Half-Truth by Seller Leads to Liability

 

By Brian Madigan LL.B.

The lawsuit Alevizos and Nirula is another Property Condition Disclosure Statement case. This case came before the Manitoba Court of Appeal for consideration in 2003. It is the highest Court yet to discuss this document, since no cases have reached the Supreme Court of Canada.

The comments made by the Justices are noteworthy. Originally, this was a claim that was heard in Small claims Court due to the monetary size of the dispute, but under appeal it was considered sufficiently important for the Court of Appeal to offer some guidance.

The Alevizos purchased from the Nirulas a substantial home in the Tuxedo area in Winnipeg. During the initial negotiations, and after a first offer to purchase had been made, a request was made by the purchasers for the vendors to complete a PCS. Mr. Alevizos had noticed a gap in a window and had expressed a concern to his real estate agent who in turn suggested that a PCS be obtained from the vendors.

Pertinent for our purposes is question H and the answer noted directly underneath:

"To your knowledge has there ever been any flooding or leakage affecting any portion of the property (into the house or garage or into low-lying areas of the yards or other part of the property) and from any cause or source (rainwater, snow melt, sewer backup or other cause or source)?

[Answer] Exterior water tap froze and broke - caused some flooding in the rec rm. - thus all doors, flooring & carpeting, & lower 3 ft. of all walls replaced 1998."

But a frozen water tap was not what the purchasers were worried about. Rather, their concern was about the potential difficulties with some of the windows.

Analysis by the Court:

· There can be no doubt that caveat emptor is alive and well.

· mere silence without more on the part of the vendor with respect to a defect subsequently discovered by a purchaser will not normally found a cause of action against the vendor by the purchaser for misrepresentation or for fraud.

· A distinction must be made between a failure to disclose which in effect renders what has been stated a misrepresentation, and a failure to disclose which leaves anything said or written as true, but results in some misconceptions since the whole truth has not been told. The former kind of non-disclosure if fraudulent is fraudulent misrepresentation.

· A half a truth will sometimes amount to a real falsehood

· A representation might be literally true but practically false, not because of what it said, but because of what it left unsaid. In short, because of what it implied. This is as true of an innocent misrepresentation as it is of a fraudulent misrepresentation.

· To state a thing which is true only with qualifications or additions known to, but studiously withheld by, the representor, is to say the thing which is not. Such a statement is a "lie", and one of the most dangerous and insidious forms of lie.

· Any active concealment by the vendor of defects which otherwise would be patent is treated as fraudulent, and the contract is voidable by the purchaser if he has been deceived by it. Any conduct calculated to mislead a purchaser or lull his suspicions with regard to a defect known to the vendor has the same effect.

· The purpose of active concealment, of course, is to make latent that which would otherwise be patent.

· Where there is an active concealment of an otherwise patent defect, the general rule of caveat emptor will not apply.

· .... the question is whether the Mr. Nirula deliberately omitted to say something which was required to render completely true his response to question numbered H on the PCS, namely, whether there had "ever been any flooding or leakage affecting any portion of the property."

· Assuming the statement made by Mr. Nirula about the frozen water tap as far as it went was true, does it also represent a positive statement that no other leakage occurred?

· Viewed in this way, confirmation that the frozen water tap was the only leakage is a fraudulent misrepresentation within the classic definition contained in Peek, earlier referred to, since, "the withholding of that which is not stated makes that which is stated absolutely false". (Derry and Peek)

· ....the misrepresentation, .... runs afoul of yet another exception to caveat emptor, namely, because there was a duty to disclose such a material fact pursuant to the terms of the PCS document itself? In addition to the nature of a contract (uberrimae fidei for example), such a duty may arise "from circumstances which occur during the negotiation".

· ..... a contracting party who is entitled to remain silent once the decision is made to say anything at all during negotiations on a particular subject that is relevant "must say everything, that is, everything material to the topic in question; by breaking silence, he impliedly ‘undertakes' a duty which otherwise the law would not have prescribed".

· by speaking there is an implied undertaking in the circumstances to speak fully.

· The vendors' response was not merely a "half truth," it was a positive falsehood. Once the vendors voluntarily undertook to complete the PCS, they were obliged - indeed they were under a duty "in the circumstances" - to do so honestly and completely. This they did not do.

The Court on The PCS itself:

· Declarations made in a PCS are representations as opposed to terms of the contract.

· Such statements do not constitute a warranty, rather the purpose of a PCS is to put purchasers on notice, to make purchasers aware of a problem if there is one.

· Since the purpose of the PCS is to give the purchasers a "heads up" with respect to potential problems, liability will ordinarily be disallowed when the problem in question is obvious. This is because purchasers in such circumstances should not have been misled by the disclosure statement.

· If the vendor answers the PCS honestly and does not deliberately intend to mislead, then liability will not follow even if the representation turns out to be inaccurate

· Based on the experience of those provinces that have employed the PCS, it seems to present a ripe ground for litigation. Doubtless this is due in no small measure to the problems inherent in an informal "fill in the blank" form which can have such serious legal consequences when problems subsequently develop in a real estate transaction. The wisdom of maintaining in use a form fraught with such inherent difficulties, exacerbated by the conflicting statements within the form concerning its purpose and effect, should be addressed by lawyers and real estate agents alike.

Mr. Justice Kroft, another Justice of the Court of Appeal offered his own comments about the use of the PCS:

· "My purpose in writing these brief separate reasons is to emphasize an aspect of this case which should be of particular interest to members of the public who are buyers or sellers of homes and to the agents and lawyers who represent them. I am referring to the risks, well demonstrated here, which are inherent in the recently introduced "form" document described as a property condition statement or PCS.

· The Chief Justice, in paragraph 36 of his judgment, sets forth five "general statements" which describe the nature of the PCS. He explains both the intent and the difficulties related to its use. In his fifth statement, he observes that based on the experience of other provinces, the form creates "a ripe ground for litigation." He attributes at least part of the problem as being due to the frailties of a practice which encourages important representations about the condition of real property to be asked and answered on a short pre-printed form comprised of standard questions and answers which are given by filling in boxes and blanks.

· This judgment should, in my view, be taken as a warning about the routine use of the PCS. The purchase and sale of a home is for many people the most significant business transaction they will ever enter into. Representations as to the condition of the property are inevitably going to be requested and given. I do not believe that these concerns are ever going to be safely dealt with by filling in the blanks on a short form carried in the real estate agent's briefcase with his or her other supplies.

· It is my concern that the use of the PCS is likely to increase the number of disputes in circumstances similar to those which existed here. That view causes me to emphasize the suggestion of Chief Justice Scott that the continued use of the PCS "should be addressed by lawyers and real estate agents alike." A more careful and traditional way of making important representations about the condition of property is surely better than incurring the risk of costly and uncertain litigation."

COMMENT:

So, you might wonder whether to use this document at all? The Court emphasized that should the vendor choose to answer the document which was otherwise voluntary, then there were certain conditions and limitations placed upon the vendor in terms of responses.

No half truths, no concealments. There was now a duty to be fully forthright and provide detailed and accurate answers. Anything that might trick a purchaser is a deceit. Answering questions in a clever way is really not allowed. That is just a little too "cute".

Adding additional information is sometimes distracting and is intended to placate the purchaser into the false belief that full and complete disclosure has been provided, when really it's just a "curve ball" calculated to deceive.


Remember... "the truth, the Whole truth, and NOTHING but the truth!


Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com