Executive Summary: Key Legal and Evidentiary Issues

• Dispute arose from the sale of SALA Wellness and SPA Centre and whether the business complied with zoning and governmental regulations at the time of purchase.
• Negligent misrepresentation claim failed due to credibility problems, evidentiary weaknesses, and the operation of an entire agreement clause barring reliance on pre-contract statements.
• Contractual representation that the business was being carried on in compliance with zoning, governmental regulations and restrictive covenants was found to be breached, leading to damages.
• Damages of $70,000 were assessed for breach of contract but reduced by 50 percent for contributory fault, resulting in a $35,000 award to the plaintiff.
• Evidence regarding an alleged osteopath licence and the deliberate understatement of the purchase price to avoid HST undermined the plaintiff’s credibility and showed apparent unlawful conduct.
• On costs, the court concluded that despite the plaintiff’s success on liability, its lack of clean hands and participation in unlawful activity justified denying it any costs of the action.

Facts of the business sale and regulatory shutdown

The dispute centres on the sale of a spa business in Oakville, Ontario, known as SALA Wellness and SPA Centre. The defendant, Yuanhui Ye, sold this business to the plaintiff, Sunrise Sunset Wellness Ltd., pursuant to an agreement of purchase and sale. Within about six weeks of closing, the plaintiff shut down the business after the Town of Oakville issued orders stating that the premises were being operated as an unlicensed Body-Rub Establishment. The plaintiff maintained that it had believed it was buying a legitimate wellness and spa operation that could continue to operate as before, and that it would not have proceeded had it known of the licensing and regulatory problems. In response to the shutdown, the plaintiff commenced an action seeking rescission of the contract or, alternatively, the return of the purchase monies together with out-of-pocket expenses as damages.

Legal claims and the contract framework

The plaintiff framed its case on two main grounds: negligent misrepresentation and breach of contract. It alleged that the defendant made pre-contractual representations about the regulatory status and legality of the business that induced the purchase, and that there were also binding contractual representations in the written agreement. One key contractual term was a representation that the business was being carried on in compliance with zoning, governmental regulations and any applicable restrictive covenants. The court identified this clause as central to the dispute and ultimately treated it as the basis for contractual liability. At the same time, the agreement contained an entire agreement clause, which limited the parties’ rights to the written contract and excluded reliance on prior oral statements. This clause became pivotal in disposing of the negligent misrepresentation claim.

Credibility issues and the failure of negligent misrepresentation

In its reasons on the merits, the court observed that there were significant credibility issues with both the plaintiff and the defendant. The plaintiff’s negligent misrepresentation claim depended heavily on oral statements it said were made before the contract. However, the evidence was not strong enough to satisfy the court that the elements of negligent misrepresentation were met. The judge noted several reasons why the claim failed, including the parties’ credibility problems and the entire agreement clause, which cut off reliance on pre-contract representations. In effect, the court held that whatever may have been said before the contract was signed, the parties had chosen to enshrine their rights and obligations in the written agreement and to disclaim other representations, which meant the plaintiff’s tort claim could not succeed.

Breach of the regulatory-compliance representation

Although the negligent misrepresentation claim failed, the court reached a different conclusion on the contractual front. It accepted that the representation in the agreement of purchase and sale that the business was being carried on in compliance with zoning, governmental regulations and any applicable restrictive covenants had not been honoured. The shutdown by the Town of Oakville due to the spa’s status as an unlicensed Body-Rub Establishment was inconsistent with the notion of a compliant operation. The court found that the plaintiff had purchased a business that was not operating in conformity with the promised regulatory framework and that this non-compliance constituted a breach of contract. Consequently, while the plaintiff did not establish negligent misrepresentation, it did establish liability based on breach of this specific contractual representation.

Damages calculation and contributory fault

In assessing damages, the court evaluated the plaintiff’s financial loss from entering into the transaction and then being forced to shut down the business. It fixed damages at $70,000. However, the court did not place the whole responsibility on the defendant. It held that the plaintiff was contributorily at fault and bore 50 percent of the responsibility for its loss. This shared fault reflected the plaintiff’s own role in how the transaction was structured and in its approach to due diligence and compliance. As a result, the court reduced the damages by half, leaving a net award of $35,000 in favour of the plaintiff. This figure represented roughly one third of the approximately $108,000 that the plaintiff had claimed, underscoring that the plaintiff achieved only partial success overall.

Questionable licence evidence and tax-avoidance conduct

The court’s concerns about the plaintiff went beyond its litigation position and extended to the underlying conduct and evidence. First, the plaintiff tendered an “osteopath licence” for its representative during the trial. The judge found this document troubling. It was never credibly explained how the representative could have become an osteopath in less than 10 days, and there were two versions of the licence put before the court that differed in important respects. While the judge stopped short of declaring the licence a fraud, the court was not persuaded that it was legitimate or that the plaintiff’s representative had truly become an osteopath. Second, the agreement of purchase and sale itself did not accurately reflect the true purchase price. The parties acknowledged that the real price was $85,000, yet the contract stated a purchase price of $10,000. They deliberately adopted this lower figure to avoid paying HST. The court found that the plaintiff either sought this arrangement or willingly agreed to it, characterizing the misstatement as unlawful conduct designed to evade tax obligations. These aspects of the evidence played an important role in the court’s view that the plaintiff did not come to court with clean hands.

Costs analysis and the denial of any costs

After the merits decision, both sides made written submissions on costs. The plaintiff sought its costs on a substantial indemnity basis in excess of $53,000, plus disbursements, emphasizing that it was overall more successful than the defendant on the judgment. The defendant opposed this claim and argued that the plaintiff should receive no costs because success was divided, the plaintiff recovered only a small fraction of its claim, and the result fell within the jurisdiction of the Small Claims Court. The court reviewed the governing principles under section 131 of the Courts of Justice Act and Rule 57.01, stressing that costs are discretionary and should be fair and reasonable rather than a strict reimbursement of every dollar spent. It also confirmed that elevated costs on a substantial indemnity scale are reserved for circumstances involving reprehensible or outrageous conduct or where a party has triggered Rule 49 cost consequences, none of which applied in favour of the plaintiff. In the ordinary course, the judge concluded that the plaintiff, as the successful party on liability, would have been entitled to partial indemnity costs only. Based on the plaintiff’s bill of costs, the court fixed a starting point of $29,000 plus HST and disbursements on a partial indemnity basis. It then indicated that this figure should be reduced further to $8,000 plus HST and disbursements to reflect the limited success in relation to the amount claimed, the plaintiff’s lack of success on some issues, the way the trial had been conducted, and the fact that only one lawyer’s time was properly claimable for most of the trial. However, the court did not stop at this reduced figure. It went on to consider the plaintiff’s role in misstating the purchase price to avoid HST and in presenting the questionable osteopath licence. Citing authority that parties involved in unlawful activity or those coming to court without clean hands can be denied costs even when they succeed, the judge held that the plaintiff appeared to have engaged in unlawful conduct and did not warrant any costs award at all. The court therefore declined to award any costs to the plaintiff and concluded that it was not entitled to costs of the action.

Overall outcome and monetary result

Taken together, the merits decision and the costs ruling produce a mixed but clear outcome. Sunrise Sunset Wellness Ltd., the plaintiff, was successful in establishing that the defendant breached the contractual representation that the business was being carried on in compliance with zoning and governmental regulations and secured a damages award, after a 50 percent reduction for contributory fault, in the amount of $35,000. At the same time, its negligent misrepresentation claim failed, its credibility was seriously undermined, and its participation in misstating the purchase price to avoid HST and offering a suspect osteopath licence led the court to conclude that it did not come to court with clean hands. As a consequence, although the plaintiff prevailed on the key contract issue and received $35,000 in damages as the successful party, it was denied any recovery of legal costs, and no costs were ordered in its favour; the total monetary amount ordered for the plaintiff in the case therefore consists of $35,000 in damages only, with no additional sums awarded for costs or disbursements.