Executive Summary: Key Legal and Evidentiary Issues

• Dispute over whether a March 23, 2021 “Geothermal Proposal” formed a binding contract (or contract to make a contract) between Sher Markham Inc. and the “Diverso Energy” business name.
• Contested identification of the proper contracting party, given that “Diverso Energy” is an unregistered business name and a later TEPA names a different limited partnership not sued.
• Allegations of negligent performance and negligent misrepresentation concerning the design and installation of a geothermal system for a townhouse development.
• Use of documents referred to in the pleadings (Proposal, later TEPA, invoice summary) on a Rule 21 motion, and the limits on treating them as “evidence” at the pleadings stage.
• Debate over discoverability and timing of damages (delays and later borehole leakage) for the purposes of the two-year limitation period.
• Defendants’ unsuccessful attempt to strike the claim as disclosing no reasonable cause of action and as being statute-barred, resulting in an award of $10,000 in costs to the plaintiff.

Background and parties

Sher Markham Inc. is the owner and developer of a property at 9704 McCowan Road in Markham, Ontario, where it is constructing a community of 131 condominium townhouse suites known as Everhome Markham. The project required the design and installation of a geothermal energy system to service the development. Sher alleges it contracted with parties it understood to be operating as “Diverso Energy” to design and install this geothermal system. The defendants are four corporate entities associated with that operation: Geo Holdco Inc., Diverso Energy Inc., Diverso Holdings Inc., and Diverso Energy Limited Partnership, collectively referred to in the pleadings as the “Diverso Defendants.” The plaintiff’s difficulty is that “Diverso Energy” itself is not a legal person but only a business name, and that business name was not registered as required under section 2 of Ontario’s Business Names Act. Sher says it did not know which actual corporate entity stood behind the “Diverso Energy” name and therefore sued all four as the parties responsible for the work.

The alleged contract and geothermal project

According to the statement of claim, Sher and the Diverso Defendants entered into a contract on March 23, 2021, under which the defendants would design and construct a geothermal energy system for the project. The work included drilling boreholes and completing the related construction required to supply and install the system. In response to a request for production of the contract referenced in the pleading, Sher produced a document titled “9704 McCowan Rd. – Geothermal Proposal” dated March 23, 2021, which it treats as the contract in issue. This Proposal is addressed from “Diverso Energy,” described as “A Geothermal Utility Company,” but it identifies no corporation or legal entity behind that name and is signed only by Sher’s president. The Proposal details the contemplated geothermal work, provides cost estimates and projected savings, and notes that a detailed engineering review will be needed. It further states that once financing is confirmed, “the parties shall enter into and execute the final Thermal Energy Purchase Agreement (TEPA)” based on the terms discussed and outlined in the Proposal. In Sher’s pleading, the Proposal is expressly defined as the “Contract,” and the allegedly deficient work is said to be the work described in that document. Sher’s position is that the Proposal was accepted and binding, or at minimum operated as an enforceable contract to make a contract, and that the opaque use of the “Diverso Energy” business name has forced it to name the various corporate entities as defendants.

The later TEPA and contractual framework

The defendants requested a copy of the TEPA referred to in the Proposal, even though it was not pleaded in the statement of claim. Sher produced an October 1, 2021 TEPA between Sher and “Geothermal ECD, L.P.,” a limited partnership said to be acting through and represented by its general partner, 10439118 Canada Inc. The TEPA includes standard provisions governing the thermal energy relationship, and contains an entire agreement clause stating that it “supersedes any prior understandings and agreements between the parties.” It also includes a notice clause that directs notices to an individual at a “legal@diversoenergy.com” email address, again linking the arrangement to the Diverso business name. There is no indication in the TEPA of the ownership of the general partner or any information about the limited partners, and Geothermal ECD, L.P. is not among the named defendants in Sher’s action. The defendants argued that the TEPA, not the March 23 Proposal, is the operative contract, and because it is between Sher and a different limited partnership, the action against the Diverso Defendants is bound to fail. The court rejected that invitation at this early stage, emphasizing that Sher has clearly pleaded that the Proposal is the contract it sues upon, and whether the Proposal is a binding contract or a contract to make a contract is a question for a later evidentiary process such as summary judgment or trial.

Alleged negligence and misrepresentation

Beyond breach of contract, Sher pleads negligence and negligent misrepresentation against the Diverso Defendants. It alleges that they represented having the requisite skill, expertise, and resources to design and install the geothermal system in accordance with all contractual and applicable standards, and that these representations induced Sher to enter into the arrangement. Sher says those representations were negligently made and that the defendants then performed the work negligently. The design work is alleged to have been completed by July 2021, with construction running from November 2021 to March 2022. Sher claims that the construction work was inadequately performed, causing delays and later physical problems, including leaking boreholes that led to flooding on the project.

Timeline of damage and limitation period issues

The pleadings outline two main categories of harm. First, Sher alleges it did not become aware that it had suffered damage due to the defendants’ delay and poor performance until June 23, 2022, when it reviewed a document from the construction manager summarizing invoices relating to the project and identifying amounts connected to Diverso’s work. Second, it says that beginning in September 2022 and continuing until February 2023, the boreholes drilled by the defendants began leaking, causing flooding to the project site. Sher alleges it had to retain a third party to address and repair these leakage problems, which were resolved by March 2023. The defendants argued that because Sher’s notice of action was issued on May 22, 2024, more than two years after the events originating the project work, the action was barred by the two-year limitation period under the Limitations Act, 2002. They sought to rely on the invoice summary document produced to suggest that Sher had the relevant invoices earlier than June 23, 2022, and thus would have discovered damage earlier. The court declined to infer earlier discoverability on a Rule 21 motion, noting the clear pleading that Sher “first learned it suffered damages” on June 23, 2022, and also emphasizing that the subsequent borehole leakage, occurring from September 2022 to February 2023, created additional damage plainly within two years of the May 2024 notice of action.

Use of documents on a Rule 21 motion

A central procedural issue was how far the court could go in using documents produced in response to requests for particulars and production on a Rule 21.01(1)(b) motion, where no evidence is formally admissible. The court cited Rule 25.06(7), which allows a party to plead the effect of a document briefly without reproducing its exact wording, and the jurisprudence holding that documents incorporated by reference and forming an integral part of the claim can be treated as part of the pleading for the purpose of a motion to strike. In that light, the Proposal—explicitly pleaded and central to Sher’s case—could be examined to understand the nature of the alleged contract and work. However, the TEPA, which was not mentioned in the statement of claim and on which Sher did not rely, was treated more cautiously. The court refused to allow the defendants to re-characterize the claim through the TEPA and to use it as a basis for finding that the wrong defendants were sued at the pleadings stage. Any close comparison between the Proposal, the TEPA, and the actual work performed was seen as requiring evidence and factual findings inappropriate for a Rule 21 motion.

Court’s analysis on cause of action and negligence

In addressing whether the pleading disclosed a reasonable cause of action, the court applied the established test that a claim should only be struck when it is plain and obvious it has no reasonable prospect of success. Taking Sher’s pleaded facts as true for this purpose, the court accepted that Sher has clearly pleaded that the Proposal is the contract, that the geothermal work was performed under that contractual arrangement, and that the defendants were responsible for the work done through the “Diverso Energy” business name. Whether those allegations can be proven is a matter for later stages. The court further held that Sher’s negligence claim is properly pleaded: it alleges that the defendants owed a duty of care grounded in their undertaking to perform specialized services and Sher’s reliance on them, that they breached the applicable standard of care in designing and installing the system, that Sher suffered damage, and that this damage was caused in fact and in law by the defendants’ breach. The negligent misrepresentation claim was also found adequately pleaded, including a special relationship, negligent and misleading statements about capability, reasonable reliance by Sher, and resulting loss. The court concluded it was not plain and obvious that the contract, negligence, or negligent misrepresentation claims would fail, and therefore refused to strike them.

Outcome of the motion and costs awarded

Ultimately, the Ontario Superior Court of Justice dismissed the defendants’ motion under Rule 21.01(1)(b) to strike the action on both grounds advanced: failure to plead a viable cause of action and expiry of the limitation period. The court held that Sher’s statement of claim, read generously and in light of the Proposal, disclosed arguable causes of action in contract, negligence, and negligent misrepresentation against the named Diverso Defendants, and that it was not possible at the pleadings stage to conclude the claims were statute-barred. As a result, the action will proceed to the next stages of litigation, where the factual record can be fully developed and issues such as the true contracting party and the precise scope of any duty and damages can be tested. In disposing of the motion, the court also ordered that the plaintiff, Sher Markham Inc., was entitled to its costs on a partial indemnity basis in the agreed amount of $10,000, which is the only quantified monetary award made in this decision; there is no determination yet of the amount of any damages or further costs that may ultimately be awarded at trial or on other motions.