On appeal from the judgment of Justice Thomas M. Dunn of the Superior Court of Justice dated February 14, 2003.
Timothy P. Bates and M. Christine Fotopoulos, for the appellants, John Adrian Lemstra and Anne Lemstra.
Anna Towlson, for the respondent, Sharon Ann Mariani.
Peter Haney, for the respondents, Alpine Homes Ltd. and Marinus Van Engen.
The judgment of the Court was delivered by
¶ 1 SHARPE J.A.: Sharon Ann Mariani purchased a home from the appellants, John and Anne Lemstra, pursuant to a standard agreement of purchase and sale. Some time after the transaction closed, Mariani discovered structural defects in the construction of the home. The issue on this appeal is whether the Lemstras are liable to Mariani for any of the cost of repairing or demolishing and rebuilding the home.
¶ 2 The Lemstras built the home on a piece of vacant land approximately four years before they sold it to Mariani. John Lemstra acted as his own general contractor and did some of the work himself. Anne Lemstra assisted in the design of the home. It was to be the Lemstras' "dream home". However, due to a change in John Lemstra's employment, they had to move. They vacated the property and put it up for sale. The listing agreement described the home as "well-built". Ten months later, Mariani inspected the home with her own real estate agent and again with her father-in-law who had experience in construction. He advised her that the home was well-built and she entered the agreement of purchase and sale. The standard form agreement of purchase and sale contained an "entire agreement clause" at clause 22, which provided:
There is no representation, warranty, collateral agreement or condition, whether direct or collateral or expressed or implied, which induced any party herein to enter into this Agreement or on which reliance is placed by any such party, or which affects this Agreement or the property or supported hereby, other than as expressed herein.
¶ 3 The transaction closed approximately one month later on May 30, 1991. Some time after the closing, Mariani discovered a number of problems with the house. The most serious were cracking along a high centre bearing wall and excessive dampness in the basement. Mariani commenced this action in 1993. In addition to the Lemstras, Mariani sued the Corporation of the Township of Puslinch ("Township") alleging negligent inspection. She also sued Alpine Homes Ltd. and Marinus Van Engen, who had constructed the centre load-bearing wall. Over the next several years Mariani retained various experts to advise her how to remedy the structural defects of the centre wall and the building envelope. She did not carry out any significant repairs and, after the home became infected with toxic mould, she concluded that it was necessary to demolish the house and rebuild. By the date of trial, she had commenced the construction of a new home on the same property, but she had not demolished the house that is the subject of this litigation.
¶ 4 Prior to the trial, Mariani entered into a "Mary Carter"-type settlement agreement with the Township. The Township paid Mariani $150,000. Mariani agreed that if all crossclaims against the Township were not dismissed on consent, Mariani would not enforce any judgment against the other defendants for more than their apportioned share of liability, which would avoid any claim for contribution against the Township. The Township also reached a settlement with Van Engen and Alpine Homes, whereby the latter agreed to dismissal of their crossclaim against the Township. The Lemstras and the Township reached a partial settlement. The Township abandoned its crossclaim against the Lemstras, but the Lemstras were at liberty to advance their crossclaim against the Township. The Township agreed not to defend the crossclaim and the Lemstras undertook not to pursue any award of costs that might be made in their favour against the Township.
¶ 5 In the action, Mariani alleged a long list of defects in the home. The two most significant were that the centre load-bearing wall was structurally unsound and that the building envelope was defective, resulting in water penetration. The trial judge found that these two defects were proved, but rejected all of Mariani's other complaints and claims, including her claims for damage to personal property, mental distress and the loss of rental of a basement apartment.
¶ 6 The trial judge found liability on the part of both the Lemstras and the Township apportioned at seventy-five per cent and twenty-five per cent, respectively. The trial judge dismissed the claim against Alpine Homes and Van Engen.
¶ 7 The trial judge found that the Lemstras were liable to Mariani for the cost of demolition and reconstruction. He assessed damages in the amount of $299,610. The primary basis for liability was the trial judge's finding that the Lemstras had "fraudulently (or negligently) misrepresented" the house as being "well-built". The trial judge also found that the Lemstras were liable on the ground that they knew or should have known of defects in the house and failed to disclose them, and that they were liable for the negligent construction of the home and the economic loss suffered by Mariani. The trial judge rejected the Lemstras' submission that Mariani had failed to mitigate her damages by acting more quickly to remedy the defects in the house. The trial judge found that the Township was liable for its negligence in failing to supervise or inspect the building and apportioned its liability at twenty-five per cent. Finally, the trial judge ordered prejudgment interest on the damages awarded from November 19, 1993, the date the statement of claim was issued.
¶ 8 The Lemstras appeal the trial judge's findings of liability and, in the alternative, his assessment of the damages and his awards of prejudgment interest and costs. Although the Notice of Appeal is silent on the point, in their factum, the Lemstras ask this court to find liability on the part of Van Engen and increase the apportionment of liability as against the Township.
¶ 9 The transaction between Mariani and the Lemstras was governed by a standard form agreement of purchase and sale. The agreement provided no warranties or guarantees as to the fitness of the property or construction of the house. Mariani had the opportunity to inspect the house and satisfy herself as to its fitness. She is bound by the venerable but enduring principle of caveat emptor - buyer beware. As a result, she does not seek remedy in contract. Mariani can only succeed if she can demonstrate fraud or the breach of some non-contractual duty owed to her by the Lemstras.
1. Fraudulent Misrepresentation
¶ 10 In the listing agreement between the Lemstras and their real estate agent, the house is described as "well-built". The trial judge found that although the statement that the house was well-built was not part of the agreement of purchase and sale, "the plaintiff was aware of it and relied upon it to her detriment". The trial judge further found that as John Lemstra acted as his own contractor and did much of the work himself, "he either knew or must be taken to have known of the defects." The trial judge also found that, "[t]he statement made in the listing agreement that the house was 'well-built' and which the plaintiff says came to her attention prior to making the offer, I find to be a fraudulent (or negligent) misrepresentation".
¶ 11 The Lemstras submit that the trial judge erred both in fact and in law with respect to this finding. I agree with that submission.
¶ 12 It is common ground before this court that the elements of fraudulent misrepresentation are: (1) that the defendant made a false representation of fact; (2) that the defendant knew the statement was false or was reckless as to its truth; (3) that the defendant made the representation with the intention that it would be acted upon by the plaintiff; (4) that the plaintiff relied upon the statement; and (5) that the plaintiff suffered damage as a result.
¶ 13 While it certainly could be inferred that the Lemstras represented to their own real estate agent that their home was well-built, in my view, there is no evidence in the record capable of supporting a finding of fraudulent misrepresentation in Marani's favour on elements (2), (4) or (5).
¶ 14 With respect to element (2) and the knowledge or recklessness of the Lemstras, I cannot agree that because of his involvement in building the home, John Lemstra must be taken to know of the serious defects in construction. We were pointed to no evidence that would indicate that Lemstra had any knowledge that the house was defective. There is no legal principle to support the finding that as the builder he is in law deemed or presumed to know of defects in the structure. In addition, this finding appears to be contradicted by the trial judge's other finding that the Lemstras "observed no significant problems with the construction or with the finished home" and that the structural problems only became known after the closing of the transaction. Finally, with respect to Anne Lemstra, there is no finding of knowledge or recklessness on her part to support liability against her in fraud.
¶ 15 I have also concluded that there is no evidence in the record capable of supporting the trial judge's finding that Mariani relied to her detriment on any representation from the Lemstras that the home was "well-built". Mariani was asked to identify the documents she saw prior to entering the agreement of purchase and sale. Mariani specifically testified that she did not see the listing agreement and another document derived from the listing agreement that included the crucial words "well-built" home. None of the documents she saw before signing the agreement included the representation that the home was "well-built". While at one point Mariani testified that, prior to entering the contract, she believed the home to be a "custom home, energy efficient, well-built", there is nothing in the trial record that links that impression to anything said or done by the Lemstras. I would add here that the words "custom home, energy efficient, well-built" do not appear in the listing agreement. Finally, before deciding to make an offer, Mariani inspected the home twice, once with her own agent and once with her father-in-law who was involved in the construction industry and advised her that it "appeared to be a well-built home."
¶ 16 Another significant problem with the trial judge's finding is that Mariani did not plead fraudulent misrepresentation. His finding that such a pleading is contained in paragraphs 16-21 of the statement of claim is plainly wrong in law. In these paragraphs, Mariani pleads that the Lemstras knew or ought to have known of the deficiencies and latent defects in the house, and that they had a duty to inform the plaintiff of such problems. This pleading is simply not capable of supporting an allegation of fraudulent misrepresentation, as the essential elements of the tort are not alleged.
¶ 17 Accordingly, I would set aside the finding of liability for fraudulent misrepresentation.
2. Negligent Misstatement
¶ 18 The trial judge appears to have also found liability for negligent misstatement although he did not consider the case in terms of the requisite elements of that tort.
¶ 19 The elements of negligent misstatement set out in Hedley Byrne & Co. v. Heller & Partners Ltd.,  A.C. 465 are: (1) a duty of care based upon a special relationship between the plaintiff and the defendant; (2) a false statement by the defendant; (3) negligence on the part of the defendant as to the truth of the statement; (4) reasonable reliance by the plaintiff in the truth of the statement; and (5) the plaintiff suffering damages as a result.
¶ 20 There is no finding with respect to the issue of duty of care. The relationship between the Lemstras and Mariani was governed by a standard agreement of purchase and sale for real estate that explicitly excluded reliance upon any representations. Consequently, it is difficult to see why a separate Hedley Byrne duty of care in tort would not be excluded as well. In any event, as I have already found, there is no evidence capable of supporting a finding of reliance by Mariani on any statement by the Lemstras that the house was "well-built" and that is sufficient to dispose of the tort of negligent misstatement.
¶ 21 Accordingly, I would set aside the finding of liability for negligent misstatement.
3. Failure to disclose defects
¶ 22 The trial judge also found that the Lemstras were liable for failure to disclose the defects in the construction of the house. The trial made the following finding:
[S]ince John Lemstra himself acted as his own contractor and did much of the work on the construction of the premises, he either knew or must be taken to have known of the defects. The Lemstras' failure to advise the purchaser Mrs. Mariani of these defects, in my opinion, is actionable and sufficient to allow Mrs. Mariani recovery.
¶ 23 A vendor may be required to disclose known latent defects: see P.M. Perell & B.H. Engell, Remedies and the sale of land, 2d ed. (Toronto: Butterworths, 1998) at 102. However, as I have already stated, the trial judge erred by imputing such knowledge to the Lemstras. I have already dealt with negligent misstatement. Another possible head of liability would be innocent misrepresentation inducing the contract. However, if made out, that claim would support rescission of the contract, not liability for damages in tort for the cost of demolition and construction: see S.M. Waddams, The Law of Damages, looseleaf (Toronto: Canada Law Book) at 5.640-5.650. No claim for rescission has been advanced. Accordingly, if the trial judge intended to impose liability for some form of misrepresentation other than negligent or fraudulent misstatement, it is my view that he erred in law.
4. Negligent Construction
¶ 24 While his reasons are not as clear as they might be, the trial judge also appears to have found that the Lemstras were liable for the economic loss flowing from the negligent construction of the home. He mentioned the leading case Winnipeg Condominium Corporation No. 36 v. Bird Construction Co.,  1 S.C.R. 85, and he found that there were two latent defects that rendered the house dangerous. The first defect was the centre structural wall and the second defect was the problem with the building envelope and resulting moisture and eventual mould that made the house uninhabitable.
¶ 25 Winnipeg Condominium establishes that a builder owes a duty of care to subsequent purchasers. As La Forest J. stated at para. 35:
[I]t is reasonably foreseeable to contractors that, if they design or construct a building negligently and if that building contains latent defects as a result of that negligence, subsequent purchasers of the building may suffer personal injury or damage to other property when those defects manifest themselves. A lack of contractual privity between the contractor and the inhabitants at the time the defect becomes manifest does not make the potential for injury any less foreseeable. Buildings are permanent structures that are commonly inhabited by many different persons over their useful life. By constructing the building negligently, contractors (or any other person responsible for the design and construction of a building) create a foreseeable danger that will threaten not only the original owner, but every inhabitant during the useful life of the building [emphasis added].
¶ 26 However, a claim for defective construction is a claim for purely economic loss, and recovery under the Winnipeg Condominium is subject to an important caveat. The structure must be dangerous, not merely shoddy, and it is only the cost of repairing the structure and restoring it to a non-dangerous state that is recoverable: see Winnipeg Condominium at para. 12.
[T]he degree of danger to persons and other property created by the negligent construction of a building is a cornerstone of the policy analysis that must take place in determining whether the cost of repair of the building is recoverable in tort. As I will attempt to show, a distinction can be drawn on a policy level between "dangerous" defects in buildings and merely "shoddy" construction in buildings and that, at least with respect to dangerous defects, compelling policy reasons exist for the imposition upon contractors of tortious liability for the cost of repair of these defects.
¶ 27 The Lemstras submit that the trial judge erred in three ways. First, they submit that the Lemstras owed no duty of care to Mariani sufficient to sustain liability for negligent construction. The Lemstras were not commercial builders. Unlike the commercial builder in Winnipeg Condominium, they were not building the house with the intention to sell it. The Lemstras built the home as their "dream home" with the intention to live it in indefinitely. It was only when their economic situation took a turn for the worst that they decided to sell.
¶ 28 I do not agree with this submission. Anyone who builds a home for their own use must be taken to know that that their circumstances may change and that, someday, they may have to sell it. As the passage I have quoted above indicates, the duty is imposed not only upon building contractors, but also upon "any other person responsible for the design and construction of a building". See also Perell, supra at 143: "... [A] vendor who is also a builder assumes the same responsibilities as a third party builder."
¶ 29 The Lemstras' second ground relates to the question of dangerousness. They submit that while the centre wall was unstable, the house was not dangerous in the sense that there was any risk to personal safety or of imminent collapse. The trial judge found that the defective centre wall "rendered the premises dangerous" but then added:
The various experts apparently did not conclude that it was unsafe in the sense that the house was likely to collapse but it is clear from that same evidence that the centre wall deficiencies made the house susceptible to movement or shifting in any significant wind, or as the case may be, snow load.
¶ 30 The trial judge also found that "the proliferation of mould ... presents a danger to the occupants of the house." The Lemstras argue that the toxic mould only developed after Mariani failed to take meaningful remedial steps to prevent the penetration of water into the house despite the advice of her own experts. The Lemstras say that even if the building envelope was defective, the defects could have been remedied at a much lower cost if the problems had been tackled in a timely fashion. The trial judge rejected the contention "that the proliferation of mould was simply a lack of maintenance by the plaintiff or indeed one that even now can be remedied". When it came to considering whether Mariani had acted reasonably to mitigate her damages, he found that, "[c]ertainly in the best of all worlds, in 1993 she could have spent substantial money to correct the problem but I cannot say that by acting as she did that she failed to mitigate the damages as a reasonable person might".
¶ 31 I would not interfere with the trial judge's findings with respect to dangerousness. There was expert evidence that the centre wall was unstable and dangerous within the meaning of the Ontario Building Code, R.R.O. 1990. While those same experts agreed that there was no danger of imminent collapse, there was evidence that the defect made the building unstable and that, if not repaired, it might collapse under a heavy snow load and that if not repaired, "a catastrophic condition may prevail". Similarly, with regard to the problem with the building envelope, it is evident from what has actually happened that if not remedied, the entry of water into the structure can lead to a condition hazardous to health and to property in the home.
¶ 32 In my view, the evidence on both defects is capable of bringing the case within the Winnipeg Condominium principle. That case does not require the level of immediate danger suggested by the argument advanced by the Lemstras. The operative principle is explicitly preventative. Recovery for the economic loss of repair is allowed to avoid the greater cost of recovery for personal injury should the danger materialize and this must mean that the plaintiff is entitled to claim for the cost of repairs required to avoid the danger and to prevent it from occurring. La Forest J. stated at paras. 36-37:
If a contractor can be held liable in tort where he or she constructs a building negligently and, as a result of that negligence, the building causes damage to persons or property, it follows that the contractor should also be held liable in cases where the dangerous defect is discovered and the owner of the building wishes to mitigate the danger by fixing the defect and putting the building back into a non-dangerous state. ...
Apart from the logical force of holding contractors liable for the cost of repair of dangerous defects, there is also a strong underlying policy justification for imposing liability in these cases. ... [T]he plaintiff who moves quickly and responsibly to fix a defect before it causes injury to persons or damage to property must do so at his or her own expense. By contrast, the plaintiff who, either intentionally or through neglect, allows a defect to develop into an accident may benefit at law from the costly and potentially tragic consequences. In my view, this legal doctrine is difficult to justify because it serves to encourage, rather than discourage, reckless and hazardous behaviour. Maintaining a bar against recoverability for the cost of repair of dangerous defects provides no incentive for plaintiffs to mitigate potential losses and tends to encourage economically inefficient behaviour.
¶ 33 However, I do agree with the Lemstras' third ground, namely, that the quantum of damages awarded by the trial judge cannot be sustained as damages for negligent construction. The trial judge found that by the time of trial, the building had no value and that Mariani was entitled to the lesser of the cost of replacement ($300,000) and the difference between the price she paid for the property ($375,000) and the value of the land at the time ($100,000), namely $275,000, plus the cost of demolition ($23,000) for a total of $298,000. Under Winnipeg Condominium, at para. 42, Mariani is entitled only "to the reasonable cost of putting the building into a non-dangerous state". As I have rejected the other grounds for liability, it follows that the damages must be assessed based on liability for negligent construction, and reduced accordingly.
¶ 34 It is admittedly difficult to measure those damages on the basis of the findings of the trial judge, but in view of the extremely protracted course this litigation has followed, it is in the interest of all parties for this court to do the best it can in order to bring this matter to completion.
¶ 35 The Lemstras say that at best, Mariani should be limited to the cost of the recommended repairs to deal with the two defects. In 1993-4, Mariani received estimates for $13,624 to deal with the problems with the building envelope and $6,000 to deal with the centre wall problem. However, Mariani considered this to be a "band-aid" solution, and the trial judge found that she acted reasonably in getting further estimates. The trial judge's factual findings are entitled to deference in this court, and I would not interfere. In 1998, there were two repair estimates, one for $100,657 and the other for $131,125. In my view, it is appropriate to award Mariani damages in the amount of $100,657 for negligent construction on the basis that the structure could have been restored to a non-dangerous condition for that amount.
¶ 36 Mariani is entitled to prejudgment interest on that award at the rate prescribed by the Courts of Justice Act, R.S.O. 1990, c. C.43, but having insisted on postponing the repairs, she should not be awarded prejudgment interest from the date of the statement of claim, but only from the date the cost would have been incurred. I would take that to be the date of the estimate upon which the award is based, namely October 29, 1998.
¶ 37 In my view, there is sufficient evidence of Anne Lemstra's involvement in the design and construction of the house to render her liable for negligent construction and, accordingly, for these damages.
5. Liability of Alpine Homes and Van Engen
¶ 38 I see no basis to interfere with the trial judge's finding that Alpine Homes and Van Engen are not liable for any portion of the damages awarded to Mariani and I would dismiss the appeal against them.
¶ 39 Accordingly, I would allow the appeal in part and vary the judgment at trial by
Substituting in paragraph 1 damages assessed at $100,657.
Amending paragraph 2 to reflect the reduction in the damages payable by the Lemstras to $75,493 in view of the apportionment of liability with the Township.
Amending paragraph 3 to provide for prejudgment interest at the rate prescribed by the Courts of Justice Act from October 29, 1998.
¶ 40 In their submissions, the parties did not address the effect or impact of the settlement reached between Mariani and the Township upon Mariani's entitlement to enforce the judgment against the Lemstras. Accordingly, these reasons do not touch upon that issue.
¶ 41 I would not interfere with the trial judge's costs assessment of quantum of the trial costs. However, the appellant shall have ten days from the release of these reasons to make written submissions as to the effect, if any, of this judgment upon the trial costs, and the respondent shall make any reply within ten days thereafter.
¶ 42 The appellants have achieved substantial success on appeal and I would fix their costs of this appeal at $30,000 inclusive of GST and disbursements. Alpine Homes and Van Engen are entitled to their costs of the appeal against the appellants fixed at $3,500 inclusive of GST and disbursements.
CATZMAN J.A. I agree.
GOUDGE J.A. -- I agree.
QL UPDATE: 20041025