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Contracts - Deposit II

. 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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