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Civil Litigation

Grow-op case highlights dangers of loose contract drafting

An Ontario Court of Appeal (OCA) decision in favour of a seller whose house was once used as a marijuana grow-op is a cautionary tale about the dangers of a loosely drafted contract, Toronto senior litigation lawyer Jeffrey Silver tells AdvocateDaily.com

The case revolves around a representation and warranty in the agreement of purchase and sale (APS), which declared the property had never been used for the growth or manufacture of illegal substances “to the best of the Seller’s knowledge and belief.”

The buyer put down a $30,000 deposit on the house but subsequently discovered the building had in fact been used as a grow-op before the current owner purchased it. The buyer attempted to pull out of the deal.

But the sellers refused to terminate the APS and launched a court action to seize the buyer’s deposit and claim damages for losses suffered as a result of the delay in reselling the house, which has since sold for half the price originally agreed between the litigants.

After a close look at the illegal substances clause and the APS as a whole, a unanimous panel of the appeal court ruled that the buyer had breached the agreement and ordered the case back down for an assessment of damages, overturning a lower court judgment in favour of the buyer.

“The main takeaway is that you’ve got to make sure the language of your contract is as tight as reasonably possible. That applies not just to this clause, which built in some unwanted wiggle room, but to the entire agreement,” says Silver, principal of Jeffrey C. Silver Barrister.

“Overall, it’s a sad case in the sense that all parties are innocent. Nobody was trying to pull the wool over the eyes of the other, but now the buyer has no house and is out of pocket for a huge sum," he says. "Even the successful seller has had to wait a long time for his damages while paying out some hefty legal bills.

“Because of some poor drafting, everyone came out a loser,” Silver adds.   

The Superior Court judge who originally decided the case ruled that even if the seller did not know about the property’s history at the time he signed the APS, the standard-form representation was intended to last until closing. Once the purchaser informed him of the grow-op, the seller “could no longer honestly give the representation in the Illegal Substances Clause.”

However, on appeal, the three-judge panel agreed with the sellers that the representation referred to their knowledge and belief at the time they signed the APS, rather than the date of closing.  

Writing for the panel, OCA Justice David Brown wrote that the interpretation flowed from the plain language used in the clause, as well as the absence of any mention of the closing date, in contrast to other provisions found in the APS.

"That other provisions of the APS use language signifying that the Sellers’ representation or warranty operates at the time of closing suggests that the absence of similar language in the Illegal Substances Clause reflects the parties’ intention to limit its operation to the state of affairs known at the time of the APS’ execution,” Brown wrote.

“Put another way," he continued, "it was open to the parties to craft the representation and warranty so that it either spoke to the Sellers’ state of knowledge and belief on closing, or required the Sellers to give some sort of declaration or bring-down certificate about the state of their knowledge on closing. The Purchaser did neither.” 

Silver says, “It’s a foundational principle of contractual interpretation that you can’t read a clause in isolation. It has to be read in the context of the contract as a whole.”

He says drafters must take particular care when copying and pasting clauses from other contracts or from a central repository to construct, for example, a full and final release following a settlement.

“If there’s a slight change, for example, in the wording between one clause and another similar clause and some issue surfaces down the road as to the scope of the release, a court could say there must be some reason for the difference,” Silver says. “You need to keep everything consistent.”

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