IS THERE A RECOURSE AGAINST A BAD FAITH SELLER WHEN A BUYER PURCHASES AT HIS OWN RISK AND PERIL?

This issue was recently discussed in De Niverville et al. vs. Blanchard, 2016 QCCS 4698.

In 2003, Plaintiff acquired a building and commerce from the estate of the late owner (the “Estate”) for the price of $115,000.00 ($74,000.00 for the property and $41,000.00 for equipment and inventory).

The contract provided that the sale was made without any legal or contractual warranty and at the sole risk and peril of the buyer. Plaintiff also renounced her right to visit and inspect the property prior to the sale.

Around 2010, Plaintiff accepted an offer to sell the property. The mortgage lender of the prospective buyer required an environmental inspection as a result of which, it was learned that the soil of the property was contaminated and that for part of the time that the previous owner held title to the property, it was occupied by a Texaco gas station.

The cost of the environmental assessment was $6,377.00 which Plaintiff paid and the estimated cost of the decontamination was $75,000.00, which was put on hold pending resolution of Plaintiff’s claim against the Estate.

The previous owner was aware of the existence of the Texaco gas station but according to the evidence, he was not aware of the existence of any contamination. He believed in good faith that Texaco had cleaned up the site prior to giving up possession.

Article 1733 of the Civil Code of Quebec stipulates that a seller cannot exclude or limit liability for latent defects when he is aware or should be aware of their existence. However, the second paragraph of the Article makes an exception when the buyer purchases at his risk and peril from a non-professional seller, i.e. a seller who is not in the real estate business.

This exception has given rise to much discussion in the legal community since some argue that the law has turned its back on fraud. How can the law, which reflects society’s moral values, allow a fraudulent seller to escape sanction? One can only imagine the discomfort of a judge who must dismiss a claim against a fraudulent seller because the buyer purchased without any warranty. Should a judge sanction immoral conduct if it is considered to be otherwise “legal”?

The good news is that justice will prevail thanks to creative lawyers who have been able to persuade judges that the exception to the legal principle may itself give rise to an exception. The solution to the dilemma is as follows.

The legal consequence of a buyer who agrees to purchase at his own risk and peril is to waive and renounce the advantages of any legal or contractual warranty, notwithstanding that the non-professional seller may be aware of defects. However, for a contract to be valid, both parties must enter into it with free and unfettered consent. A seller who has made false representations to the buyer or has failed to disclose material information of which he has knowledge could provide the buyer with grounds to argue that his consent to the contract was tainted and thereupon apply for the annulment of the contract and/or damages.

The case law has repeatedly recognized that a party to a contract has a duty to inform the other party of any material information that he is aware of. Any consequential breach of the obligation by the seller would enable the buyer to ask for the cancellation of the contract and/or damages even without the existence of any legal or conventional warranty as to quality of the property.

In the case at bar, because the Court found that the previous owner was in good faith; was not aware of the existence of any contamination; and believed (however wrongly) that Texaco had cleaned up the site prior to vacating it, the Court found that there were no grounds upon which Plaintiff could rely to question the validity of its consent to the transaction.

Plaintiff also claims that Estate made a false representation in the Offer to Purchase by declaring that the property was at the time of the sale, in conformity with the laws and regulations relating to the environment, which the Court agreed was untrue. The Court stated, however, that the representation, although false, was made in good faith by the Estate and could not be considered to have been made intentionally to mislead the Plaintiff. Moreover, the Court also stated that in the circumstances, the said representation could not be considered to be a warranty.

This latter conclusion by the Court arguably rests upon questionable ground. The Court’s reasoning was that although the representation was technically false, it was not made in bad faith and therefore, it did not give rise to any liability. But of what value is such a provision in the contract if to have legal effect, the seller must know or have reason to believe that it was false? The Court’s reasoning would be more convincing if the representation had been qualified in such a way as to state that “to the seller’s best knowledge, the property is in conformity with environmental laws and regulations” or “the seller is not aware that the property is not in conformity with ….” However, that is not what the representation states. It states categorically that the property is in conformity.

It is submitted that a party is entitled, if not expected, to rely upon representations made by a co-contracting party when entering into a contract. If evidence is brought that the false representation induced the party to enter into the contract, then there should be a recourse available to the party to seek the cancellation of the contract and/or damages. Such recourse could be based on contractual liability. For example, Article 1458 of the Quebec Civil Code states that “Every person has a duty to honour his contractual undertakings” e.g. a representation regarding the environmental condition of the property. Alternatively, such recourse could be based upon the general theory of civil liability (Article 1457 Quebec Civil Code). A co-contracting party who makes a false representation which is relied upon by the other party is arguably negligent by not verifying the accuracy of the representation and should be held responsible in law for the resulting prejudice.