated to the court that his realtor advised him not to reveal this information because it would make it more difficult for him to sell his property. His realtor testified that no such conversation ever took place.

The plaintiffs alleged that the defendant was liable for damages for either fraudulent misrepresentation, negligent misrepresentation, or breach of contract. The Court elected not to address the matter of breach of contract (as it was satisfied that the case could be justly decided based on the claim for misrepresentation), and so confined its analysis to tort law principles.

Fraudulent Representation

On the first claim, Justice Dorgan set out the test for fraudulent misrepresentation from Van Beek v. Dodd (2010 BCSC 1639), where the court held that the five requisite components are:

  1. the defendant made a representation of fact to the plaintiff(s);
  2. the representation was false in fact;
  3. the defendant knew that the representation was false when it was made, or made the false representation recklessly, not knowing if it was true or false;
  4. the defendant intended for the plaintiffs to act on the representation; and
  5. the plaintiffs were induced to enter into the contract in reliance upon the false representation and thereby suffered a detriment.

Justice Dorgan of the Court found that Mr. Keleher had not committed fraudulent misrepresentation on the basis that the standard of proof for fraud is higher than for other torts, in light of the seriousness of an allegation of deceit. Consequently, a plaintiff must prove that the defendant intended to mislead the plaintiff. While Justice Dorgan found that Mr. Keleher was aware of the Notices and the monitoring wells, and had them on his mind at the time of the transaction on the basis that he consulted with his realtor about whether he should have disclosed their existence, the judge held the evidence of the defendant's intent to deceive the plaintiffs to be insufficient for a finding of fraud. The judge's findings appear surprising in light of the facts and also because Mr. Keleher's credibility as a witness was brought into question during the trial, when he made statements that were inconsistent with his evidence given during examination for discovery. Justice Dorgan's rationale for not finding an intent to deceive on the part of Mr. Keleher was based on the fact that he was a police officer by profession, and therefore was "accustomed to accurately reporting facts", and that he had not "positively misstated a fact" but rather left the plaintiffs with a false impression. It is interesting to note that his written answer of "No" to the question regarding the Notices was not considered to be a positive misstatement.

This decision appears to be inconsistent with the case cited by the Court for the test of fraudulent misrepresentation, Van Beek v. Dodd. In Van Beek, the defendant property developer represented in its sales literature that the house in question was a new build, and therefore subject to GST. The plaintiffs paid the purchase price plus an additional $40,000 to cover the GST, but later found out that the defendant declared this property as a sale of a former residence for income tax purposes. Even though at no point did the defendant expressly state to the plaintiffs that GST would be payable on top of the purchase price, the court found that the mere presentation of the house and the statements in the sales literature was enough for a finding of fraud.

Negligent Misrepresentation

The plaintiffs were, however, successful in arguing that Mr. Keleher had negligently misrepresented to them the state of the property. The Court was satisfied, based on an earlier British Columbia Supreme Court ruling (Hanslo v. Barry, 2011 BCSC 1624), that the vendor owed a duty of care to the purchasers based on their "special relationship". In addition, the other four steps of the test for negligent misrepresentation were also made out (these elements include the need for an inaccurate or misleading representation, negligence by the representor in making the representation, reliance by the representee on the misrepresentation, and damages resulted from the reliance), with the result that Mr. Keleher was found to have committed this tort and was liable for damages.

Buyer Beware?

On the doctrine of caveat emptor (let the buyer beware), the plaintiffs claimed that there was nothing in the PDS or any of the surrounding circumstances that should have put the plaintiffs on notice that they needed to make further inquiries. As a result, the defendant could not reasonably argue that the plaintiffs could have discovered the defendant's fraud if they had conducted a search of the Site Registry (a later search of the Site Registry did not yield any information concerning off-site contamination). The Court noted that where a misrepresentation is properly characterized as being fraudulent, the doctrine of caveat emptor will not apply.

Does Contamination Give Rise to Stigma?

A final point of interest on this case is the Court's calculation of damages. It affirmed that the proper approach in a case of fraudulent or negligent misrepresentation is to assess the FMV of the property at the time of the sale (accounting for the contamination) and subtract that value from the price paid, with the remaining amount constituting the damages owed to the plaintiffs. The Court considered expert evidence on how to assess FMV for properties impacted by contamination. Since there was no appropriate data available for that period and from that area to use as a comparator, the expert for the plaintiffs assessed property values impacted by the stigma of having been a former grow-op for marijuana production on the mainland of BC around Vancouver. While the expert for the defendant identified several key weaknesses in this data as a comparator group, the Court found that his failure to provide a viable alternative method of assessment meant that the court was obliged to adopt the plaintiff's approach.

Ultimately the Court was satisfied that stigma does arise when a property is known to be or potentially is contaminated, and found it was irrelevant that the property value had risen by more than the difference between the FMV and the price paid by the plaintiffs. The court also found that stigma in a stable market is of greater consequence than in a rapidly rising or falling market. The fact that the market was stable in 2013 in Victoria, that the property in question was a residential property where the comfort level with contamination is lower than in a commercial transaction, and that there was very little certainty as to the extent of the contamination, caused the court to factor in the impact of stigma considerably. The Court also assessed damages based on the reduced use and enjoyment of the property's yard, as the presence of the wells now precluded the plaintiffs from building a pool, using that part of the yard for a shed they wished to build or from planting vegetables. Furthermore, the monthly visits by the environmental consulting company to attend to the wells was deemed to be highly intrusive. As a consequence, the Court held that the FMV of the property at the time of the sale was $95,000 less than what the plaintiffs had paid for it, and awarded damages in that amount.

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