Ontario – settlement rescinded based on innocent misrepresentation of material fact unknown to Defendant

In Deschenes v. Lalonde, 2020 ONCA 304, Ontario’s Court of Appeal upheld rescission of a settlement on the basis of Defendant’s innocent misrepresentation regarding a fact material to Plaintiff’s decision to settlement.  Defendant’s actual or constructive knowledge that the representation was false was unnecessary.  The Court distinguished rescission based on innocent misrepresentation from rescission based on unilateral mistake. Despite the strong presumption favouring finality of settlements, the Court reiterated that the ways to “upset” a settlement are the same as those applicable to other contracts, including fraud, misrepresentation, duress, undue influence, unconscionability, or mutual or unilateral mistake.

Between 1970 and 1973, Plaintiff was sexually assaulted by Charles Sylvestre, a priest (“Father Sylvestre”) while a student at a school affiliated with and a member of church within the jurisdiction of the Roman Catholic Episcopal Corporation of the Diocese of London in Ontario (“Diocese”).

She commenced an action in Ontario in 1996 against Father Sylvestre and the Diocese claiming damages for the sexual assaults (“First Action”).  Her claims against the Diocese alleged vicarious liability for its priest’s actions and negligence in failing to prevent the assaults.

The Statement of Defence of the Diocese did not admit any of the allegations in the Statement of Claim and denied direct and vicarious liability for Father Sylvestre’s alleged actions. In particular, the Diocese denied “that it had direct, indirect, actual or constructive knowledge of the alleged sexual propensities or acts of Sylvestre” and stated that it had “no direct, indirect, actual or constructive knowledge of the allegations made by the plaintiffs until October 1992, well after the alleged assaults had ceased””.

In the First Action, the Diocese filed an affidavit of documents and its deponent, Father Anthony Daniels, now Bishop Daniels, was examined as the Diocese’s representative for discovery.  He confirmed that he had conducted a search of the Diocese’s records, made diligent inquiries to determine when the Diocese first learned about the allegations against Father Sylvestre, denied that anyone in the Diocese had any idea of the events alleged by Plaintiff and stated that no one at the Diocese had reason to believe that there were problems with Father Sylvestre until 1989.

Plaintiff and the Diocese attended a mediation during which the Diocese reiterated its lack of knowledge, including the following affirmation:

“There were never any complaints about Father Sylvestre, or reason to believe there could be any problems with him or his behaviour prior to 1989 when a fellow priest raised concerns with the Bishop about possible alcohol abuse by Father Sylvestre. He was immediately removed from the parish where he was then serving, and sent to a treatment centre”.

Following the mediation, Plaintiff and the Diocese settled that First Action (“Settlement”): the Diocese would pay Plaintiff $100,000.00; Father Sylvestre would pay the Diocese $50 per month until his death; Plaintiff would execute a full and final release in favour of Father Sylvestre and the Diocese; and Plaintiff would obtain an order dismissing the action. Plaintiff executed the release and received payment.  The First Action was dismissed October 16, 2000 by a consent order.

In 2006, information surfaced which established that the information provided by the Diocese in the First Action was incorrect.  Three (3) girls had made statements on January 17, 1962 to the Sarnia Police Service about sexual assaults by Father Sylvestre.  That information was transmitted to Catholic Social Services in Sarnia which then forwarded them to the Diocese’s then Bishop who died in December 1963 without apparently having advised anyone else about the girls’ statements. 

Between January 1962 and January 1963, Father Sylvestre was on a leave of absence in Roxboro, Québec. The police statements were discovered in 2006 by the executive assistant of the bishop of the Diocese at the time, in a filing cabinet where they had been misfiled with old accounting records. Shortly thereafter, copies of the statements were sent to all lawyers representing plaintiffs with outstanding claims against Father Sylvestre, including [Plaintiff’s] former counsel”.

Plaintiff brought an action against the Diocese and others in December 2008 (“Second Action”) seeking to rescind the settlement and to claim damages.  She asserted that she would never have entered into the Settlement had she known that the Diocese had information about Father Sylvestre’s prior sexual assaults of children at the time she had been assaulted.

Plaintiff and the Diocese each brought motions for summary judgment.  The Diocese applied to dismiss the Second Action because it was barred by the release in the Settlement.  Plaintiff applied for a declaration rescinding the release and the order dismissing the First Action.  The motion’s judge granted Plaintiff’s motion.  (Those reasons, identified by the Court of Appeal as reported at 2018 ONSC 7080, are not available online at the time this note posted).

On appeal, the Court maintained the orders issued by the motions judge but clarified the analysis on which it accepted to do so.  The key passages in the reasons cover paras 27-32 and this note only flags the high level principle from each paragraph.

(1) para. 27 – “The departure point is that there is a strong presumption in favour of the finality of settlements”.  A settlement will not be rescinded on post-settlement information which indicates that a party has entered into an improvident settlement.  Hindsight is not sufficient to revisit a settlement. See Tsaoussis (Litigation Guardian of) v. Baetz (1998), 1998 CanLII 5454 (ON CA), paras 15-16, leave to appeal refused, [1998] S.C.C.A. No. 518; Mohammed v. York Fire & Casualty Insurance Co. (2006), 2006 CanLII 3954 (ON CA) para. 34, leave to appeal refused, [2006] S.C.C.A. No. 269.

(2) para. 28 – Misrepresentation justifies rescinding a settlement despite the interest in finality of settlements.  The same grounds to “upset” a contract apply equally to a settlement including “contractual problems” such as fraud, misrepresentation, duress, undue influence, unconscionability or mutual or unilateral mistake.  See Radhakrishnan v. University of Calgary Faculty Assn., 2002 ABCA 182.

(3) para. 29 – Rescission is an equitable remedy available where a false or misleading representation induces a contract.  The party seeking rescission must prove that the misrepresentation was material and it relied on it.  To qualify as “material”, the misrepresentation “relate to a matter that would be considered by a reasonable person to be relevant to the decision to enter the agreement, but it need not be the sole inducement for acting”. See Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 SCR 423 para. 39; 1323257 Ontario Ltd. (Hyundai of Thornhill) v. Hyundai Auto Canada Corp., 2009 CanLII 494 (ON SC) para. 71; Barclays Bank v. Metcalfe &Mansfield, 2011 ONSC 5008 paras 156-159, aff’d Barclays Bank PLC v. Devonshire Trust, 2013 ONCA 494, leave to appeal refused, [2013] SCCA No. 374; York University v. Markicevic and Brown, 2016 ONSC 3718 para. 145, aff’d York University v. Markicevic, 2018 ONCA 893, leave to appeal refused, [2019] SCCA No. 134.

(4) para. 30 – Rescission is available when the misrepresentation is made innocently, “that is, by a party who believed it was true”. Proof of misrepresentation is sufficient (provided other requirements are met, including the misrepresentation being material and inducing a party to contract) and having done so “honestly” or “free from blame” is not relevant.  See Derry v. Peek (1889), [1886-90] All E.R. Rep. 1 (H.L.), p. 13, per Lord Herschell; Kingu v. Walmar Ventures Ltd., 1986 CanLII 142 (BC CA) para. 15.

Based on the case law, the Court determined that the relevant elements to consider were: whether the Diocese made a misrepresentation; whether the misrepresentation was material to the settlement; and (3) whether Plaintiff had relied on the misrepresentation in settling the First Action on the terms she did.

At para. 30, the Court reiterated the distinction between “innocent misrepresentation” and “unilateral mistake” as separate grounds for rescission of a contract. Rescission for unilateral mistake allows a party to seek rescission of a contract for its own unilateral mistake only where the mistake goes to a material term of the contract, where the other party knows or ought to know of the mistake, and where it would be unconscionable for the second contracting party to rely on the contract. See 256593 BC Ltd. v. 456795 BC Ltd. et al., 1999 BCCA 137 para. 28; Toronto Transit Commission v. Gottardo Construction Ltd., 2005 CanLII 31293 (ON CA) para. 30, leave to appeal refused, [2005] SCCA No. 491.

The Court agreed that the motions judge mixed terms and, at times, “confused the language of mistake and misrepresentation”.  The Court acknowledged that an innocent misrepresentation “could be viewed as a unilateral mistake in the sense that it was a one-sided error made on the part [of the party resisting rescission], but not in the legal sense of the term”.

The Court refused to apply the unilateral mistake as a ground for rescission in the circumstances, holding that it the facts did not support its application.

As I have previously noted, a contracting party may obtain rescission on the basis of its own unilateral mistake where the mistake goes to a material term of the contract (something that goes to the root of the contract, or is fundamental to the contract), where the other party knows or ought to know of the mistake, and where it would be unconscionable for the second contracting party to rely on the contract”.

There is no question that where there has been a unilateral mistake by the innocent party to a contract, a contract can be rescinded only if the non-mistaken party knew, or ought to have known, of the innocent party’s mistake. The core element of knowledge, however, is that of the non-mistaken party”.

On the facts though, the Court determined that the unilateral mistake analysis did not apply because the mistake was that of the Diocese not Plaintiff.

[47] The proper characterization of what occurred here is that the Diocese made a representation that was false when it stated repeatedly, including under oath, that no one knew that there was any reason to be concerned about Father Sylvestre’s behaviour before [Plaintiff] claimed to have been assaulted by him, and that there had been no prior complaints. In this sense, the Diocese made a “mistake”. Although the Diocese was mistaken when it made the representation, this was not a case of rescission for unilateral mistake. Rather, rescission of the settlement agreement was warranted on the basis of the law of innocent misrepresentation”.

Even if the motion judge incorrectly applied the law of unilateral mistake, the Court has jurisdiction to apply the correct legal framework to the evidence.  See section 134(1)(a) of the Courts of Justice Act, R.S.O. 1990, c. C.43; L.M. v. Peel Children’s Aid Society, 2019 ONCA 841 para. 54; and Ontario (Attorney General) v. Darby Road, Welland (In Rem), 2019 ONCA 31 para. 30.

The Court dealt with imputed knowledge to the Diocese and determined that imputation of knowledge was not determinative. The actual or constructive knowledge of the Diocese was not necessary.

[40] Rescission based on innocent misrepresentation does not require a finding that the Diocese had actual or constructive knowledge that the representation was false at the time it was made. An innocent misrepresentation is one that is made without knowledge that it is wrong: see Barclays Bank, at para. 156”.

In closing the Court considered the Diocese’s arguments that Plaintiff’s decision was like much other decisions to settle, based on imperfect or incomplete information.  The Court dismissed this argument.

[54] As noted by the appellants, settlements are compromises made on the basis of the information that is available to the parties at the time. In many instances, civil actions are settled on the basis of imperfect or incomplete information. In other cases, as here, they are settled after the discovery of documents and oral discovery. Settlement decisions are based on the available information and the parties’ assessment of the strength or weakness of their case, informed by a consideration of legal precedent.

[55] Contrary to the appellants’ suggestion, [Plaintiff] did not seek to resile from the settlement simply because new information had come to light which would have strengthened her case. Rather, rescission was available because certain key information that was provided to [Plaintiff] by the Diocese was false. Rescission was available as a remedy for innocent misrepresentation, which could only be granted once the requirements had been met”.

urbitral note – First, the list of requirements for rescission based on innocent or non-fraudulent misrepresentation are listed in Kingu v. Walmar Ventures Ltd., 1986 CanLII 142 (BC CA), referred to by the Court of Appeal in its reasons.  The requirements are as follows:

(a) A positive misrepresentation must have been made by the defendant.

Where the defendant owes a fiduciary duty to the plaintiff, as it may be contended Chmilar did to the plaintiffs in this case, failure to disclose material facts may suffice: Laskin & Bache & Co. Inc. (1972), 1971 CanLII 598 (ON CA), 23 D.L.R. 385 (Ont. C.A.); Waddams, The Law of Contract, 2nd ed., p. 262.

(b) The representation must have been of an existing fact: Anderson v. Pacific Fire and Marine Insurance Co. (1872), L.R. 7 C.P. 65; see also Bisset v. Wilkinson, 1926 CanLII 536 (UK JCPC), [1927] A.C. 177 (H.L.)

(c) The representation must have been made with the intention that the plaintiff should act on it: Peake v. Gurney (1873), L.R. 6 H.L. 377.

(d) The representation must have induced the plaintiff to enter into the contract: Shortt v. MacLennan 1958 CanLII 11 (SCC), [1959] S.C.R. 3.

(e) The plaintiff must have acted promptly after learning of the misrepresentation to disaffirm the contract: Clough v. L.N.W. Ry. (1871), L.R. 7 Ex. 26; Wallbrige v. W.H. Moore & Co. Ltd. (1964), 1964 CanLII 722 (BC SC), 48 W.W.R. 321 (B.C.S.C.); Dodds v. Millman (1964), 1964 CanLII 467 (BC SC), 45 D.L.R. (2d) 472 (B.C.S.C.); Bango v. Holt 1971 CanLII 988 (BC SC), [1971] 5 W.W.R. 522 (B.C.S.C.); Timmins v. Kuzyk (1962), 1962 CanLII 452 (BC SC), 32 D.L.R. (2d) 207 (B.C.S.C.)

(f)  No innocent third parties must have acquired rights for value with respect to the contract property: Babcock v. Lawson (1880), 5 Q.B.D. 284.

(g) It must be possible to restore the parties substantially to their pre-contract position: Redgrave v. Hurd (1881), 20 Ch. D. 1; Schlote v. Richardson, 1951 CanLII 90 (ON SC), [1951] O.R. 58 (H.C.J.); McLaughlin v. Colvin, 1941 CanLII 302 (ON CA), [1941] 4 D.L.R. 568, affd. 1942 CanLII 359 (SCC), [1942] 3 D.L.R. 292 (Ont. C.A.); Friesen v. Berta (1979), 1979 CanLII 449 (BC SC), 100 D.L.R. (3d) 91 (B.C.S.C.); Andronyk v. Williams, 1985 CanLII 3681 (MB CA), [1986] 1 W.W.R. 225 (Man. C.A.).

(h) An executed contract for the sale of an interest in land will not be rescinded unless fraud is shown: Redican v. Nesbitt, [1923 CanLII 10 (SCC), 1924] S.C.R. 135; Shortt v. MacLennan, supra; Kra h-Hansen v. Kin-Corn Construction & Developments Ltd. (1979), 13 R.P.R. 22 (B.C.S.C.)”.

Second, in Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 SCR 423, at paras 39 and 40, the Supreme Court pauses to clarify the “fundamental confusion” which seems to exist over the meaning of the terms “rescission” and “repudiation”. Rescission is a remedy available to the representee, inter alia, when the other party has made a false or misleading representation. Repudiation, by contrast, occurs “by words or conduct evincing an intention not to be bound by the contract”.

Third, in 1323257 Ontario Ltd. (Hyundai of Thornhill) v. Hyundai Auto Canada Corp., 2009 CanLII 494 (ON SC) at para. 71, the court acknowledged that rescission was available in cases of fraudulent misrepresentation and innocent misrepresentation, provided it induced the other party to contract.  It defined a fraudulent misrepresentation as “a statement known to be false or made not caring whether it is true or false”.

Fourth, in Barclays Bank v. Metcalfe &Mansfield, 2011 ONSC 5008 at para. 156, the court spoke to the role of negligence and a rebuttable presumption that a material representation induced the misrepresentee to enter into the contract.

[156] A material misrepresentation, whether innocent or fraudulent, may be grounds to set aside a contract entered into by one party in reliance on the representation. A fraudulent misrepresentation is a statement known to be false or made not caring whether it is true or false. For innocent misrepresentation the misrepresentation might be entirely honest and careful, there is no need for promissory intention, the negligence of the party seeking relief is no defence, and there is a presumption that a material representation did in fact cause the misrepresentee to enter into the transaction. The presumption can be rebutted by proof of no reliance on the misrepresentation”.