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Contracts - Deposits
MORE CASES
Part 2
. Benedetto v. 2453912 Ontario Inc.
In Benedetto v. 2453912 Ontario Inc. (Ont CA, 2019) the Court of Appeal addresses the law of deposits in an interaction with some corporate law:[1] This appeal addresses the legal question of how the law governing deposits that secure contracts for the purchase and sale of real property interacts with section 21 of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”), which governs pre-incorporation contracts. On a motion for summary judgment, the motion judge found that the appellant forfeited the deposit when the transaction did not close, even though the pre-incorporation contract stated that the appellant was signing the contract ‘without any personal liabilities’. At the conclusion of the hearing of the appeal, the court announced that the appeal was dismissed with reasons to follow. These are those reasons.
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(1) The law with respect to deposits
[5] Where a payer (usually the purchaser) gives a vendor a deposit to secure the performance of a contract for purchase and sale of real estate, the deposit is forfeit if the purchaser refuses to close the transaction, unless the parties bargained to the contrary: see Howe v. Smith (1884), 27 Ch. D. 89 (C.A.); March Bothers & Wells v. Banton (1911), 1911 CanLII 74 (SCC), 45 S.C.R. 338. In Howe v. Smith, Fry L.J. stated at p. 101:Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract. [6] The deposit stands as security for the purchaser’s performance of the contract. The prospect of its forfeiture provides an incentive for the purchaser to complete the purchase. Should the purchaser not complete, the forfeiture of the deposit compensates the vendor for lost opportunity in having taken the property off the market in the interim, as well as the loss in bargaining power resulting from the vendor having revealed to the market the price at which the vendor had been willing to sell: H.W. Liebig Co. v. Leading Investments Ltd., 1986 CanLII 45 (SCC), [1986] 1 S.C.R. 70, at pp. 86-87.
[7] The motion judge provided a helpful summary of the law: a deposit is not part of the contract of purchase and sale, but “stands on its own as an ‘ancient invention of the law designed to motivate contracting parties to carry through with their bargains’, ‘something which binds the contract and guarantees its performance’, and is an ‘earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract’”: see Tang v. Zhang, 2013 BCCA 52, 41 B.C.L.R. (5th) 69; Comonsents Inc. v. Hetherington Welch Design Ltd., 2006 CanLII 33779 (Ont. S.C.); Howe v. Smith.
(2) Pre-incorporation contracts and s. 24 of the OBCA
[8] At common law, a purchaser who breaches a contract of purchase and sale by electing not to complete the purchase will generally be liable to the vendor, who can pursue damages or other remedies. But contracts that are executed by a person acting as a promoter or functionary – that is, executed on behalf of a company intended to be incorporated later – have an added complexity. Section 21 of the OBCA modifies the common law of contract to facilitate such transactions, clarifying the rights and obligations parties assume in pre-incorporation contracts.
[9] The default rule is provided by s. 21(1) of the OBCA:Contract prior to corporate existence
21 (1) Except as provided in this section, a person who enters into an oral or written contract in the name of or on behalf of a corporation before it comes into existence is personally bound by the contract and is entitled to the benefits thereof. [10] This court stated in Szecket v. Huang (1998), 1998 CanLII 4425 (ON CA), 42 O.R. (3d) 400 (C.A.), at para. 33 that, “personal liability of the promoter is established by s. 21(1) and prevails unless either contracted out of pursuant to s. 21(4), or displaced by the adoption of the contract by the company subsequent to its incorporation pursuant to s. 21(2).”
[11] The default rule of personal liability is thus subject to an opt-out under s. 21(4), where the parties make it clear that is what they have chosen:Exception to subs. (1)
(4) If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof. [12] In the event of a breach of a pre-incorporation contract where s. 21(4) applies – such as in this case, where the promoter advised the vendor he would not be completing the purchase – the vendor has no remedy for the breach: 1394918 Ontario Ltd. v. 1310210 Ontario Inc (2002), 2002 CanLII 19996 (ON CA), 57 O.R. (3d) 607. The vendor cannot obtain damages against the intended corporation because the intended corporation – if it even came into existence - did not adopt the contract: para. 9. Neither can the vendor seek damages against the promoter because the vendor and the promoter contracted to the contrary: para. 7.
(3) The application of s. 21(4) to a deposit
[13] Does a deposit stand on a different footing? We were not directed to any authority directly on point. The appellant argued that under s. 21(4), where a contract provides that a promoter is not bound by the contract, neither can the promoter be bound by a deposit given to secure the performance of the contract. That is, if a promoter has no personal obligation to perform a contract, this necessarily entails the promoter is not bound by the terms of the deposit either.
[14] The motion judge made no error in rejecting this argument. As stated above, a forfeited deposit does not constitute damages for breach of contract, but stands as security for the performance of the contract. A purchaser’s obligations under a contract of purchase and sale are thus distinct from the obligation incurred by the payer of the deposit. An implied term of a deposit is that on breach of the contract by the purchaser (or, in the case of a pre-incorporation contract, by the promoter on behalf of the intended purchaser), the deposit is forfeited to the vendor.
[15] Of course, parties can contract otherwise with respect to the deposit. The appellant argues that in this case, where the contract expressly provides that the appellant was signing the contract “without any personal liabilities”, the language was broad enough to exclude personal liability not only for damages for breach of contract, but also with respect to the deposit.
[16] It was reasonable for the motion judge to interpret the phrase “without any personal liabilities” in the context of the contract as a whole, as not applying to the deposit. As he noted, the contract had no express provisions concerning the deposit. In particular, “(t)he terms of the Deposit do not include a provision that if the contract is not performed, the Deposit is to be returned to [the appellant]. Under settled law, such a ‘contrary intention’ must be expressly stated if the deposit is not to be forfeited upon the failure of the purchaser to perform his or her obligations under the agreement of purchase and sale.” As the motion judge found, the interpretation offered by the appellant would render a deposit meaningless, providing no incentive to close the transaction, and no compensation to the vendor for failure to close.
[17] The motion judge also put some stock in the interpretation given to nearly identical contractual language in Adamis v. Aviks, 1983 CarswellOnt 3436 (Ont. Co. Ct.). That case, a decision of the County Court, addressed the liability of a trustee in a real estate contract of purchase and sale, who signed a contract “with no personal liability”. The trial judge in Adamis held that the trustee was not liable for damages for the breach of the contract, but forfeited the deposit.
[18] The appellant argues that it was an error to rely on Adamis, as the transaction arose in a significantly different legal context: the purchaser was a trustee as opposed to a promoter, and the case pre-dated the enactment of s. 21 of the OBCA. Adamis, however, was not binding on the motion judge and the motion judge did not suppose that it was. The motion judge made no error in taking comfort from the fact that the trial judge in Adamis interpreted similar contractual language – given in a different but similar context – in a similar manner. . Aylward v. Rebuild Response Group Inc.
In Aylward v. Rebuild Response Group Inc. (Ont CA, 2020) the Court of Appeal states this with respect to the law of deposit:[4] The law relating to deposits was set out generally by this court in Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 374, which the trial judge cited at para. 70 of the decision. At para. 20 of Redstone, this court quoted with approval Tang v. Zhang, 2013 BCCA 52, 359 D.L.R. (4th) 104, where Newbury J.A. noted, at para. 30, that:A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and this is not dependent on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price [.] . Azzarello v. Shawqi
In Azzarello v. Shawqi (Ont CA, 2019) the Court of Appeal commented as follows on the law of deposits:[44] Where the vendor breaches the agreement, the deposit is returned to the purchaser. If the purchaser has suffered damages as a result of the vendor’s default, the purchaser may also sue to recover those damages or in an appropriate case, may sue for specific performance of the agreement.
[45] It is well-established by case law that when a purchaser repudiates the agreement and fails to close the transaction, the deposit is forfeited, without proof of any damage suffered by the vendor: see Tang v. Zhang, 2013 BCCA 52 (CanLII), 359 D.L.R. (4th) 104, at para. 30, approved by this court in Redstone Enterprises Ltd., v. Simple Technology Inc., 2017 ONCA 282 (CanLII), 137 O.R. (3d) 374. Where the vendor suffers no loss, the vendor may nevertheless retain the deposit, subject to relief from forfeiture.
[46] This court recently restated the law regarding why a deposit is forfeited in Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149 (CanLII), 86 B.L.R. (5th) 1, at paras. 5-7:Where a payer (usually the purchaser) gives a vendor a deposit to secure the performance of a contract for purchase and sale of real estate, the deposit is forfeit if the purchaser refuses to close the transaction, unless the parties bargained to the contrary: see Howe v. Smith (1884), 27 Ch. D. 89 (C.A.); March Bothers & Wells v. Banton (1911), 1911 CanLII 74 (SCC), 45 S.C.R. 338. In Howe v. Smith, Fry L.J. stated at p. 101:Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract. The deposit stands as security for the purchaser’s performance of the contract. The prospect of its forfeiture provides an incentive for the purchaser to complete the purchase. Should the purchaser not complete, the forfeiture of the deposit compensates the vendor for lost opportunity in having taken the property off the market in the interim, as well as the loss in bargaining power resulting from the vendor having revealed to the market the price at which the vendor had been willing to sell: H.W. Liebig Co. v. Leading Investments Ltd., 1986 CanLII 45 (SCC), [1986] 1 S.C.R. 70, at pp. 86-87.
The motion judge provided a helpful summary of the law: a deposit is not part of the contract of purchase and sale, but “stands on its own as an ‘ancient invention of the law designed to motivate contracting parties to carry through with their bargains’, ‘something which binds the contract and guarantees its performance’, and is an ‘earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract’”: see Tang v. Zhang, 2013 BCCA 52 (CanLII), 41 B.C.L.R. (5th) 69; Comonsents Inc. v. Hetherington Welch Design Ltd., 2006 CanLII 33779 (Ont. S.C.); Howe v. Smith. [47] However, forfeiture is always subject to the equitable remedy of relief from forfeiture. Section 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43, provides that: “[a] court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” In Stockloser v. Johnson, [1954] 1 Q.B. 476 (C.A.), the English Court of Appeal set out the two pronged test that has been followed in Ontario for applying the relief from forfeiture provision: 1) whether the forfeited deposit was out of all proportion to the damages suffered; and 2) whether it would be unconscionable for the seller to retain the deposit: Redstone at para. 15.
[48] Up to this point, I have discussed what happens to the deposit when the agreement is completed, when the vendor defaults and when the purchaser defaults but the vendor suffers no damage. The issue in this case arose when the vendor did suffer a loss because of the purchaser’s breach; in that case, is the deposit treated as part payment and credited toward the damages, or is it retained in addition to the damages, subject to relief from forfeiture?
[49] In Dobson v. Winton & Robbins Ltd., 1959 CanLII 19 (SCC), [1959] S.C.R. 775, where the purchaser defaulted and the vendor eventually resold the land for $5000 less than the agreed price, the Supreme Court stated at para. 14, without discussion:[t]he measure of damages in this case is the difference between the price provided for in the first contract, $75,000, and the price provided for in the second contract, $70,000. Counsel for the appellant admits that against the difference of $5,000 must be credited the deposit of $4,000; (Mayne on Damages, 11th ed., p. 234; 29 Hals., 2nd ed., p. 378). The same proposition is stated in Victor Di Castri, The Law of Vendor and Purchaser, 3rd ed. (Toronto: Thomson Reuters, 2016), vol. 2 at p. 17-25, in discussing when a deposit is recoverable by a defaulting purchaser: “[w]here the land is sold at a loss, [the vendor] is entitled to recover that loss, less the amount of the deposit.”
[50] The issue of the treatment of the deposit where the vendor suffers a loss arose squarely in the recent summary judgment decision, Bang v. Sebastian, 2018 ONSC 6226 (CanLII), aff’d 2019 ONCA 501.[1] There, two deposits were paid totaling $35,000, on substantially identical language as in the agreement of purchase and sale in this case. Counsel for the vendor submitted that the deposit should be forfeited without crediting it to the damages for the loss, on the basis of the case law referred to above that says that the deposit is not just part payment but is held as security and is forfeited on breach of the agreement.
[51] The judge in that case rejected the vendor’s argument. He pointed out that the vendor could point to no case where the deposit was forfeited without crediting it toward the damages, although there were a number of cases where the opposite had occurred: Goldstein; Blonski v. Jarmakowicz and Kowalski, 1957 CanLII 426 (ON SC), 9 D.L.R. (2d) 66 (Ont. Supreme Court, High Court of Justice); and Dobson.
[52] He found that the result was dictated by the wording of the agreement of purchase and sale, at paras. 69 and 71:Real estate transactions routinely involve the payment of deposits. The proper application of the deposit in circumstances where the purchaser fails to complete the transaction is governed by the parties’ agreement. Here, the wording of the Agreement of Purchase and Sale states expressly that the deposit is to be “credited towards the purchase price” on completion of the transaction.
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I find that the wording of the deposit term in the Agreement of Purchase and Sale clearly and unambiguously reflects the parties’ intention that the deposit would be applied as a credit to the payment obligation owed by the purchaser defendant to the vendor plaintiffs on completion of the transaction. There is no difference to the use of the deposit in the event of termination of the agreement as opposed to its successful completion. Rather, it was intended to be applied as a credit to the obligation owed by the purchaser to the vendors: whatever form that obligation might take. I conclude that the $35,000 paid by the purchaser defendant is to be paid to the vendor plaintiffs and credited against the damages that they have proven [53] I agree with this analysis. While the agreement only specifically calls for the deposit to be credited to the purchase price on completion of the agreement, the measure of damages is based on the difference between the purchase price and the lesser amount that the property sold for after the purchaser’s default. In other words, it is based on the vendor receiving the purchase price that was bargained for. One can infer that the intent of the parties was that the deposit be applied to the purchase price whether received on completion or as damages.
[54] I also agree that the cases discussed above, including Benedetto, where the deposit is forfeited because it is not just part payment but also a security mechanism to incentivize the purchaser to complete the transaction, explain why the deposit is forfeited when the vendor suffers no loss. The respondents point to one sentence in the Benedetto decision where the court states that “a forfeited deposit does not constitute damages for breach of contract but stands as security for the performance of the contract”: at para. 14. That statement is part of the explanation for the forfeiture of the deposit where there is no loss. However, where there is a loss, the deposit is treated as part payment for the damages suffered as a result of the loss. . Redstone Enterprises Ltd. v. Simple Technology Inc.
In Redstone Enterprises Ltd. v. Simple Technology Inc. (Ont CA, 2017) the Court of Appeal sets out the considerations involved in determining whether a contractual deposit may be forfeited and when statutory (CJA) relief from forfeiture may be granted, here focussing particularly on the issue of unconscionability:[15] Section 98 of the Courts of Justice Act provides simply that: “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” The application judge referred to Varajao in specifying the two steps of the test as:
1. whether the forfeited deposit was out of all proportion to the damages suffered, and
2. whether it would be unconscionable for the seller to retain the deposit.
This is sometimes referred to as the test in Stockloser v. Johnson, [1954] 1 Q.B. 476 (C.A.). .....
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(2) Is the Forfeiture Unconscionable?
[18] The analysis of unconscionability requires the court to step back and consider the full commercial context.
[19] Deposits are commonplace in the operation of the market, especially for larger assets such as residential and commercial real estate. Their purpose was explored at learned length by Newbury J.A. speaking for a five-person panel in Tang v. Zhang, 2013 BCCA 52 (CanLII), 359 D.L.R. (4th) 104. At issue in the case was the forfeiture of a deposit of $100,000 on a residential real estate purchase of slightly more than $2 million. The trial judge relieved against forfeiture on the basis that the vendor had been able to re-sell the property for more than the original purchase price so that he had not suffered any loss. The court of appeal reversed the trial decision.
[20] While Newbury J.A. rejected the argument that simply labelling a payment as a deposit immunized it against the court’s equitable jurisdiction to relieve from forfeiture, she declined relief. She distilled several relevant principles from English and Canadian case law, at para. 30. Two are especially pertinent to this appeal:A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependant on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price;
The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller's retention of it would be penal or unconscionable, the court may relieve against forfeiture…. [21] The decision of this court in Peachtree II Associates-Dallas L.P. v. 857486 Ontario Ltd. (2005), 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A.), leave to appeal refused, [2005] S.C.C.A. No. 420, is instructive, even though it involved stipulated penalty clauses, not deposits. The case explored the distinction between penalties and forfeitures.
[22] Justice Sharpe noted, at paras. 31-32:[C]ourts should, if at all possible, avoid classifying contractual clauses as penalties and, when faced with a choice between considering stipulated remedies as penalties or forfeitures, favour the latter.
[C]ourts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses. Accordingly, he pointed out that: “the strict rule of the common law refusing to enforce penalty clauses should not be extended” (at para. 33). The reason, he explained, is “the policy of upholding freedom of contract” (at para. 34).
[23] Justice Sharpe continued, noting that: “Judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowing parties to define for themselves the consequences of breach” (at para. 34). He cited in support Dickson J., who decried the prohibition of penalties as “blatant interference with freedom of contract”, and advocated treating both penalties and forfeitures under the rubric of unconscionability: Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916 at p. 937, 83 D.L.R. (3d) 1, 1978 CarswellOnt 1235, at para. 47 (WL Can).
[24] The point is well made in Union Eagle Ltd. v. Golden Achievement Ltd., [1997] UKPC 5, [1997] A.C. 514, by Lord Hoffmann for the Judicial Committee of the Privy Council said, at p. 519 (A.C.)[I]n many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be "unconscionable" is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic. [25] I would agree that the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.
[26] Can unconscionability be established purely on the basis of a disproportionality between the damages suffered and the amount forfeited? While in some circumstances a disproportionately large deposit, without more, could be found to be unconscionable, this is not such a case.
[27] As to quantum, Newbury J.A. quoted, at para. 24 of Tang, the statement of the Privy Council in Workers Trust & Merchant Bank Ltd v. Dojap Investments Ltd., [1993] A.C. 573 (P.C.), at p. 578:In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages, being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10 per cent of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract. [Emphasis in Tang.] [28]Justice Newbury cited one case in which a deposit at 20% was found to be reasonable, but added, at para. 27, the amount of the deposit must not be excessive. I agree, but I would be reluctant to specify a numerical percentage, since much turns on the context. I note, however, that in this case the deposit was slightly more than 7%. There is no evidence that this was a commercially unreasonable deposit.
[29] Where, as here, there is no gross disproportionality in the size of the deposit, the court must consider other indicia of unconscionability. This is an analysis the application judge did not undertake. By failing to do so, the he erred in law.
[30] The list of the indicia of unconscionability is never closed, especially since they are context-specific. But the cases suggest several useful factors such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties. . Brown v. Godfrey
In Brown v. Godfrey (Div Ct, 2006) the court commented that forfeiture of deposit on breach is allowable even where not expressly required by the contract:[11] In this case, the Respondent originally sought to recover the deposit of $5,000, as well as damages of $5,000 for the remaining amount to be paid as a further deposit. While the express word “forfeiture” is not used in the claim, it is clear from the pleading as well as the evidence that the Respondent sought the forfeiture of the deposit held by the broker, plus the further deposit owing by the Appellants.
[12] According to Allied Canadian Acquisition Corporation v. 1012689 Ontario Limited, [2002] O.J. No. 289 (S.C.J.), a decision of Pitt J. relied on by the trial judge, forfeiture is not available with respect to deposit monies that have not been paid. However, a vendor may retain a deposit when a purchaser repudiates the contract, provided it is not unconscionable to do so. He may do so even if the deposit is greater than actual damages (De Palma v. Runnymede Iron & Steel Co., 1949 CanLII 73 (ON CA), [1950] 1 D.L.R. 557 (Ont. C.A.)). In the alternative, the vendor has a right to sue for damages for breach of contract and apply the deposit to the amount awarded, if the damages are greater than the deposit.
[13] The Respondent began this case seeking the recovery of the deposit monies. While the agreement of purchase and sale does not expressly say that the monies will be forfeited if the purchaser breaches, the $5,000 is called a deposit, and it is clear that its purpose was to secure performance of the agreement. Given that a deposit was made, it is subject to forfeiture because of the Appellants’ repudiation of the agreement, even if there is no express reference to forfeiture in the agreement. Therefore, the Respondent is entitled to claim this amount from the $5,000 paid into court by the broker, even if his actual damages are less than the deposit. In the circumstances of this case, there are no grounds for the Appellants to seek relief from forfeiture. . Pleasant Developments Inc. v. Iyer
In Pleasant Developments Inc. v. Iyer (Div Ct, 2006) the Divisional Court held that a deposit towards the purchase of a home may be retained by the vendor on breach by purchaser unless expressly agreed otherwise. There is an exception where the amount of deposit forfeited is punitive or out of proportion to the losses suffered, in which the case law of contractual penalties applies, or where forfeiture is unconscionable:(i) Was it necessary for the Appellant to prove damages in order to forfeit the Respondents’ deposit?
[6] The trial judge found that the wording of the Agreement of Purchase and Sale was insufficient in the circumstances of this case to forfeit the Respondents’ deposit without proof of the Appellant’s damages. In my view, the trial judge erred in coming to such a conclusion.
[7] The law is clear that a deposit may be forfeited without proof of damages. See DePalma v. Runnymede Iron & Steel Co. 1949 CanLII 73 (ON CA), [1950] 1 D.L.R 557. In other words even in the case where the vendor resells at a purchase price that is high enough to compensate for any loss from the first sale, the vendor may nevertheless retain the deposit. See Perell and Engell, Remedies and the Sale of Land, 2nd ed at p. 186.
[8] While I accept that the language of the contract is not by itself determinative, the use of the word “deposit” will imply that the payment is intended for forfeiture upon the purchaser’s breach. See Perell and Engell, supra, at p. 187. The common law position is that if the agreement is silent and the purchaser defaults, the deposit, by it very nature is forfeited to the vendor. See Salavatore et al, Agreement of Purchase and Sale (Toronto: Butterworths, 1996) at p. 61.
[9] In my view, there can be little doubt that the $10,000 paid by the Respondents in respect of the Agreement of Purchase and Sale was a deposit. The Agreement refers to the money as a deposit. There is nothing in the Agreement to suggest that the deposit is to be returned to the Respondents upon default. Unless an agreement indicates an intention that the deposit is not to be forfeited, the vendor has an implied right to retain it. The Agreement of Purchase and Sale was not completed by reason of the Respondents’ default and in such circumstances a true deposit is lost. See Morris v. Cam-Nest Developments Ltd. (1988), 1988 CanLII 4604 (ON SC), 64 O.R. (2d) 475 (Ont. H.C.J. ) at p. 491.
[10] Based on all the circumstances, I am satisfied that the $10,000 paid by the Respondents was intended to be a deposit in the strict sense of an earnest or guaranty to bind the purchaser to the transaction. In my view, the deposit was forfeited upon the default of the Respondents. In these circumstances it was not necessary for the Appellant to prove damages in order to forfeit the Respondents’ deposit and the trial judge erred in so concluding.
(ii) Were the Respondents entitled to relief against forfeiture?
[11] The trial judge found that relief from forfeiture of the deposit was available to the Respondents in the circumstances of this case. The trial judge found the reason the Appellant proved no damages was because there were no losses or very minimal ones and keeping the deposit would result in a $10,000 windfall for the vendor.
[12] I accept that there are circumstances where the loss of a deposit may be subject to relief from forfeiture. If there is relief, the deposit is returnable, in whole or in part, to the defaulting purchaser. If the Court regards the forfeiture of the deposit as a penalty, then regardless of the wording of the contract, the Court retains the power to relieve the penalty. See Perell v. Engell, supra, at p. 187.
[13] The Courts will award relief from forfeiture of the purchaser’s deposit only where it is established that the sum is out of all proportion to the losses suffered and that it would be unconscionable for the vendor to retain the money. See Stockloser v. Johnson, [1954] 1 Q.B. 476. Where these requirements are not made out, the Courts will allow the forfeiture of the deposit without an inquiry into the extent of the vendor’s damages. See Craig v. Mohawk Metal Ltd. (1975), 1975 CanLII 1172 (ON SC), 61 D.L.R. (3d) 588 (Ont. H.C.J.).
[14] The onus is on the party seeking to invalidate a clause to show that it inflicts a penalty, rather than determines the damages payable by the guilty party. But even where a clause does inflict a penalty, it will not always be unenforceable where, for example, it is not unconscionable. See Fridman, The Law of Contracts in Canada, 4th ed. (Toronto: Carswell, 1999) at p. 817.
[15] I am of the view that the trial judge erred in awarding the Respondents relief from forfeiture of the deposit. In my view, there was not a sufficient evidentiary basis to suggest, as the trial judge did, that the reason the Appellant proved no damages was because there were no losses or very minimal ones and keeping the deposit would result in a $10,000 windfall for the Appellant. As I have indicated previously in these reasons, it was not necessary for the Appellant to prove damages in order to forfeit the Respondents’ deposit. Accordingly, it was an error for the trial judge to infer that the failure of the Appellant to prove damages was evidence of a windfall for the Appellant.
[16] The onus was on the Respondents to prove that the sum of the deposit is out of all proportion to the losses suffered and that it would be unconscionable for the Appellant to retain the deposit. In my view, on the facts in this case, it was an error to conclude that the Respondents had met that onus. At the date of the Agreement of Purchase and Sale the Respondents were required to pay a deposit of $10,000 towards a purchase price of $280,900 or 3.6% of the purchase price. In all the circumstances, I am not satisfied there was a sufficient evidentiary basis for the trial judge to have concluded that the Respondents’ deposit is out of all proportion to the losses suffered and that it would be unconscionable for the Appellant to retain the deposit. Accordingly, I am of the view the trial judge erred in finding that relief from forfeiture of the deposit was available to the Respondents in the circumstances of this case. . Cassandro v. Glass
In Cassandro v. Glass (Ont CA, 2019) the Court of Appeal commented on the law of deposits:[57] I do not accept Mr. Glass’ argument that he is entitled to credit for the remaining $13,500. His argument is inconsistent with the law of deposit. As this court recently held in Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149, 86 B.L.R. (5th) 1, at para. 7 (citations omitted), a deposit is not part of the contract to which it is attached but instead “stands on its own as an ancient invention of the law designed to motivate contracting parties to carry through with their bargains.” If the contract is not performed, the payee is not obligated to return the deposit to the payor: Benedetto, at para. 5. In this case, Mr. Glass would have understood when he paid the deposit that he would not get it back until the Site Plan Agreement was completed. Pursuant to the Oral Agreement with Mr. Cassandro, Mr. Glass was responsible for completing the Site Plan Agreement. He did not do so. He would only get the deposit back if he did. Mr. Glass cannot get his deposit back through the backdoor by crediting it from the damages he owes Mr. Cassandro.
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