Unsophisticated Party and the “Entire Agreement” Clause

The Divisional Court in its February 2014 decision in 2190322 Ontario Ltd. v Ajilon Consulting reviewed an appeal from a decision of Mongovan J. in Small Claims Court which allowed for a judgment against the corporation in spite of a clause which specifically denied any actionable representations.

The Defendant company, Ajilon Canada Inc., had been retained by Loblaws to provide consultants to it. Ajilon typically required the persons it recruited to incorporate and then enter into an independent contractor agreement with it.

The plaintiff hence was a numbered company, which had been so incorporated, the principal of which was Wanda Langley. Ms. Langley, at the time of the offer of a six months consultancy to her from Ajilon, had received an offer of a three month position from a third party, which was subject only to reference checks. She withdrew from this opportunity to accept the offer from the defendant.

Essentially, the evidence which followed at trial was that Loblaws had not committed for the hiring of this position and the relationship between the two litigants did not proceed.

Apart from the “entire agreement” clause, the case was one of classic negligent misrepresentation. The clause read as follows:

This Agreement constitutes the entire agreement between the Parties pertaining to the consulting engagement set forth herein and supersedes all prior negotiations, understandings and agreements between the Parties, written or oral ….

The judge at Small Claims Court found that this “entire agreement” clause was not a bar to recovery as it would only be enforceable where the parties were “sophisticated commercial parties”.  The reasons of Mungovan J. are recited in those of the Divisional Court:

The trial judge considered the “entire agreement” clause in the agreement and held that, while it did not specifically use the word “representation”, any representations would be covered by the category of “understandings” which was mentioned in the clause.  However, he went on to hold that the clause would only be enforceable where the parties to the contract are “sophisticated commercial parties” and that Ms. Langley was not a sophisticated commercial party and was not knowledgeable about technical legal aspects of contracts.  Moreover, he held it was unenforceable because it was not specifically brought to her attention by Ajilon prior to signing the contract.

It was this issue, it is submitted, which was the focal point on the appeal to Divisional Court.

The Court first noted that there was a fine line between an “entire agreement” clause and a disclaimer clause, even though they each intend to bring about the same result:

The problem of determining whether an entire agreement clause can preclude liability for a negligent misrepresentation is one that lies on the shifting sands between tort and contract.  An entire agreement clause is similar to but distinct from a general exculpatory, or exclusionary, clause.  In general, “both types of clauses have the effect of excluding liabilities of various kinds and are capable of producing unjust results”: see John D. McCamus, The Law of Contracts, 2nd ed. (Toronto: Irwin Law Inc., 2012), at p. 372.  More specifically, an exculpatory clause limits or excludes “liability for damages for breach of contract or for a tort connected to the contract”, while an entire agreement clause “seeks to exclude liability for statements other than those set out in the written contract and is sometimes referred to as an exclusion clause”: see Shelanu Inc. v. Print Three Franchising Corp. (2003), 2003 CanLII 52151 (ON CA), 64 O.R. (3d) 533 (C.A.), at para. 31.  Where the issue is the effect of an entire agreement clause on a party’s liability in tort for a negligent misrepresentation, there appears to be little practical difference between its effect and that of an exculpatory clause.

While the difference may appear modest at first blush, Himel J., writing for the unanimous panel, noted that there is a difference with a meaning given the Supreme Court of Canada decision in Tercon, referenced above. Tercon, this court noted, required unconscionability and public policy as the gateway to setting aside the disclaimer clause.

Tercon found its essence in the inequality of bargaining power at the formation of the contract, as a prelude to unconscionability. The issue to be decided by the Divisional Court became whether this test should also apply to the “entire agreement” defence.

The Court answered this question affirmatively. It then applied the test and upheld the trial decision. The critical aspect, it is submitted, was the issue of unconscionability:

  On step one, the trial judge concluded that the entire agreement clause did apply to negligent misrepresentations by use of the word “understandings” and I have already indicated I will not interfere with this finding.

[67]           Step two of the approach is focused on whether the clause is unconscionable.  Unconscionability requires the combination of inequality of bargaining power and the use of that inequality by the stronger party to obtain an improvident bargain: see Mundinger v. Mundinger (1968), 1968 CanLII 250 (ON CA), [1969] 1 O.R. 606 (Ont. C.A.), at p. 610.  In ABB Inc. v. Domtar Inc., 2007 SCC 50 (CanLII), [2007] 3 S.C.R. 461, the Supreme Court wrote, at para. 82, that “[u]nder the doctrine of unconscionability, a limitation of liability clause will be unenforceable where one party to the contract has abused its negotiating power to take undue advantage of the other.”  Here, I consider the standard form nature of the agreement, the importance of the clause in light of Ajilon’s knowledge that they were keeping Ms. Langley in abeyance without a final approval of the position from Loblaw, and the lack of any notice regarding the clause.  While the appellant argues that Ms. Langley was not unsophisticated because of her experience as a contractor in the IT industry, the key points are that the clause took on outsized importance given the uncertainty of the Loblaw position and that her access to information regarding this uncertainty was controlled by Ajilon.  I conclude that Ajilon used its stronger informational position in the circumstances to obtain Ms. Langley’s supposed consent to an improvident clause.

[68]           Step three of the analysis need not be undertaken given my finding on step two but, in any event, it may well be that the clause is also unenforceable on the public policy ground that recruitment companies should be prevented from leading potential recruits to believe they have secured work when they have not.  This would not lead to an unduly restrictive operating environment for recruitment companies.  Ajilon could have acknowledged to Ms. Langley and the other consultants the uncertainty in the situation with Loblaw and still tried to sell them on the merits of the positions, and their eventual placement which served Ajilon’s financial interests.  The consultants may well have chosen to disregard other opportunities in favour of the potential but uncertain Loblaw positions.

It is to be noted that independent legal advice is typically a conclusive plea when facing a submission of this nature. This submission may no longer carry the day, given the Supreme Court's views on this issue on the question of unconscionability discussed here.

The court also spoke of the fact that the significance of the clause was not brought to the attention of the weaker party. Both these arguments should be readily addressed by the draftsperson.

The argument has yet to be made that the Bhasin duty of honest performance will have an impact on the employer's position in this context. This issue is reviewed here.