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Contracts - Deposit (2). Pleterski (Re) [where relief claimant precipitates breach]
In Pleterski (Re) (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal from a motion that granted a bankruptcy receiver 'relief from forfeiture' from a defaulted APS deposit.
Here the court considers the awarding of relief from forfeiture even where the bankrupcy receiver precipitated the breach of the APS contract:[5] A few weeks before the closing date, Grant Thornton and Mr. Murphy advised the appellant that they would not be completing the transaction. The appellant treated this as an anticipatory breach, and a few months later it sold the Westney Road property to another purchaser for $300,000 more than Mr. Pleterski and Mr. Murphy had agreed to pay for it. However, the appellant maintains that before it resold the property it had to spend money repairing damage done by Mr. Pleterski and Mr. Murphy.
[6] Grant Thornton moved for relief from forfeiture of the $500,000 deposit, pursuant to s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43 (“CJA”). The motion judge granted this relief and ordered that the $500,000 deposit being held in trust by the realtor be returned to Grant Thornton, for the benefit of the creditors in the bankruptcy.
[7] Applying the two-part test approved of in Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 374, at para. 15, the motion judge considered the following two factors:(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. He concluded that in the circumstances here, both factors weighed in favour of directing that the full amount of the deposit be returned to Grant Thornton.
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[9] The appellant appeals. It acknowledges that decisions under s. 98 of the CJA are discretionary and ordinarily command appellate deference: see Redstone, at para. 14. The appellant framed its arguments somewhat differently in its factum, but in oral argument counsel distilled her submissions into an argument that the motion judge made two related errors.
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[14] The appellant’s second argument is that the motion judge erred by describing this case as a “dispute … between two innocent parties.” According to the appellant, if the motion judge had focused his attention on Grant Thornton rather than on Mr. Pleterski’s investors, he would not have characterized Grant Thornton as “innocent”, since Grant Thornton had deliberately caused the breach of contract by choosing not to complete the transaction.
[15] The appellant places particular reliance on Frechette (Re) (1991), 1991 CanLII 7207 (ON SC), 3 O.R. (3d) 664 (Gen. Div.), which at p. 673 quoted approvingly Cotton L.J.’s observation in Howe v. Smith (1884), 27 Ch. D. 89 (C.A.), at p. 96, that a purchaser who has “acted as to repudiate on his part the contract” cannot “take advantage of his own default to recover [a] deposit from the vendor.”
[16] However, this court has rejected the argument that there is an absolute rule that bars a party who has caused a breach of contract from ever obtaining relief from forfeiture of a deposit. In Naeem v. Bowmanville Lakebreeze West Village Ltd., 2024 ONCA 383, 51 B.L.R. (6th) 199, at para. 7, this court held:Significantly, Redstone does not make it a precondition for obtaining relief from forfeiture that the party seeking relief demonstrate that they were not to blame for the contractual breach. Although the would-be buyer’s conduct will often be highly relevant to the question of whether it would be unconscionable to permit the vendor to keep the deposit, it is only one factor to be considered. [17] In Ching v. Pier 27 Toronto Inc., 2021 ONCA 551, 460 D.L.R. (4th) 678, at para. 78, Pepall J.A. explained that:[R]elief from forfeiture is an equitable and discretionary remedy. Absent a legal or palpable and overriding error, it is not for this court to substitute its discretion for that of the trial judge. [18] In the case at bar, the motion judge correctly instructed himself about the applicable legal principles. He recognized that “[a] finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case”, adding:It is indeed the rare case when the law that typically applies to deposits ought not to be applied. That is precisely why, in my view, the equitable remedy of relief from forfeiture exists in the first place, and it is also why such equitable relief is granted only sparingly and in rare cases. . Naeem v. Bowmanville Lakebreeze West Village Ltd.
In Naeem v. Bowmanville Lakebreeze West Village Ltd. (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal against a granting of 'relief from forfeiture', here respecting an APS deposit:[5] The appellant’s main argument is that the motion judge applied the wrong legal test for granting relief from forfeiture. Citing Shah v. Southdown Towns Ltd., 2017 ONSC 5391 and Wang v. 2426483 Ontario Limited, 2020 ONSC 3368, the appellant submits that “relief from forfeiture is not available to a party as a remedy where the contractual breach was entirely [that party’s] fault and within [that party’s] control”.
[6] We disagree. The motion judge correctly referred to and relied on the factors set out by this court in Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 374, which has been followed in numerous other cases: see e.g., Ching v. Pier 27 Toronto Inc., 2021 ONCA 551; Azzarello v. Shawqi, 2019 ONCA 820, leave to appeal refused [2019] S.C.C.A. No. 521; Rahbar v. Parvizi, 2023 ONCA 522, 485 D.L.R. (4th) 239. Redstone directs judges to consider two main factors: (i) whether the forfeited deposit is “out of all proportion to the damages suffered” by the vendor; and (ii) whether it would be unconscionable for the vendor to retain the deposit. As Lauwers J.A. explained in Redstone, at para. 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. [7] Significantly, Redstone does not make it a precondition for obtaining relief from forfeiture that the party seeking relief demonstrate that they were not to blame for the contractual breach. Although the would-be buyer’s conduct will often be highly relevant to the question of whether it would be unconscionable to permit the vendor to keep the deposit, it is only one factor to be considered.
[8] As Pepall J.A. noted in Ching, at para. 78:[R]elief from forfeiture is an equitable and discretionary remedy. Absent a legal or palpable and overriding error, it is not for this court to substitute its discretion for that of the trial judge. [9] We are not persuaded that the motion judge in this case committed any palpable and overriding errors. Citing Redstone, she correctly noted that “[a] finding of unconscionability must be exceptional and strongly compelled on the facts of the case”. She found that this high standard was met on the facts here.
[10] One factor the motion judge relied on was her conclusion that the appellant is a sophisticated party that is “in the business of negotiating agreements of purchase and sale with prospective homebuyers”, whereas the respondent “is a widow who worked two jobs while undergoing cancer treatment in order to save enough money to put the deposit down on a home for her family”. Another factor she took into account was that the appellant had apparently suffered no loss as a result of the transaction not closing.
[11] Perhaps most significantly, however, the motion judge was sharply critical of the appellant’s conduct in the years before the transaction fell through. After extending the closing date twice in accordance with the notice provisions of the APS, the appellant purported to extend the “firm” closing date of May 14, 2018 to a date in March 2019, despite giving the respondent insufficient notice.
[12] When the respondent then requested a few months later to have the closing date pushed back further to late April or the first week of May 2019, the appellant replied that the date could not be moved past April 23, 2019, or else the respondent would lose her right to compensation for the delay in completing the house. The motion judge found as a fact that when the respondent agreed to the April 23, 2019 closing date she “was not told, nor was she aware, that she did not have to sign the amendment and that the APS was voidable at this juncture.” The motion judge found further that the appellant’s representative had “deliberately” misled the respondent “into thinking she had no choice but to set a new date”.
[13] In our view, the motion judge was entitled to conclude as she did, on the facts as she found them, that it would be unconscionable to permit the appellant to keep the deposit. . Mouralian v. Groleau
In Mouralian v. Groleau (Ont CA, 2024) the Ontario Court of Appeal considers the test for forfeiture of a contractual deposit, here respecting an real estate APS:[6] The motion judge properly considered the applicable two-part test for forfeiture from Stockloser v. Johnson, [1954] 1 Q.B. 476 (C.A.): (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.
[7] The motion judge assumed that the first part of the test was made out, primarily because the respondent did not suffer a loss, and turned to the question of unconscionability. Having considered a variety of indicia of unconscionability, she determined that it would not be unconscionable for the respondent to retain the deposit. She was not persuaded that the appellant lacked capacity to sign the APS. She found that there was no inequality of bargaining power: the parties had never met when the APS was concluded, the respondent was unaware of the appellant’s circumstances, each party had an agent advising them, the APS was negotiated at arms-length, and the appellant had some past experience buying real estate. Moreover, the motion judge observed that the appellant did not seek to repudiate the agreement at any time until her financing fell through and had admitted on cross-examination that she had intended to complete the transaction. Relatedly, the motion judge concluded that the bargain between the appellant and the respondent was not improvident, as reflected by the appellant’s stated intention to close the transaction. . Rahbar v. Parvizi
In Rahbar v. Parvizi (Ont CA, 2023) the Court of Appeal considered the rationale for forfeiture of a deposit (here of an APS deposit):[50] A rationale for forfeiture of a deposit is the need to provide an incentive for the purchaser to complete the purchase: Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149, 86 B.L.R. (5th) 1, at para. 6. “It is [also] recompense to [the vendor] for the fact that his property was taken off the market for a time as well as for his loss of bargaining power resulting from the revelation of an amount that he would be prepared to accept”: HW Liebig Co. v. Leading Investments Ltd., 1986 CanLII 45 (SCC), [1986] 1 S.C.R. 70, at para. 33; see also Benedetto, at paras. 5-7.
[51] Mindful of the purposive underpinnings of forfeiture of deposits, this court has considered two factors in assessing whether relief from forfeiture pursuant to s. 98 of the Courts of Justice Act is appropriate, namely whether (i) the deposit is “out of all proportion” to the damages suffered by the vendor, and (ii) it would be unconscionable for the vendor to retain the deposit: Redstone Enterprises, at paras. 15ff; Jesan Real Estate Ltd. v. Doyle, 2020 ONCA 714, at paras. 54ff; and Azzarello v. Shawqi, 2019 ONCA 820, 439 D.L.R. (4th) 127, at para. 47, leave to appeal refused, [2019] S.C.C.A. No. 521. As noted in Redstone, “the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case”: at para. 25. . Brampton Worship Centre v. Montgomery
In Brampton Worship Centre v. Montgomery (Div Court, 2022) the Divisional Court considered an application for a return of a deposit by a real estate purchaser who failed to close. After hearing the appellant's arguments the court accepted the application judge's reasoning:[10] The agreement of purchase and sale provided for the disposition of the deposit upon completion of the agreement – if the agreement were completed, the deposit would be credited to the purchase price. However, the agreement did not provide for disposition of the deposit, in the event the appellant repudiated the agreement.
[11] The application judge cited Azzarello v. Shawqi, 2019 ONCA 820, at paras. 42-45, to the effect that in the absence of an agreement to the contrary, where a purchaser repudiates the agreement by failing to complete the transaction, the deposit is forfeited without proof of any damage suffered by the vendor, subject to relief from forfeiture. Based upon this law, she held that Montgomery was entitled to keep the deposit. . Ching v. Pier 27 Toronto Inc.
In Ching v. Pier 27 Toronto Inc. (Ont CA, 2021) the Court of Appeal commented on the law of deposits:[67] In Azzarello v. Shawqi, 2019 ONCA 820, 439 D.L.R. (4th) 127, at para. 45, leave to appeal refused, [2019] S.C.C.A. No. 521, Feldman J.A. briefly summarized the law relating to repudiation and real estate deposits stating: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, 359 D.L.R. (4th) 104, at para. 30, approved by this court in Redstone Enterprises Ltd., v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 374. Where the vendor suffers no loss, the vendor may nevertheless retain the deposit, subject to relief from forfeiture. . Grandeur Homes Inc. v Zeng
In Grandeur Homes Inc. v Zeng (Div Ct, 2021) the Divisional Court considered the crediting of a contractual deposit to a damage award when the deposit was structured according the stages of the contract:[14] Zeng relies on authority decided by the Court of Appeal for Ontario in the context of failed real estate deals, Azzarello v. Shawqi, 2019 ONCA 820 at paras 53-55, leave to appeal at SCC ref’d; Bang v.Sebastian, 2018 ONSC 6226 at paras 68-69, aff’d 2019 ONCA 501. She concedes that the deposit indeed stands as security for the performance of the contract and that its forfeiture provides an incentive for the payor to complete its obligations. However, when damages are claimed and suffered, the deposit must be treated as a partial payment toward the damages. The claim for unpaid invoices in this case is a claim for damages for breach of contract. As such, based on the principles set out by the Court of Appeal in Azzarello and Bang, the deposit must be applied as a credit against the judgment.[2]
[15] Notwithstanding Ms. Posno’s able submissions, I am unable to agree with this argument.
[16] In this case, the deposit is defined in the contract in para. 2.11, which states:The Owner shall pay to the Contractor the following non-refundable deposit at the following times set out below. The non-refundable deposit shall be applied towards the final progress payment and other final amounts to be invoiced by the Contractor in respect of the Project. [17] The final progress payment is set out in Schedule B to the agreement. It is the final payment or “Completion Work” (Stage 8).
[18] I agree with the motion judge. The contract makes clear that the intention of the parties was that the deposit would be applied to the completion stage. This was contingent on the contract reaching the completion stage. That stage was never reached because of Zeng’s breach. And, because of that breach, Grandeur Homes lost the benefit of the second half or more of the contract.
[19] The argument Ms. Posno has raised turns on the nature of the underlying claim. What the Court of Appeal is saying in cases like Azzarullo and Bang is that, if there is a claim for expectation damages, it will be reasonable to apply the deposit as a credit against any judgment award for that claim. The classic definition of the purpose of expectation damages is to put the plaintiff in the same position it would have been if the contract had been performed. In a claim for expectation damages, damages represent a monetary “replacement” for performance. Where a deposit is to be applied against the final invoice on completion, the principle of expectation damages would suggest that the deposit be credited against any judgment for expectation damages.
[20] The problem for Zeng’s legal argument on this appeal is that there is no claim for expectation damages for the loss of the bargain arising out of Zeng’s breach. Grandeur Homes is not seeking to be placed in the same position it would have been if the contract had been performed. It is not seeking, for example, damages for its loss of profit on the agreement. Grandeur Homes has only advanced a claim for payment of invoices representing less that half the work already performed on the project. The clear intention of the non-refundable deposit in this case was not to provide Zeng some protection against what is, in effect, a restitutionary claim for unpaid interim invoices in the event Zeng failed to complete the contract. It was clearly (and admittedly) intended to motivate Zeng to complete the contract.
[21] 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: Tang v. Zhang, 2013 BCCA 52 at ¶30, cited in Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282 at ¶20. See also: Aylward v. Rebuild Response Group Inc., 2018 ONSC 4800, paras. 66-74, aff'd 2020 ONCA 62.
[22] In the circumstances, it would only be appropriate to apply the deposit towards interim invoices if the deposit was intended as a pre-payment of interim invoices. Here, the agreement is explicit that the deposit is not for prepayment of ongoing invoices; the agreement expressly states that the deposit is to be applied only against the final invoice upon completion of the project. If Zeng were permitted to apply the deposit against her obligations arising from the early stage invoices, the entire purpose of the deposit under this agreement would be vitiated.
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