Damages in Negligent Inducement of Purchase of Defective Property

In my practice, I frequently find myself involved in professional negligence cases. Since the publication of the Ontario Court of Appeal’s decision in Bowman v. Martineau, I have often heard from opposing counsel that Bowman stands for the proposition that the liability of defendants in professional negligence cases is always assessed on a diminution in value basis. That is not what the Bowman decision stands for, though, and this article is designed to set out what I believe to be the correct interpretation of the Court of Appeal’s decision in Bowman as it pertains to the quantification of damages in professional negligence cases.

THE FACTS

Aden and Shirley Bowman had seven children. Aden was a carpenter and Shirley a homemaker and avid gardener. Aden had suffered bankruptcy on a business venture and, unable to qualify for a mortgage, the Bowmans continued renting for $1,750 a month, which was high for them in 2014. On their weekly drive to Bracebridge for groceries, they passed a 1970s style bungalow with a for sale sign. They stopped to pick up a brochure prepared by the listing agent, Ms. Martineau, stating, “Solid well built home with good bones … clean and move in ready.” The Bowmans arranged to see it because it was in the right location for their kids’ schools. It was dated but clean and had five bedrooms. It needed paint and the old carpets removed. They would take out a kitchen wall to make room for their large dining table and that was all the work they anticipated. The six acres would accommodate a carpentry shop for Aden’s business and a large garden for Shirley. It was perfect.

Aden asked Ms. Martineau if there was a checklist of information about the roof, septic, and well. Ms. Martineau told him it was called a Sellers Property Information Statement (“SPIS”), but she could not give it to him because the sellers had not signed it. The MLS listing in the brochure, however, states “SPIS: Yes.” The sellers, Alma and Shelley Emond, mother and daughter, had signed their SPIS on the listing date, March 21, 2014. It contained the following information regarding the roof:

9. (a) Are you aware of any moisture and/or water problems? “No”.
9. (b) Are you aware of any roof leakage “Yes” or unrepaired damage “No”.

Additional comments: Question 9B. We have a roof heating line in the valleys for ice build up. But it is insufficient. The first roof my dad put on – he overlapped the shingles ¾ to 1”. This eliminates the ice from being able to lift the tiles. We assumed our builder would do the same and didn’t. Using the minimal overlap is not wise.

Ms. Martineau did not ask the sellers to elaborate on their cryptic answer in the SPIS. She instructed them to let her do the talking when there was a showing. The Bowmans found the property quite suitable and, hopeful of getting financing, approached several mortgage brokers recommended by Ms. Martineau. They had no luck obtaining financing, however, and had to put the house purchase out of their mind. Several weeks later, Ms. Martineau called to say the sellers were willing to give a 95% vendor-take-back mortgage. The Bowmans’ offer of $180,000 was accepted, subject to a home inspection. The sellers had already painted over water marks on the ceiling tiles, and the home inspector attributed the musty smell in the basement to original 1976 carpeting. The Bowmans removed the condition and closed the transaction.

When the Bowmans visited their new property after a rainfall, they found a puddle on the kitchen floor and some carpeting soaked. The vapour barrier in the attic ballooned full of rainwater. When they took out the kitchen wall, they found that mould coated the inside of walls and studs. The backs of electric baseboard heaters were rusted through. Some floor joists were rotted through. Water penetration had obviously been a longstanding issue. Aden said at trial that if he had known about the condition of the house he would never have bought it.

Because of the once-in-a-lifetime opportunity, however, the Bowmans decided to make repairs and accomplish the tear-out before winter. Despite taking precautions, the unheated basement floor heaved due to frost and cracked the trusses, making matters worse. Still the Bowmans did not walk away. Aden said, “My children want to live there. It’s the location they want to live to be able to go to the same school and it’s got acreage and we had plans…” The Bowmans were able to pay both their mortgage and their rent for a year before they could no longer manage the mortgage payment. The Emonds commenced a mortgage action, and the Bowmans commenced this action.

THE RESULT AT TRIAL

At trial, Mr. Justice di Tomaso found the sellers liable in negligence based on the concealment of the serious and ongoing leakage problem in the house. Referring to Shelley Emond he said, “There was ongoing water infiltration and she knew it. The musty smell was not old carpets, but mould.” She knew there was a latent defect and that it rendered the house uninhabitable. Her liability was apportioned at 30%.[1]Before trial she settled by Pierringer Agreement.

Damages were based on the tort of negligence. Justice di Tomaso concluded,

[186] I find the Bowmans are entitled to be put in the position they would have been in if the negligent conduct had not taken place. The Bowmans thought they were purchasing a house free from mould and water damage.

…
[192] In Jarbeau v Maclean, where a purchaser believed it had purchased a home free of defects, “the fairest measure of damages is that which would provide the [plaintiffs] with what they bargained for – a home free of defects.”

[193] Following the reasoning in Jarbeau, I find the fairest measure of damages would be damages that provide the Bowmans with a home that is free of mould and water damage, as well as any consequential damages flowing therefrom, and out-of-pocket expenses.[2]

THE COURT OF APPEAL DECISION

Ms. Martineau appealed the trial decision, seeking to overturn the trial judge’s decision on damages only. On appeal, Ms. Martineau argued that since she, as a negligent professional, did not cause the underlying defects (decay, mould, uninhabitability) she was entitled to have damages against her assessed on a “diminution in value” basis rather than on the basis of the cost necessary to repair the defects. The Court of Appeal agreed, saying,

[17] I agree with the appellants’ position. The difficulty with the respondents’ argument is that it conflates the cause in fact of their damages with the reasonableness of the quantum. In my view, the trial judge erred in his approach to causation. Specifically, the trial judge mischaracterized the respondents’ loss flowing from the appellants’ negligence and misinterpreted this court’s decision in Jarbeau.

…
[22] In the present case … the loss that the respondents suffered as a result of the appellants’ negligence was not property loss [like that suffered in Jarbeau].

[23] The respondents’ loss consisted of entering into a transaction to purchase a house damaged by water and mould. The appellants’ negligent provision of professional services caused the respondents to enter into a transaction that they would not have otherwise undertaken. But the appellants did not cause the water and mould damage to the property. In other words, even if the appellants had not been negligent, the respondents would still not have received a water and mould-free property; they would merely have avoided this bargain. This takes this case outside the scope of Jarbeau, Nan, and other cases where the negligence was causally related to property damage.

[24] As the appellants’ wrong did not cause the property defect, the respondents are not entitled to demand … a house free of mould and water damage… They are only entitled to damages to compensate them for entering into a bad transaction they would have otherwise avoided. These damages will include their overpayment for the defective property, namely, its diminution in value.

[25] … Awarding cost to repair would over-compensate the respondents and therefore not put them in the position they would have occupied but for the appellants’ negligence.

The Court of Appeal remitted the calculation of the diminution in value back to Justice di Tomaso, however the dispute was settled as between the parties without further intervention from the courts.

ANALYSIS – WHAT DOES THE COURT OF APPEAL’S DECISION IN BOWMAN MEAN?

The trial judge found, and the Court of Appeal agreed, that but for Ms. Martineau’s negligence, Mr. Bowman would have learned of the home’s significant deficiencies and would not have purchased the defective home. I believe that this is the part of the appeal decision at which many of my colleagues are led astray. Ms. Martineau is a professional, and her negligence did not cause the problems with the home. This must mean – so my colleagues have suggested to me – that professionals cannotbe held liable for the cost to repair damage unless the plaintiff proves that the professional actually caused the damage at issue. As a result, professionals can only be held liable for the diminution in value between the price paid and the actual value of the deficient property.

With the utmost of respect to my dear colleagues, this is an oversimplification of the Court of Appeal’s reasons. Bowmandoes not stand for the proposition that professionals, as a class of defendants, will always have their damages assessed on a diminution in value basis in property loss cases. Rather, the manner in which damages are quantified must accord with the specific type of loss occasioned by the professional’s negligence. In other words, what are the damages that the defendant’s negligence actually caused?

Indeed, several of the cases that the Court of Appeal relied on in Bowman involve negligent professionals whose damages were calculated on a cost to repair basis.

In Jarbeau v. McLean,[3] for example, the defendant solicitor was negligent in failing to sue an engineer on behalf of their purchaser clients, who thereby lost the opportunity to recover cost of repair damages from the engineer for negligently approved house construction. The solicitor did not cause the house to be poorly constructed, nor did the solicitor negligently approve construction. But the damages flowing from the solicitor’s negligence were calculated on a cost of repair basis, because that negligence cost the plaintiffs the ability to recover the cost of repair from the engineer.

In Tabata v. McWilliams,[4] the defendant solicitor was negligent in failing to advise their purchaser clients that they needed to obtain an occupancy permit prior to purchasing their home. The home’s basement had been constructed poorly and a foundation wall failed four years later. The trial judge and the Court of Appeal agreed that the solicitor’s negligence deprived the plaintiffs of the ability to obtain an occupancy inspection – which would have been a necessary precondition to obtaining an occupancy permit. That occupancy inspection, in turn, would have likely identified the foundation deficiencies. That identification of deficiencies would have likely permitted the plaintiffs to require the vendors to rectify the deficiencies prior to entering into the purchase and sale transaction. Damages against the solicitor were assessed on a cost to repair basis. The solicitor did not construct the foundation or otherwise cause the foundation deficiencies. But because the solicitor’s negligence cost the plaintiffs their ability to detect and remedy the deficiencies, the damages that flowed from the solicitor’s negligence was the cost to remedy the deficiencies.

A similar result can be found in the case of Andrade v Collins.[5] In Andrade, a lawyer was found liable for the cost to replace regulatorily noncompliant underground gas tanks for failing to adequately protect her client, Mr. Andrade, in his purchase of the restaurant and gas bar property in which the tanks were situated. It was common ground at trial that the lawyer did not cause the tanks to be regulatorily noncompliant. Nevertheless, having purchased and become the new owners of the tanks, Mr. Andrade was subjected to TSSA orders to remedy the noncompliance or risk a hefty fine or imprisonment. In her decision, Justice S.K. Stothart found that Mr. Andrade would not have been able to sell the property with the defective tanks given the outstanding TSSA orders to remedy and the risk of possible environmental contamination. Indeed, Andrade faced the risk of a fine or even imprisonment should he have failed to comply with the TSSA’s orders to remedy. As a result, she found that the cost to repair the tanks was a more appropriate measure rather than assessing the property’s diminution in value caused by the tanks’ defects.

The appeal decision in Bowman, along with the cases the Court of Appeal relied upon in its decision, show that the manner in which damages for professional misconduct are quantified depends on the type of loss that the professional negligence caused. In cases where the professional’s negligence caused the property defects or caused the plaintiffs to no longer be able to recover against a third party for the property defects (as was the case in Jarbeau and Tabata), cost of repair is the appropriate measure. Where the professional negligence caused the plaintiff to enter into a contract into which they otherwise would not have entered, diminution in value is the appropriate measure (as was the case in Bowman).

JURISPRUDENTIAL REVIEW OF THE ISSUE OF DAMAGE QUANTIFICATION

In my review of damages quantification jurisprudence, I came across several cases that provide valuable insight into the factors that courts will consider when quantifying damages.

(1) NEGLIGENCE CAUSING PROPERTY LOSS

I begin with residential properties and Jens v. Mannix Co.,[6] a 1978 decision of Meredith J. of the British Columbia Supreme Court. This decision is important because it discusses the principles of proportionality and reasonableness that the Court of Appeal refers to in Bowman.

The Jens family home north of 100 Mile House was located next to a hangar containing their collection of vintage automobiles. They invited visitors to the hangar and gave guided tours free of charge. In July, 1972, the defendant’s pipeline ruptured and crude oil saturated the buildings and land around the Jens’ home. An action ensued. The defendants admitted liability but argued the measure of damage was diminution in value, and there was no diminution in value because the land was zoned commercial and the property was worth just as much without the home and hangar. The plaintiffs asked for an amount sufficient to replace the buildings, the trees and topsoil, and to compensate for the inconvenience. They told the court how they had pioneered the area in the lumber business, had children and grandchildren living nearby, and wished to remain at that location for the remainder of their lives. Nothing less than a new house and remediated soil would compensate them.

Meredith J. cited an excerpt from McGregor on Damages where the author doubted whether the standard measure of damages in respect of damage to property was the diminution in value measure. McGregor took the view that the only time diminution in value is suitable is when replacement or repair is out of all proportion to the injury to the plaintiff. The difficulty in those cases, according to McGregor, was,

… [T]he plaintiff may want his property in the same state as before the commission of the tort but the amount required to effect this may be substantially greater than the amount by which the value of the property has been diminished. The test which appears to be the appropriate one is the reasonableness of the plaintiff’s desire to reinstate the property; this will be judged in part by the advantages to him of reinstatement in relation to the extra cost to the defendant in having to pay damages for reinstatement rather than damages calculated by the diminution in value of the land.[7]

Meredith J. awarded the cost of replacement because of two considerations which he found pivotal: (1) the plaintiffs’ claim to replacement of the building was reasonable as between the plaintiff and the defendant, and (2) replacement would not give the plaintiffs something effectively better or more valuable than they had before.

Mannix Co. appealed, asking that 16% depreciation be deducted from the award in respect of damage to the house, and that the appropriate date for assessing damages was the date of loss. The Court of Appeal agreed.[8] It also agreed with Meredith J. that damages were properly calculated on a cost-of-repair basis in the circumstances.

The British Columbia Court of Appeal refused to grant a discount for depreciation in Nan v. Black Pine Manufacturing Ltd.,[9] where a heating contractor destroyed the plaintiffs’ home by fire. With unsatisfactory appraisal evidence in hand, the trial judge ordered payment of $69,809, the cost of rebuilding the home, which she felt more closely reflected the Nans’ loss. Black Pine appealed, arguing the appraisal of $47,000 was reliable and correct, seeking to have damages reduced further to $37,500 on a diminution-in-value basis. The Court of Appeal spoke out eloquently:

[19] I do not find anything … that would require this court now to resile from the long-established general principles applicable to damages in tort actions. The first of those principles is reflected by the maxim restitutio in integrum, the damages shall be such as will, so far as money can, put the plaintiff in the same position as he would have been had the tort not occurred. The second is that the damages awarded must be reasonable both to the plaintiff and to the defendant.

[20] The result of the application of these principles, in most cases involving the tortious loss of or damage to property, will be that replacement costs will at least be the starting point for the assessment of damages. Whether or not the damages based on such costs should then be adjusted, either for pre-loss depreciation or post-reinstatement betterment, will depend on what is reasonable in the circumstances. No rules can be fashioned by which it can invariably be determined when such allowances should be made. It must, in all cases, turn on the facts peculiar to the case being considered. 

[21] For example, a review of the cases might suggest that where the property in question had a predominantly commercial nature, or was clearly held for investment purposes, such considerations should be taken into account [citations omitted].

[22] But even in cases where the property destroyed is a purely commercial facility, such as a factory, the facts may be such as to compel the court not to make an allowance, either for depreciation or for betterment [citations omitted].

[23] As noted above it must, in all cases, depend on what is reasonable, both to the plaintiff and to the defendant tortfeasor. What then is reasonable in the case where a family home has been destroyed through the negligence of a third party? Even assuming that the evidence in this case had established a “betterment” of $32,000 to the respondent, by reason of the full reinstatement of his home, could it be said that it would be reasonable to reduce his damages by that amount, leaving him and his family to finance that portion of the reinstatement on their own? I think not.

One of the cases the court cited with approval was Evans v. Balog,[10] a 1976 decision of the New South Wales Court of Appeal. The defendants were found liable for badly damaging the plaintiffs’ 75-year-old home. Like the defendants in Jens v. Mannix Co., they sought diminution-in-value and then argued the home had no value because it was on property zoned for high-rise development and was worth more without the house than with it. Samuels J.A. disagreed, saying,

I turn then to the facts of the present case. Before doing so I merely observe in passing that the consequence that unless the plaintiffs get the costs of reinstatement they may get nothing, is enough to suggest that any rule which produces such a result in the present case cannot be soundly based. The question is whether it was reasonable for the plaintiffs to desire to reinstate their property. In my opinion, there is only one answer. It undoubtedly was. They had, in effect, lost their family home. That is the nature of their damage, and not some diminution in the value of their land. Fair compensation requires that they be given back what they had before; and the only way in which that purpose can be achieved is to award them the sum reasonably necessary to restore their property to the condition in which it was before the defendants effectively destroyed it. This the learned judge did; and, in my opinion, he was right. It is not to the point that the diminution in value basis might on one view produce no damages, while the reinstatement basis produces a substantial sum. The disproportion in question in cases of this kind are not always to be revealed by arithmetical comparison. The cost to a defendant of competing measures is a significant factor. But it is but one ingredient in the calculation of whether the plaintiffs’ claim is reasonable or not. There are cases, and this, in my opinion, is one, where the nature of the plaintiffs’ loss is such that there is only one mode of fairly repairing it. If that turns out to be more expensive than another, the wrongdoer has no one but himself to blame.[11]

Samuels J.A. relied on the same passage from McGregor on Damages as did Meredith J. in Jens v. Mannix Co., which I repeat:

The difficulty in deciding between diminution in value and cost of reinstatement arises from the fact that the plaintiff may want his property in the same state as before the commission of the tort but the amount required to effect this may be substantially greater than the amount by which the value of the property has been diminished. The test which appears to be the appropriate one is the reasonableness of the plaintiff’s desire to reinstate the property; this will be judged in part by the advantages to him of reinstatement in relation to the extra cost to the defendant in having to pay damages for reinstatement rather than damages calculated by the diminution in value of the land.[12]

The Court of Appeal supported the trial judge’s decision to award the Nans the full amount of the cost of replacing their home, without deduction.

In Galan v. Finch,[13] the defendant installed a wood burning furnace improperly and the plaintiff’s home was destroyed by fire. Damages were the cost to rebuild, without deduction for betterment. In an article by Alex L. Eged entitled “The Measure of Tort Damages for the Loss of a Building,”[14]the author concludes that where loss of a family home is concerned, the usual finding of the court is the cost of reinstatement.

The decision to order the cost of reinstatement is perhaps even more reasonable when only portions of the property are damaged, such as in Carrel v. Randy Laur Burner Service,[15]where the defendant negligently repaired an oil furnace in the plaintiff’s basement resulting in many litres of fuel oil covering the porous concrete basement floor. The trial judge found it was not unreasonable to award the cost of replacing the basement floor. 

I turn now to commercial property. The Harbutt’s “Plasticine” Ltd. v. Wayne Tank and Pump Co. Ltd.[16]decision is a weighty one because the court awarded cost-of-replacement damages to a commercial enterprise when the tendency in the law was to treat commercial properties as investments and subject to the diminution-in-value measure of damages. In 1961, Harbutt paid £2,330 to the defendant for a piece of equipment for storing and dispensing liquefied wax. The heating system was defective, and in the course of making repairs, the defendant’s employees burned down the factory. Harbutt claimed under its fire insurance policy and rebuilt the factory, but it looked to the defendant to honour a clause in the equipment purchase agreement, which was to indemnify Harbutt against direct damage “to your property … caused by the negligence of ourselves or of our servants.” Litigation ensued, with Harbutt seeking cost-of-reinstatement damages of £146,581. The defendant sought difference-in-value damages of £116,785. Lord Denning said the appropriate measure was the cost of reinstatement:

The destruction of a building is different from the destruction of a chattel. If a second-hand car is destroyed, the owner only gets its value, because he can go into the market and get another second-hand car to replace it. He cannot charge the other party with the cost of replacing it with a new car. But when this mill was destroyed, the plasticine company had no choice. They were bound to replace it as soon as they could, not only to keep their business going, but also to mitigate the loss of profit (for which they would be able to charge the defendants). They replaced it in the only possible way, without adding any extras. I think they should be allowed the cost of replacement. True it is that they got new for old; but I do not think the wrongdoer can diminish the claim on that account. If they had added extra accommodation or made extra improvements, they would have to give credit. But that is not this case. I think the judge was right on this point.[17]

Lord Widgery agreed but added that “market value” cannot be measured for some kinds of property:

In my opinion each case depends on its own facts, it being remembered, first, that the purpose of the award of damages is to restore the plaintiff to his position before the loss occurred, and secondly, that the plaintiff must act reasonably to mitigate his loss. If the article damaged is a motor car of popular make, the plaintiff cannot charge the defendant with the cost of repair when it is cheaper to buy a similar car on the market. On the other hand, if no substitute for the damaged article is available and no reasonable alternative can be provided, the plaintiff should be entitled to the cost of repair. It was clear in the present case that it was reasonable for the plaintiffs to rebuild their factory, because there was no other way in which they could carry on their business and retain their labour force.[18]

Lord Cross was equally opposed to a “market value” comparison, saying,

…[I]n my judgment the value of the building and of the plant and machinery before the fire throw no light on the true measure of damage in a case like this where it was obviously right for the plaintiffs to rebuild and re-equip their factory and start business again as soon as possible.[19]

The Canadian counterpart to Harbutt’s “Plasticine” is James Street Hardware v. Spizziri. The plaintiff’s hardware and furniture store was destroyed by fire caused by negligence. The company quickly set about rebuilding at the same location, but a modern and larger building, due partly to new building code requirements. They sought reimbursement from the defendant. At trial the judge awarded damages along the lines of a diminution in value. On appeal, the court preferred the cost of reinstatement approach taken in Harbutt’s “Plasticine” Ltd. and quoted from the same passage of McGregor on Damages[20]where he stated, “The test which appears to be the appropriate one is the reasonableness of the plaintiff’s desire to reinstatement the property; this will be judged in part by the advantages to him of reinstatement in relation to the extra cost to the defendant in having to pay damages for reinstatement rather than damages calculated by the diminution in the value of the land.” The court found it reasonable for James Street Hardware to continue operating from the same location and ordered the cost of reinstatement.

The defendant argued on appeal that damages should be reduced for betterment. The Court of Appeal agreed that there was an element of betterment involved in the cost of the replacement measure of damages; however, if it were deducted from the award, then the compensation would be inadequate. The court reasoned,

Quite simply, if a plaintiff, who is entitled to be compensated on the basis of the cost of replacement, is obliged to submit to a deduction from that compensation for incidental and unavoidable enhancement, he or she will not be fully compensated for the loss suffered. The plaintiff will be obliged, if the difference is paid for out of his or her own pocket, whether borrowed or already possessed, to submit to “some loss or burden”, to quote from Dr. Lushington. Widgery L.J. in Harbutt’s “Plasticine” called it “forcing the plaintiffs to invest their money in the modernising of their plant which might be highly inconvenient for them.”[21]

There are several cases which have held that cost-of-repair damages are inappropriate for damage or destruction to buildings. These cases, however, tend to be specific to property being held for development purposes. Montreal Trust v. Hercules[22] was such a case. Montreal Trust acted as trustee for Monarch Homes, which had purchased 100 acres of farmland to subdivide for a new residential neighbourhood. On the farmland was a barn leased to Hercules. Through negligence, Hercules caused a fire which destroyed the barn. The trial judge awarded the cost of replacement, less depreciation. The Court of Appeal, however, considered the reasonableness of Montreal Trust’s request for cost of replacement. It was unreasonable, in its view, because Monarch intended to demolish the barn. Ordering a new trial on the assessment of damages, Schroeder J.A. said,

[4] The learned trial judge excluded all evidence as to the purpose for which Monarch held this property which, it was said, envisaged the eventual demolition of the farm buildings to clear the land for housing construction.

He quoted a previous Ontario Court of Appeal decision[23] where Davis J.A. said,

It is difficult, if not impossible, to arrive at an exact figure for the value of old barns upon a farm, but where a farm is in actual use and barns are obviously necessary for operation of the property as a farm, replacement cost is an element that may well be taken into account in ascertaining the actual loss. There are, of course, many cases where replacement cost less depreciation is obviously no measure of the loss. Old buildings are not infrequently a detriment, or at least of little value in the sale of land, and it would be wrong to estimate loss in such cases by ascertaining replacement cost… It is in every case the actual loss that is to be ascertained, though different methods of arriving at that loss may be appropriate in different cases.[24]

The principles I extract from these cases where negligence causes property loss are:

(a) Restitutio in integrumis a primary consideration;

(b) Damages depend on the facts peculiar to the case;

(c) Damages for loss of residential or commercial property use may differ;

(d) Damages awarded must be reasonable both to the plaintiff and to the defendant. The reasonableness of the plaintiff’s desire to reinstate the property is judged in part by the advantages to him of reinstatement in relation to the extra cost to the defendant in having to pay damages for reinstatement rather than damages calculated by the diminution in value of the land (McGregor on Damages);

(e) What may appear to be a disproportionately high cost of repair is a significant factor, but it is only one factor. Disproportion cannot always be revealed by arithmetical comparison because there are cases where the nature of the plaintiff’s loss is such that only the cost of repair will compensate; 

(f) It may be appropriate to adjust cost-of-repair damages for depreciation;

(g) Consequential damages are in addition to the loss of the property; and

(h) Relatively small inadvertences (a spark from a welding torch in James Street Hardware, for example) can cause large losses of property and require large damage awards.

(2) FRAUDULENT OR NEGLIGENT MISREPRESENTATION

INDUCING THE PURCHASE OF DEFECTIVE REAL PROPERTY

In cases where a buyer is induced to purchase defective real property by means of a seller and her realtor’s fraudulent or negligent misrepresentation, the measure of damages is often diminution in value of the thing purchased. The tort of negligent misrepresentation originated with the 1889 English House of Lords decision in Derry v. Peek,[25] a case involving intangible personal property and pure economic loss. Shareholders who had lost their investment when the company whose shares they purchased went into liquidation started an action against the directors of the company for making false statements in their prospectus. The damages equation was relatively simple: the difference between the purchase price and the value of the shares if the truth had been known, which is the shares’ “diminution in value.”

Another seminal decision for the tort of negligent misrepresentation causing economic loss is Esso Petroleum v. Mardon,[26] where Esso, wanting a gas station in Southport, purchased a site and told a prospective operator that he would sell 200,000 gallons a year. Unfortunately, the municipality did not allow the pumps to be located on the main thoroughfare, and most passersby could not even see them. Mr. Mardon sold only 78,000 gallons of gas and lost money. Esso reduced the rent and Mardon signed another lease, but business was worse than before and he could not make his rent payments. Esso drained the tanks, put Mardon out of business and started an action against him. Lord Denning recited the test for negligent misrepresentation:

…if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another – be it advice, information or opinion – with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side to enter into a contract with him, he is liable in damages.

As for damages, Lord Denning said,

Mr. Mardon is not to be compensated here for “loss of a bargain.” He was given no bargain that the throughput would amount to 200,000 gallons a year. He is only to be compensated for having been induced to enter into a contract which turned out to be disastrous for him… So the damages … are to be measured by the loss he suffered. Just as in Doyle v. Olby (Ironmongers) Ltd.[1969] 2 Q.B. 158, 167 he can say: “… I would not have entered into this contract at all but for your representation. Owing to it, I have lost all the capital I put into it. I also incurred a large overdraft. I have spent four years of my life in wasted endeavour without reward: and it will take me some time to re-establish myself.” For all such loss he is entitled to recover damages. It is to be measured in a similar way as the loss due to a personal injury. You should look into the future so as to forecast what would have been likely to happen if he had never entered into this contract: and contrast it with his position as it is now as a result of entering into it. The future is necessarily problematical and can only be a rough-and-ready estimate. But it must be done in assessing the loss.[27]

“Diminution in value” became the measure of damages in economic loss cases; however, the measure was also applied to investment properties, i.e., real estate. In some investment property cases the decision is easy: diminution in value. However, in some of them, trial judges would prefer to grant expectation damages; to grant the purchaser the property she believed she purchased. The following four decisions illustrate the mixture of results:

1. In Hepting v Schaff,[28] the Supreme Court set out that where there is both a breach of contract cause of action and a tort cause of action, the plaintiff proceeds in tort. The Court also adopted the rebuttable presumption that the purchase price is the market value for the purposes of the “diminution in value” measure of damages.

The Heptings purchased a house in Regina from the Schaafs through the agency of Exner. They paid $17,700 for the 3-bedroom bungalow. The Schaafs and Exner represented that the house contained a legal suite to rent out. The trial judge found that the Schaafs and Exner perpetrated a fraud on the Heptings by concealing the fact that no permit had been issued to build the suite. He awarded as damages the difference between the value of a 3-bedroom house with a legal suite and one without a legal suite: $2,500. The Supreme Court agreed, citing with approval the seminal judgment in McConnel v. Wright, [1903] 1 Ch. 546, 72 LJ Ch 347 (C.A.) where Collins M.R. said at 554:

[17] … That obliges me to say something as to the principle upon which damages are assessed in these cases. There is no doubt about it now. It has been laid down by several judges, and particularly by Cotton L.J. in Peek v. Derry [1887] 37 Ch D. 547, 57 LJ Ch 347; but the common sense and principle of the thing is this. It is not an action for breach of contract, and, therefore, no damages in respect of prospective gains which the person contracting was entitled by his contract to expect to come in, but it is an action of tort – it is an action for a wrong done whereby the plaintiff was tricked out of certain money in his pocket; and therefore, prima facie, the highest limit of his damages is the whole extent of his loss, and that loss is measured by the money which was in his pocket and is now in the pocket of the company. 

[18] Cozens-Hardy L.J. said at p. 559 [of Derry v. Peek]:

As a rule of convenience, and indeed almost of necessity, the property which would have been acquired by the company, if all the statements in the prospectus had been correct, must prima facie be taken to be worth the precise sum paid for the property, neither more nor less. This is the prima facie presumption, and it is sufficient for the decision of the present case, for no evidence has been adduced by the defendant to rebut the presumption.

Note that the tort damages awarded in Schaff were the same as would have been awarded for expectation damages for breach of warranty.

2. In Parna v. G. & S. Properties Ltd.,[29] the defendant sellers of an apartment building at 101 King St. E., Dundas knowingly made false representations (which is fraud) about the operating expenses of the building. The buyer purchased and found that he could not earn the expected income because of the high operating expenses. The trial judge awarded $24,790 in damages based on the difference between the purchase price and what the purchase price should have been based on the lower income. The Court of Appeal replaced that amount with damages of $4,000 on the basis that the plaintiffs were “not to be put in the position they would have been if the representations had been true.” Damages were the difference between the purchase price and the actual value of the property at the time of sale had the purchaser known the actual circumstances of the property.[30]Consequential damages were not in issue.

Consequential damages are usually an important part of the damage award. Consequential damages ensure that thisparticular plaintiff, in his or her circumstances, is compensated for the losses suffered other than for the property itself. In Liesbosch Dredger v. S.S. Edison,[31]the House of Lords did not simply award the market value of the negligently sunk dredger. They awarded consequential damages as well because the dredger was booked into the future with contracts to perform. It had added value.

… [I]t follows that the value of the Liesbosch to the appellants, capitalized as at the date of loss, must be assessed by taking into account: (1) the market price of a comparable dredger in substitution; (2) costs of adaptation, transport, insurance, etc., to Patras; (3) compensation for disturbance and loss of the Liesbosch and the time at which the substituted dredger could reasonably have been available for use in Patras, including in that loss such items as overhead charges, expenses of staff and equipment, and so forth thrown away, but neglecting any special loss due to the appellants’ financial position. On the capitalized sum so assessed, interest will run from the date of the loss.

Consequential damages may appear to be used by judges to compensate for the failure of “diminution damages” to afford adequate compensation.

3. In Wiebe v. Gunderson,[32] the seller’s realtor prepared an information sheet based on information the seller had given him about his ranch in B.C. It stated the amount of land under irrigation and its yield, the output of the irrigation system, the amount of hay produced and the number of calves sold. All the representations were false; they were merely statements of what a farmer would want to hear about the ranch. The information sheet was sent to the Wiebes, who were prospective purchasers. Neither the seller nor the realtor told the Wiebes that the ground water had a high sodium content which, when used to irrigate the fields, made the soil unsuitable for growing most crops.

The Weibes purchased the ranch for $950,000. Over the following years they had great difficulty making the ranch profitable and they started an action. The trial judge found all the elements of deceit had been established:

[225] … [Gunderson] not only knew all of the information on the information sheet was false before the second interim agreement was signed he specifically told Maurice Alexandre [the realtor] it was false yet neither he nor Alexandre did anything to advise the Wiebes but proceeded to sign the second deal (and induce it again by offering to include all the prime hay located in the hay shed).

As for damages, the trial judge assessed his options:

[227] I now turn to perhaps the most difficult aspect of this case, the assessment of damages. Liability for misrepresentation is an area of law which crosses the boundaries between contract, tort and restitution. If a misrepresentation is treated as a promise, a plaintiff may be entitled to a measure of damages calculated as if the promise was true. If it is approached as a tort the plaintiff would be entitled to be placed in the position he would have occupied before the statement was made. If it is approached as a restitution issue the concept is that it would be unjust that the defendant, by making a false statement, should be enriched at the plaintiff’s expense.

… 

[229] In England and in Canada the authorities have consistently found that the proper approach is to apply the tortious measure of damages. This is an important distinction for this approach awards a measure of damages which places the plaintiff in the position he would have occupied if the statement had not been made rather than in that he would have occupied if the statement was true.

After citing McConnel v. Wrightand adopting the diminution in value measure of damages, he discussed the consequential damages that may also be awarded in misrepresentation cases and awarded damages of $440,000 for the diminution in value of the ranch as of the date of purchase, $90,000 in out-of-pocket expenses, and $500,000 for loss of profits.

The Court of Appeal,[33] however, reduced diminution-in-value damages to $350,000, saying the trial judge had erred in awarding the cost of placing the land in the physical condition in which it ought to have been in had the representation been true. The trial judge should have considered what a hypothetical, willing but not anxious buyer, informed of the true picture, would have paid a willing but not anxious seller for the “package” of assets constituting the ranch in a competitive market at the time of purchase. The court reduced loss of profits to $250,000 on the same basis. The Wiebes should have adjusted the ranch’s production in view of what it could produce instead of trying to force the land to do what they wanted to farm or what had been represented it as capable of producing. In other words, they had failed to mitigate.

There was a strong dissent given by Newbury J.A., who warned that courts should not forget that the primary goal of damages is to place the plaintiff in the place he would have occupied had the deceit not taken place. She cited the words of Lord Steyn in Smith v. Scrimgeour Vickers, [1996] 4 All E.R. 769 (Eng. H.L.) where he said. 

There is in truth only one legal measure of assessing damages in an action for deceit: the plaintiff is entitled to recover as damages a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendants. The analogy of the assessment of damages in a contractual claim on the basis of cost of cure or difference in value springs to mind. In Ruxley Electronics and Construction Ltd v. Forsyth, [1996] A.C. 344, 360G, Lord Mustill said, “There are not two alternative measure of damages, as opposite poles, but only one; namely, the loss truly suffered by the promise.” In an action for deceit the price paid less the valuation at the transaction date is simply a method of measuring loss which will satisfactorily solve many cases. It is not a substitute for the single legal measure: it is an application of it. [emphasis added]

The decision in Goldstein v. Davison [34] is much more straight-forward. It demonstrates how damages are assessed, once again in a commercial context where a purchaser is buying the property for business reasons, on a diminution in value basis with consequential damages. Goldstein purchased from the elderly Ms Rae a property at 1480 Derry Road East, Mississauga, intending to rezone and develop it. Ms Rae and the listing agent, Dallas Budd, were aware of the fact that the City of Mississauga had recommended that the property be designated a heritage property under the Ontario Heritage Act. While the designation was pending, Budd presented, and Ms Rae accepted, an offer to purchase which provided for a VTB mortgage providing that Goldstein had the right to remove and demolish all existing structures. Ms Rae and Mr. Budd would have known that a heritage designation would preclude that right. After closing, Goldstein discovered the defect and attempted to develop a site plan for development that would satisfy the City’s heritage designation concerns but was unable to do so. He stopped paying the mortgage and an action resulted.

Ground J. considered whether rescission could be granted for an innocent misrepresentation; however, he observed that to grant rescission after the transaction has closed required the court finding a virtual failure of consideration or an error in substantialibus, neither of which he could find on the facts. He therefore allowed the action on the basis of negligent (not fraudulent) misrepresentation. The measure of damages was the difference in value between the purchase price and the value of the property as of the date of purchase knowing a heritage designation was pending. Consequential damages were awarded for the additional costs incurred by Goldstein in dealing with the heritage designation problem.[35]

The cost of repair may actually be closely connected to diminution in value. In fact, it often happens that an appraisal of actual market value of the property at the time of purchase with knowledge of the defect must take the cost of repair into consideration. In this next case, even after appeal, the trial judge observed that the appraisal report arrived at a market value by deducting the cost of remediation. 

4. In C.R.F. Holdings Ltd. v. Fundy Chemical International Ltd.,[36] the seller of industrial land advised an interested buyer that the pile of slag on the property would make “excellent fill” and indicated he had used some for that purpose. The buyer purchased the property for $260,000 and the following year actually did use the slag for the purpose of fill. He spread it over the property and constructed a warehouse and storage yard over it. He transported leftover barrels of the slag to another property for storage. Then he learned that the slag was radioactive and subject to regulation under the Atomic Energy Control Act. 

Litigation was commenced and at trial the plaintiffs sought the cost of remediation. Taylor J. agreed, saying, “[w]hile the court must, I think, assess damages with a view to making the plaintiffs whole in the sense of being in the financial position they would have been in had the land been free from contamination … that can in this case be done only by awarding the cost of placing the land in the physical condition which it ought to have been in had the representation been true.”[37] The Court of Appeal, however, ruled that the trial judge erred in this regard. He should have attempted to place the plaintiff “in the financial position in which he would have been had the representation not been made.”[38]Craig J.A. observed that the trial judge ought to have considered the extent to which the slag had reduced the value of the property. 

Taylor J. subsequently re-assessed damages. He said, 

[15] After protracted consideration, I have concluded that I should take the direction of the learned judge on the appeal to mean this. The cost of remedying the problem hidden by the misrepresentation is not to be a governing consideration in assessing damages. The principal measure is instead to be that derived by deducting, from the amount in fact paid, the amount which would have been realized on the market had the plaintiff’s question been answered truthfully.

The trial judge heard from plaintiff and defence appraisers as to what a purchaser would have been prepared to pay for the property containing radioactive slag and determined that the most an informed buyer would pay was $100,000. Taylor J. observed,

[33] While the Court of Appeal has found cost of repair to be an inappropriate measure of the damage suffered in this case, it is plain from the appraisal evidence that repair cost is the most important factor involved in arriving at the sort of valuation on which I am instead to assess the principal damages. I proceed on the assumption that I must be entitled to take cost of repair into consideration in the valuation context.

As for the $318,000 spent on spreading the slag and building a warehouse on it, Taylor J. said this was the most difficult aspect of the re-assessment because it, too, had to be done on a diminution in value basis. He agreed that one component of the calculation had to be deduction of the cost of clean-up. He determined that a prospective purchaser in December, 1975 (when the new warehouse was constructed) would have paid $250,000 plus any inflationary increase in the $100,000 land value.

For consequential damages, Taylor J. awarded $114,000 in extra inventory financing costs incurred since the date of trial due to the company’s inability to pledge real property security. He awarded $37,500 for diminution in value of the second property as a consequence of moving the barrelled slag there and infecting it with radioactivity. Taylor J.’s decision was upheld on further appeal.[39]

The following four cases deal with negligent or fraudulent misrepresentation leading to the purchase of damaged residential property, where judges seem quite uncomfortable with the diminution-in-value measure of damages.

1. In Fors v. Overacker and Mallon,[40] diminution-in-value damages were not even considered a possible remedy. Shortly after purchasing a home, Daniel Fors experienced several significant water problems related to the sump pump, the septic field, moisture in the basement and a leaking skylight. The sellers had completed an SPIS form which contained statements that were untrue, inaccurate or misleading, and the trial judge found negligent misrepresentation. Shaw J. held, 

[168] I accept that Mr. Fors would not have purchased the home if he had known of the water problems he was going to experience. He relied on the representations in the SPIS in deciding to buy the house. The representations were made negligently. Mr. Fors has suffered damages because of that negligence. He is entitled to be restored to the position he would have been in if Mr. and Mrs. Overacker had not breached their duty of care.

On hearing evidence of the repairs that would be required, the trial judge awarded $112,830.50 including HST. He added $5,000 for Mr. Fors’ disappointment and inconvenience arising out of the negligent misrepresentation. 

The Overackers third partied their listing agent. The trial judge, following Krawchuk v. Scherbak, considered him liable in professional negligence for advising the Overackers to not disclose certain information in the SPIS. He and his brokerage were liable to the plaintiffs one half ($42,459.75) the cost to repair the sump pump and basement flooding issues, but not the septic field and skylight issues because his negligent advice did not extend to those items. 

2. In Gemeinhardt v. Babic,[41] diminution in value was considered as a remedy but was specifically rejected. The trial judge (the same Justice di Tomaso as in Bowman v. Martineau) awarded the cost of repair. Ms Gemeinhardt purchased a farm including farmhouse and outbuildings, for $950,000. The Babics took a VTB mortgage. Upon moving into the house, Ms Gemeinhardt discovered a number of serious problems, including sewage flowing into the basement, a broken furnace, mould, and structural deficiencies. These defects the Babics had covered up with whitewash and paint. The trial judge found the Babics liable for breach of the sale agreement and for negligent misrepresentation. He awarded $592,941.41 for repairs to the house and garage, as well as consequential damages of $30,700.82 which included lost rental income and costs relating to finding alternative mortgage funding. Liability was joint and several with the title insurer. He stated,

[576] I have considered the issue of damages and specifically the cost of remediation relating to Ms Gemeinhardt’s claim against the Babics. I have reviewed all of the evidence including all the engineering and appraisal evidence. I identified the shortcomings in the appraisal evidence specifically and as a whole and concluded that the cost of remediation in all the circumstances was the most appropriate remedy. The evidence of Mr. Emmons was preferred to the evidence of others including Mr. Carruthers and Robin Jones, the appraiser called by Stewart Title for reasons stated. I am not satisfied that Ms Gemeinhardt would receive any “windfall” in this case. Rather, she is entitled to receive full value of the loss, in order to place her, as reasonably as possible, in the monetary position she would have been in if the Agreement of Purchase and Sale had been fulfilled: Agricultural Research Institute of Ontario v. Campbell-High (2002), 58 O.R. (3d) 321 (Ont. C.A.) at para. 16.

[577] I have considered the reasonableness of the cost of rectification. It is not unreasonable nor is it grossly disproportionate. I have considered the diminution of value to the property. The house and its additions and the garage – all in their present condition, have no value. They are to be demolished given the host of serious problems previously identified. Mr. Emmons’ evidence is the best evidence regarding the cost of remediation.

Note, once again, the judge’s reference to reasonableness and proportionality. He recognized the damages were significant, but also recognized it was Gemeinhardt’s home.

3. The trial judge in Gundersen v. Savoy,[42] viewed damages in much the same way as Justice di Tomaso did in Gemeinhardt and Bowman. He found he could not rely on the appraisal evidence and substituted the cost of repairs. Ms Gundersen purchased a home from the Savoys and within several months discovered the structure was infected with so much mould and mildew it was uninhabitable. It had been the Savoys’ listing agent, who was also an old trusted family friend, who introduced Ms Gunderson to the property. By giving Ms Gundersen only select findings from a previous home inspection report, and by discouraging her from seeking her own home inspection, he led her to believe that the only problem with the home was the furnace.

The trial judge found the Savoys not liable; they had not made representations in respect of the house. The realtor, however, was found liable in fraudulent misrepresentation. Ms Gunderson sought $70,000 to reconstruct the home, but the realtor insisted there were no damages because Ms Gunderson had bought low and the market value of the home at the time of the purchase was the same as the purchase price. Alternatively, the realtor claimed damages were minimal; – between $4,750, to $18,000 on the basis that the remediation could have been carried out for that amount immediately after Gunderson discovered the problems.

The trial judge rejected the realtor’s expert’s appraisal because it presumed that Gunderson knew the cost of curing the problems. The trial judge undertook his own evaluation of value. He considered the fact that at the time of purchase the property had been on the market for close to three years. He considered that the only previous offer had been revoked because the home inspector had discovered the mould and mildew. The $178,000 Gundersen paid was therefore the market value absent the knowledge of mould. He continued,

[83] That leaves me with only the various estimates to remediate (and in the case of one, reconstruct). While I agree that the applicable yardstick for measuring damages here is the difference (if any) between the price paid by the plaintiffs and the actual fair market value with full disclosure of the defects, in the absence of an appraisal that I accept, I conclude that I can use the estimates of remediation and reconstruction to determine if the actual market value (with disclosure) would have been less than what the plaintiffs paid.

…

[86] Thus, I conclude that, in 2007, the total cost of remediation of the mould and mildew and reconstruction of the water damaged and mould and mildew affected areas of the house would have been $36,000 plus the tax then applicable (GST of 6%) or $38,160.

[87] If anyone would have been prepared to buy this home with knowledge of its defects and have been prepared to remediate and renovate, so as to have the advantage of the size of the property, the location of the property, and the home in a reasonable state of repair … it is probable that it would not have been for more than something in the approximate amount of $179,000 less about $38,160. But, recognizing that bargaining over the price of a home is not exactly a scientific process, the plaintiffs or others may have been prepared to pay somewhat more than this difference to get the property or perhaps less so as to provide a buffer against unknown expenses for remediation and restoration.

[88]  Recognizing these factors, I conclude that the home and property was probably worth about $141,000 in 2006 to a person with knowledge of the latent defects. Thus I would assess the plaintiffs’ general damages at $37,000.

4. The dynamics at play in Krawchuk v. Scherbak[43] were such that the court was ultimately able to apply the diminution-in-value measure of damages and yet ensure that the purchaser had enough money in her hands at the end of the day to rebuild her home. This is a case where the buyer’s realtor was the listing agent. She owed an obligation to the buyer to disclose all material facts relevant to the purchase. It was Krawchuk’s first home purchase, and the agent failed to disclose issues with the foundation and the plumbing. She did not urge Krawchuk to write a home inspection condition into her offer. Krawchuk purchased without a home inspection and after closing discovered serious structural defects and plumbing issues.

The trial judge did not award the $191,414.94 Krawchuk claimed she would need to make full repairs because, in his view, (a) the measure of damages was diminution in value, and (b) she failed to mitigate by rescinding the contract. With no evidence of fair market value as of the date of purchase, he awarded the same damages her title insurer had offered: purchase price of $110,100, less lot value of $41,000, plus $29,318 cost of removing and remediating soil to allow for building, plus $4,952.54 cost of a soils engineering report, plus $2,371.78 moving expenses, for a total of $105,742.32. In other words, he awarded many consequential damages but not the cost of repair. He added $5,000 for emotional upset and loss of health. The Court of Appeal did not disturb the trial judge’s damage award but corrected his denial of the private insurance exception, which entitled her to receive both the title insurer’s settlement and the trial judgment, which gave her enough to make full repairs.

The following three cases demonstrate that judges sometimes employ a hybrid of cost-of-repair and diminution-in-value damages to arrive at what they feel is a suitable solution to the problem of the plaintiff’s property loss. 

1. In Sedgemore v. Block Bros. Realty,[44] the plaintiffs purchased a 9-acre hobby farm on Vancouver Island. They were introduced to the property by the listing agent. Before offering to buy the property, the plaintiffs learned that the water supply in the area could be a problem and asked the listing agent about it. She responded that the well was 300 feet deep and its rate of flow was 3 ½ gallons per minute. On the plaintiffs’ second visit to the property they observed a water cistern and inquired about it. The listing agent told them the owner had run out of water once when 30 people camped there for a family reunion. After a third visit the plaintiffs offered to purchase. When they moved to the property, they experienced a serious water shortage. They had to store water in the bathtub to flush the toilet. There was not enough water to raise animals, leave alone wash their clothes. They drilled a new well and installed a new pumping system, but there was simply no water.

At trial, the court found the seller 75% liable for fraudulent misrepresentation and the realtor 25% liable in negligence. While making oral submissions addressing remedies, the plaintiffs advised that they sought rescission as against the seller. The court granted rescission and cancelled the mortgage. It ordered return of the down payment less real estate commission. It ordered the realtor to disgorge the real estate commission. It also allowed recovery for incidental or consequential losses, agreed to be $8,475.79.

2. In Neill v. Trenholm,[45] the trial judge found the defendants liable to the plaintiff for negligent misrepresentation. They had provided the purchaser with a Property Condition Disclosure Statement and answered “no” to questions about water and moisture problems in the basement or crawl space of their home. The home was located in a neighbourhood known for its high water table; the plaintiff was new to the area and was not aware of the fact. For damages, the judge acknowledged the tortious measure of damages: the amount of money required to put the plaintiff in the position that he would have occupied, not if the statement had been true, but if the statement had not been made. He heard evidence from an appraiser who did a “drive-by” appraisal suggesting a loss in value of $5,000 to $7,000 but found he could not rely on it. He heard from a builder who estimated that to install a new concrete basement under the house would cost $36,000. The trial judge awarded half this amount to address the betterment, and awarded consequential damages as well.

3. In Lunney v. Kuntova, Badre and Re/Max,[46] the purchaser discovered three years after closing that the stone rubble foundation of her 90-year-old home was past its useful life and was crumbling. Power J. found no liability on the defendants but went on to consider damages. He heard evidence that she had purchased the house for $180,000, had rented it out for two years, and that its market value was $340,000 at the time of trial. The bare lot value was $275,000. Ms Lunney sought $275,000 to replace the foundation. Power J. saw the expenditure of $275,000 as a waste of money and awarded $65,000, the difference between market value and lot value.

Principles that I take away from these cases where a negligent or fraudulent misrepresentation has induced the purchase of defective property are:

(a) Due to the foundational cases of Derry v. Peek and Esso v. Mardon where economic loss is the subject of the litigation, damages default to the diminution-in-value measure of damages;

(b) Where residential property is concerned, however, the cost of repair measure is often more appropriate;

(c) The cost of repair may be the only way to assess the diminution in value;

(d) Consequential damages may be significant. They are similar to a personal injury assessment of damages, “You should look into the future so as to forecast what would have been likely to happen …”; and

(e) The remedy of rescission may be an optional remedy.

(3) SOLICITOR NEGLIGENCE CAUSING TITLE DEFECTS

I come now to the category of cases that Ms Martineau on appeal suggested was appropriate because they support the diminution-in-value measure of damages. This category has to do with title defects, not physical damage to property, and not misrepresentation as to quality. The Court of Appeal agreed with Ms Martineau because the solicitors did not cause the defects in the property, just as Ms Martineau did not cause the defects in the property.

What is surprising is that, although they purport to apply the diminution-in-value measure of damages, these cases discuss, and in the case of Kienzle v. Stringer award, cost-of-repair damages, i.e., the cost of repairing title. They are very similar to property loss cases inasmuch as the resulting awards are a mixture of diminution-in-value and cost-of-repair damages, depending on the circumstances.

I start with the Messineo v. Beale[47] decision because many subsequent cases follow “the rule in Messineo v. Beale.” In March of 1969, Mr. Messineo of Rochester, New York, purchased from Miss Marjorie Finley some 518 acres of raw land on three parcels measured by metes-and-bounds on and around Upper Rideau Lake. He purchased it for his brothers and sisters and for a bargain price. Rideau Lake is on the Rideau Canal connecting Ottawa and Kingston, providing access to the St. Lawrence River. The area is sometimes referred to as Ontario’s “other” cottage country. Messineo purchased the acreage for $45,000, payable $5,000 down and the balance 6 months after closing to allow for a surveyor to prepare a survey. The surveyor discovered a 54-acre deficiency, and the price was reduced $1,500. When the six months expired, the surveyor had not yet completed his work and Messineo withheld $8,000. When the survey was completed, Messineo discovered that Murch’s Point, a peninsula jutting into the lake 1,500 feet, had not been in the holdings of Miss Finley. He advised he was not going to pay the remaining $8,000. He sued his real estate lawyer, Mr. Beale, for the value of Murch’s Point, which he assessed as $25,000 in the claim initially but later raised to $76,500. Mr. Beale, he argued, should have alerted him to the fact that Miss Finley did not own Murch’s Point.

At trial it was clear that Mr. Messineo wanted from Mr. Beale the money’s worth of Murch’s Point so he could purchase it. Mr. Beale argued that damages against negligent solicitors were measured by diminution of value. Land values had risen substantially since Mr. Messineo’s purchase and Mr. Messineo had not lost anything. The trial judge found Mr. Beale negligent in failing to discover that Miss Finley did not own Murch’s Point and in failing to advise Mr. Messineo that his purchase would not include it. His negligence amounted to a breach of contract. He awarded nominal damages of $500 (the account of his solicitor having been $479.50 plus $137.50 disbursements). On appeal by Mr. Messineo, Arnup J.A. said,

[14] In my view it is obvious that the defendant’s breach of duty was not the cause of the plaintiff’s getting no title to Murch’s Point. The vendor had not title to Murch’s Point, and could give none. Nothing the defendant could have done would have changed that situation.

[15] It is to be observed that if the defendant had discovered, before closing, that Miss Finley had no title to Murch’s Point, it would have been his duty to communicate that fact at once to his clients. Their options then would have been to refuse to close, to close and take title to what Miss Finley could convey, or to try to negotiate, once more, for a lower price. In the circumstances it would not, I think, have been a case for specific performance with abatement.

[16] There was evidence that the plaintiffs got a “pretty good buy” at $43,500 for what they actually got title to. This was stated by the plaintiffs’ own expert witness, in answer to a question from the trial judge. (Of course the plaintiffs have actually paid only $35,500.) A few months later they listed the property for sale at $125,000 but have not sold it; it was listed only once, and apparently for a short period only.

[17] After reviewing the authorities in Ontario and England, the trial judge came to the conclusion that the measure of damages was the actual loss sustained by the plaintiffs arising from the defendant’s negligence. He was referred to virtually all of the relevant cases. I agree with his result, but would state the principle in these words. The measure of damages is the difference in money between the amount paid by the client to the vendor, and the market value of the land to which the client received a good title. [emphasis added]

The first highlighted sentence in this judgment is the launching point for the Court of Appeal’s discussion of “causation” in respect of damages in Bowman v. Martineau. Note that Arnup J.A. is referring to Mr. Beale’s liability for the damages being claimed. He is saying that Mr. Beale did not cause Mr. Messineo to “lose” Murch’s Point. In fact, there was no loss to Mr. Messineo at all, except that Mr. Beale should have alerted Mr. Messineo to the fact that Murch’s Point was not included in Miss Finley’s property holdings.

A solicitor negligence case reaching the Court of Appeal shortly after Messineo was Kienzle v. Stringer.[48] In Kienzle v. Stringer, due to Mr. Stringer’s error, Mr. Kienzle did not have clear title to his farm in the County of Oxford. Not knowing of the defect, Mr. Kienzle agreed to sell the farm to a purchaser and awaited closing. He did not renew a lease of neighbouring lands which he had farmed to augment his income at the Oxford farm. Meanwhile, he purchased another farm in Kincardine, conditional upon sale of the Oxford farm. When the defect in title was discovered, both the sale of the Oxford farm and the Kincardine farm collapsed. In the litigation that followed, the trial judge felt bound by Messineo v. Beale to limit the award to the difference between the contract price and the market value of what was received. Since Kienzle had been deprived of the interest of one of his sisters, he was awarded the sum of $15,509.48, which was what he needed to purchase her interest and clear the title. He was also awarded return of the legal fees paid to the lawyer who made the error; and legal fees paid to another solicitor who attempted to unravel the title problems. 

Mr. Kienzle appealed, seeking additional damages for (a) loss of income on the Oxford farm when it was no longer a viable operation without the additional leased land, and (b) damages for the lost purchase of the Kincardine farm when the value of that land had risen substantially. Zuber J.A. awarded an additional $10,750 for loss of profit in farming the Oxford farm. He did not, however, award a further $20,000 for his loss of the Kincardine farm purchase, finding it was not a “reasonably foreseeable” loss. Wilson J.A. issued a dissenting opinion, being of the view that loss of the Kincardine farm was a reasonably foreseeable loss when a solicitor’s opinion is that the client has “good and marketable” title.

In the course of setting out his reasons, Zuber J.A. recognized the limitations of Messineo v. Beale and said, 

[12] … “Messineo v. Beale decides only that the defendant did not cause the plaintiff any damage. Since the vendor did not own Murch’s Point, the defendant’s solicitor did not cause its loss.”

[13] It appears that in many of the cases, as a matter of fact, the damages amount to no more than the difference between the purchase price and the market value of what is received, but I find no case binding on this Court compelling the acceptance of such a measure as a rule of law. 

[14] In my view the law should not support a rule which gives exceptional protection to solicitors from the general principles of damages which flow from either contractual or tortious responsibilities.

In the final analysis, while the Court of Appeal might have thought it awarded diminution-in-value damages, it actually ordered the cost of repair; – the fees of the second lawyer to correct the title, the amount of money to buy out the sister’s remaining interest in the property, plus consequential damages. 

In Toronto Industrial Leaseholds Ltd. v. Posesorski,[49] the Posesorskis purchased an industrial property in 1979 for $325,000. It was subject to a long-term lease to 1984, registered on title, with an option to renew for an additional 10 years at rent substantially below market rents. The lawyer acting for the Posesorskis on the purchase did not notice the 10-year option to renew and there was no problem until the tenant gave notice of its intention to renew the lease. The Posesorskis and their lawyer, and subsequently their new lawyer, disputed the validity of the option. The dispute went to litigation, where the Posesorskis’ solicitor admitted his negligence in failing to advise them about the option to renew. Later in the litigation, the lawyer’s insurer negotiated a settlement with the tenant for $260,000 and extricated the Posesorskis from the option. The Posesorskis sold the property in late 1984 for $700,000. Ten years later, the matter reached the Court of Appeal.

Doherty J.A. established at the outset that an award of damages against a solicitor should, to the extent possible, restore the defendants to the position in which he or she would have been had their solicitor properly discharged his duties. Here, the solicitor’s error caused the defendants to enter a transaction into which they otherwise would not have entered.

Doherty J.A. identified three types of loss flowing from the solicitor’s negligence: (1) the clients paid more for the property than it was worth; (2) they lost the use of the funds represented by that overpayment for five years; and (3) they incurred additional costs and expenses such as legal fees of lawyers retained to extricate them from the original lawyer’s error, the cost of following the new lawyers’ advice, and the cost of maintaining the vacant property.

In his discussion about the overpayment of the property, Doherty J.A. followed Zuber J.A.’s reasoning in Messineo v. Beal, as echoed by the Court of Appeal in Bowman v. Martineau, concluding,

[77] … The clients were not deprived of the property minus the option because of Mr. Solway’s negligence. The property without the option could not have been conveyed to the clients. As in Messineo, the solicitor’s negligence caused the clients to complete a transaction they would not have entered into had the solicitor done his job properly. As in Messineo, the clients are entitled to recover the overpayment, if any, resulting from the solicitor’s failure to alert them to the “defect” in the property. The overpayment is the difference between the price actually paid for the property and the market value of the property with the option.

He agreed with the trial judge that the Posesorskis paid $110,000 more for the property than it was worth at the time of the purchase, all because of the unfortunate option in the lease. In deciding this way, Doherty J.A. specifically avoided calculating the loss as the cost of removing the option, which was the $260,000 the lawyer’s insurer had paid to buy out the 10-year low-rent lease. That would have been a “cost of repair” measure of damages, and would have resulted, in his view, in significant overpayment. 

As for the loss of use of the funds represented by the overpayment of $110,000, Doherty J.A. applied an interest rate of 15% from the date of purchase to the date of sale: $81,000. Finally, for consequential damages he awarded $39,422.57, which was for legal fees in respect of the new lawyer retained to extricate the Posesorskis from the lease, plus the cost of maintaining the vacant building until it could be sold.

Galligan J.A.’s dissenting opinion was that the cost of reinstatement was the more appropriate choice because the lawyer’s insurer had paid $260,000 to extricate the Posesorskis from the 10-year low-rent lease. The $260,000 would have exactly compensated the Posesorskis, since that is how the error was actually dealt with.

Principles to take away from these few solicitor negligence cases are:

(a) Diminution-in-value damages are the default measure of damages unless the court finds that only cost-of-repair damages will appropriately compensate the plaintiff. 

(b) Diminution in value is not a rule of law; cost-of-repair damages may be granted, in which case the negligent solicitor must pay to un-do or repair the error;

(c) The diminution-in-value measure of damages tends to give exceptional protection to the defendant. The law should not support a rule which gives exceptional protection to a type of tortfeasor such as a lawyer or a realtor);

(d) Diminution in value may be calculated by assessing the cost of repair;

(e) Consequential damages may be awarded, in which case the court will assess the reasonable foreseeability of the loss.

In Kienzle v. Stringer, the solicitor created the title defect and paid the cost of repairing it, plus consequential damages. In Posesorski, the solicitor did not create the title defect but induced the Posesorskis to purchase not knowing of the defect. He did pay for its repair through his insurance coverage; somehow the Posesorskis had to be extricated from the effects of his error. They were then awarded an additional $110,000 in diminution-in-value damages, plus consequential damages. 

CONCLUSION

I hope that this review has helped shed some light on the various factors that courts will consider when determining how to quantify damages. While there are principles that help identify whether quantification is more appropriate on a diminution in value or a cost of repair approach, it will come down to the specific facts of any given case. If you do find yourself involved in an action where the quantification of damages is in dispute, it is very important that you retain a lawyer who is well versed in this area of practice.

Published on May 21, 2024 by David Morin.

David Morin is the Managing Partner at Davidson Cahill Morrison LLP.  His practice focuses on civil litigation and, in particular, personal injury, product liability, municipal liability, and professional negligence claims. 

David has been privileged to hold many titles external to his practice at Davidson Cahill Morrison LLP, such as Former President of the Muskoka Law Association, Chair of the Ontario Bar Association Audit Committee, as well as Chair of the Paralegal Regulation Sub-Committee for the Ontario Bar Association. 

David is also an active current member of the Ontario Bar Association, Advocates’ Society, the American Association for Justice, and has been an appointed Deputy Judge of the Superior Court of Justice for the Province of Ontario since 2003.

Contact David Morin today to request a consultation on a professional negligence claim involving a defective property.

Footnotes

[1] Bowman v Martineau, 2019 ONSC 1467 at paras 168-74, 185.

[2] Bowman v Martineau, 2019 ONSC 1468 at paras 186, 192-193.

[3] Jarbeau v. McLean, 2017 ONCA 115 (Jarbeau).

[4] Tabata v. McWilliams et al., 1982 CanLII 2159 (ON CA) (Tabata).

[5] Andrade v. Collins, 2023 ONSC 6011 (Andrade).

[6] Jens v. Mannix Co. Ltd., 1979 CarswellBC 752 (B.C.C.A.).

[7] Jens v. Mannix Co. (1978), 89 D.L.R. (3d) 351 (B.C.S.C.).

[8] Jens v. Mannix Co., supra.

[9] Nan v. Black Pine Manufacturing Ltd., 1991 CarswellBC 75 (B.C.C.A.).

[10] Evans v. Balog, [1976] 1 N. S.W.L.R. 36.

[11] Evans v. Balog, supra, p. 40.

[12] MacGregor on Damages, 13th ed. (1972), p. 713.

[13] Galan v. Finch, 2015 ONSC 2455.

[14] Alex L. Eged, “The Measure of Tort Damages for the Loss of a Building,” (2005, Dolden Wallace Folick LLP), www.dolden.com/wp-content/uploads/2016/06/128.

[15] Carrel v. Randy Laur Burner Service, 2004 CarswellOnt 66.

[16] [1970] 1 Q.B. 447 (C.A.).

[17] Harbutt’s “Plasticine” Ltd. v. Wayne Tank and Pump Co. Ltd., supra, p. 467.

[18] Harbutt’s “Plasticine” Ltd. v. Wayne Tank and Pump Co. Ltd., supra, p. 472.

[19] Harbutt’s “Plasticine” Ltd. v. Wayne Tank and Pump Co. Ltd., supra, p. 475.

[20] McGregor on Damages (14th ed) (1980), c. 51, p. 763.

[21] James Street Hardware and Furniture v. Spizziri, 1987 CarswellOnt 764 (Ont. C.A.). The reference in the quote to Dr. Lushington is from his decision in The “Gazelle” where he held that the owner of a damaged ship was entitled to the cost of repair even though ship would be improved by the use of new materials.

[22] Montreal Trust Co. v. Hercules Sales Ltd. et al, [1969] 1 O.R. 661 (Ont. C.A.).

[23] Vanderburgh v. Oneida Farmers’ Mutual Fire Insurance Co. (1934), [1935] O.R. 67 (Ont. C.A.).

[24]See also C.R. Taylor (Wholesale) Ltd. v. Hepworths Ltd., [1977] 1 W.L.R. 649 (Eng. Q.B.) where a commercial building burned down at a time when the plaintiff had intended to demolish it and redevelop the land. Its destruction by fire only saved the plaintiff the cost of demolishing it. The defendant was not liable for the cost of repair.

[25] Derry v. Peek, (1889) 14 App Cas. 337 (H.L.).

[26] Esso Petroleum v. Mardon, [1976] Q.B. 801 (Eng. C.A.).

[27] Esso Petroleum v. Mardon, supra, pp. 820-1.

[28] Hepting v. Schaaf, 1963 CarswellSask 100, [1964] S.C.R. 100 (S.C.C.).

[29] Parna v. G. & S. Properties Ltd., 1969 CarswellOnt 872 (Ont. C.A.). 

[30] See also Bitton v. Jakovljevic, 1990 CarswellOnt 984 (S.C.J.) where the defendants sold a building representing that all units were fully leased. The defendant had made several fraudulent leases, representing 60% of the represented income. Van Camp J. awarded damages for all losses directly flowing from the fraudulent inducement, including consequential loss.

[31] Liesbosch Dredger v. S.S. Edison, [1933] AC 449 (H.L.).

[32] Wiebe v. Gunderson, 2003 BCSC 1282, 2003 CarswellBC 2029 (B.C. S.C.).

[33] Wiebe v. Gunderson, 2004 BCCA 456, 2004 CarswellBC 2109 (B.C.C.A.).

[34] Goldstein v. Davison, 1994 CarswellOnt 710 (Ont. Gen. Div.)

[35] See also Bitton v. Jakovljevic, 1990 CarswellOnt 984 (S.C.J.), a case involving income-producing property in Mississauga where the seller warranted a return of 10.41% per annum and represented that all units were fully leased. All but four leases were fraudulent and the seller admitted a breach of warranty. Ground J. found fraudulent misrepresentation and assessed damages on a diminution-in-value basis with consequential damages consisting of the shortfall in income.

[36] C.R.F. Holdings Ltd. v. Fundy Chemical International Ltd., 1981 CarswellBC 368, 33 B.C.L.R. 291 (B.C.C.A.), leave to appeal refused [1982] 1 S.C.R. vii (S.C.C.).

[37] C.R.F. Holdings Ltd. v. Fundy Chemical International Ltd., 1980 CarswellBC 163 at para. 47 (B.C.S.C.).

[38] C.R.F. Holdings Ltd. v. Fundy Chemical International Ltd., 1980 CarswellBC 368 at para. 18 (B.C.C.A.). 

[39] C.R.F. Holdings Co. v. Fundy Chemical International Ltd., 1983 CarswellBC 3334 (B.C.C.A.). See also Sevidal v. Chopra, 1987 CarswellOnt 226 (Ont. H.C.J.) where fraudulent misrepresentation by the Chopras led to the Sevidals purchasing in 1981 a residential property contaminated with historic radioactive soil. They sold in 1984 for a loss. The trial judge awarded the difference between the purchase price and the sale price.

[40] Fors v. Overacker and Mallon, 2014 ONSC 3084 (S.C.J.).

[41] Gemeinhardt v. Babic, 2016 ONSC 4707 (Ont. S.C.J.).

[42] Gundersen v. Savoy, 2012 BCSC 1047 (B.C.S.C.).

[43] Krawchuk v. Scherbak, 2009 CarswellOnt 4578 (Ont. S.C.J.).

[44] Sedgemore v. Block Bros. Realty, 1985 CarswellBC 625 (B.C.S.C.).

[45] Neill v. Trenholm, 2000 CarswellNB 514 (N.B.Q.B.).

[46] Lunney v. Kuntova, Badre and Re/Max, 2009 CanLII 7173 (S.C.J.).

[47] Messineo v. Beale (1978), 20 O.R. (2d) 49, 86 D.L.R. (3d) 713 (Ont. C.A.).

[48] Kienzle v. Stringer, 1981 CarswellOnt 530 (Ont. C.A.).

[49] Toronto Industrial Leaseholds Ltd. v. Posesorski, 1994 CarswellOnt 745 (Ont. C.A.).