Caveat Emptor #218

May 01, 1994

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By Gerry Neely
B.A., LL.B.

For those of us who felt that court decisions had relegated the doctrine of caveat emptor to an earlier era, a recent case confirms that the doctrine is still alive to protect vendors, if the facts are right. In one case, prospective purchasers noticed cracks and a sagging floor during their inspection of a house. They were accompanied by the wife's father, a former real estate salesman who was there to offer his advice.

The vendors explanation of these defects was that they were there when they purchased the house three years earlier. They assumed that they were due to a settlement problem which existed when they moved in. The purchasers made an unconditional offer to purchase with a written contract prepared by the father, which was accepted.

When the purchasers moved in they found more cracks in the walls and in the concrete floor of the basement, that had been covered by wallpaper, wood panelling, drapes, carpets or furniture. They spent $12,000 to raise one end of the house and repair the damage caused by the settling and sued to recover this sum.

The printed form contract contained the usual clause that there were no representations or warranties, a clause that would not protect the vendors against fraudulent misrepresentations made by them. The judge's assessment of the vendors was that they were honest and that they had made no false or fraudulent statements. His decision that the purchasers bought the home "as is" was influenced by the reliance placed by them upon the advice of the father, who was described by the judge as an expert, because of his real estate experience. The judge stated that the purchasers could have protected themselves by making their offer conditional upon an inspection.

The purchasers also argued that the vendors had an obligation to advise the purchasers that a door that had been permanently left open, because a freezer had been placed in front of it, could not be closed upon the vendors vacating the premises. The purchasers claimed this was evidence of a serious settling problem. The Court of Appeal said they had no duty to disclose this to the purchasers, in part because the Contract of Purchase and Sale had already been entered into when they made this discovery, and partly because the statement concerning settling was one of opinion rather than a representation of fact.1

***

The courts are widening the liabilities of directors of a company for offences committed by the company with their knowledge. Personal liability was imposed in the following circumstances:

  • a director of a company who advised another company that if it bought his company's products, the products could be resold for a profit to a buyer named by the director. When that buyer refused to purchase the goods, they were resold at a loss of $150,000, which the judge ordered the director to pay personally.2
  • upon directors of a travel agency who put the proceeds of sale of Air Canada tickets into their general account, with the result that the agency's bank took the money to cover an outstanding line of credit. This breach of an agreement with Air Canada, that all ticket sale monies were to be held in trust to be paid only to Air Canada, was held by the Supreme Court of Canada to be a dishonest and fraudulent breach of trust.3
  • judgment for $53,765.22 against the sole director of a small B.C. company, the amount of provincial sales tax collected by the company, but not paid. The director had taken from the company approximately $40,000 before it stopped carrying on business. The Social Services Tax Act provides that any person who collects tax under the Act holds it in trust for the province. The reasons in the Air Canada case were applied to hold the director personally liable.4 (This case and the $150,000 judgment case are being appealed.)

Failure to pay sales tax or GST may also result in criminal charges for an officer, director, employee or agent of a company involved in the commission of the offence by the company, and penalties of fines or imprisonment or both.

These consequences suggest that it would be imprudent to use collected tax monies as a substitute for a bank line of credit.

  1. Crozman v. Ruesch, 1994 (4 W.W.R. 116).
  2. Hall-Chem Inc. v. Vulcan Packaging Inc., 1994 O.J. #817, March 22, 1994.
  3. Air Canada v. M & L Travel Ltd., 108 D.L.R. (4th), 592.
  4. British Colum bia v. D'Sena, RS. C. B. C., Vancouver Registry, January 20, 1994.

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