Penalty Clauses. 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 on the issue of unconscionability and penalties:
 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:. Kechnie v. Sun Life Assurance Company of Canada
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,  1 Q.B. 476 (C.A.). .....
(2) Is the Forfeiture Unconscionable?
 The analysis of unconscionability requires the court to step back and consider the full commercial context.
 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.
 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 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,  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.
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….
 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.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).
[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.
 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),  2 S.C.R. 916 at p. 937, 83 D.L.R. (3d) 1, 1978 CarswellOnt 1235, at para. 47 (WL Can).
 The point is well made in Union Eagle Ltd. v. Golden Achievement Ltd.,  UKPC 5,  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. I would agree that the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.
 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.
 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.,  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.]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.
 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.
 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.
In Kechnie v. Sun Life Assurance Company of Canada (Ont CA, 2016) the Court of Appeal considered interesting penalty clause and relief from forfeiture arguments in the context of a insurance commission compensation scheme for terminated commission salespersons:
The Forfeiture Analysis
 The appellants rightly refrain from asserting that the CORe payment termination clause is a “penalty” and therefore unenforceable because of the common law’s reluctance to enforce such clauses. A penal clause involves the payment of a sum as a consequence of a breach that does not represent a genuine pre-estimate of damages at the time the contract is entered into: Dunlop Pneumatic Tyre Co. v. New Garage & Motor Co.,  A.C. 79 (H.L.), at pp. 86-87.
 The CORe payment termination clause is not such a provision. However, it may properly be characterized as a “forfeiture clause”, because it involves “the loss, by reason of some specified conduct, of a right, property, or money”: Torrey Springs, at para. 22. And it could, potentially, involve “penal consequences”, since the right forfeited by the defaulting party might in some circumstances bear no relation to the loss suffered by the innocent party. Counsel for the appellant gave us an example of the latter when he posited a situation where termination of a significant CORe payment stream occurred after a terminated advisor enticed away a de minimus portion of the total book of business the advisor had released to Sun Life on termination.
 Default triggering the operation of a forfeiture clause attracts a relief-from-forfeiture analysis where there are concerns about “penal consequences” and about “unconscionability”. The jurisprudence recognizes – in the spirit of honouring parties’ rights to freedom of contract and their right to define their own consequences of breach – that penal clauses and forfeiture clauses (referred to below as “stipulated remedy clauses”) may be enforced unless these two requirements underlying the granting of relief from forfeiture weigh against it.
 For this reason, the appellants are incorrect when they assert that the trial judge erred in considering whether the CORe payment termination clause had penal consequences. Penal consequences are the first concern in the relief-from-forfeiture inquiry. Equity does not relieve against all forfeiture consequences that may be negotiated by parties. It relieves against “penal” forfeitures. The analysis is conducted as of the time of the default, and not on the basis of a hypothetical situation.
 Sharpe J.A. put it this way in Torrey Springs, at paras. 25-26:
Equity, on the other hand, considers the enforceability of forfeitures at the time of breach rather than at the time the contract was entered. Equity also looks beyond the question of whether or not the stipulated remedy has penal consequences to consider whether it is unconscionable for the innocent party to retain the right, property, or money forfeited. As explained by Denning L.J. in Stockloser v. Johnson,  1 All E.R. 630 (Eng. C.A.) at 638: “Two things are necessary: first, the forfeiture clause must be of a penal nature, in the sense that the sum forfeited must be out of all proportion to the damage; and, secondly, it must be unconscionable for the seller to retain the money.” Much of the analysis in Torrey Springs was directed towards smoothing out the rigid distinction between the common law’s treatment of penal clauses (unenforceable at common law) and equity’s treatment of forfeiture clauses (subject to relief if the penal consequences and unconscionability requirements are met), concluding, at para. 32, that, “courts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses.” While this distinction is not important for this appeal, the underlying principle for moving away from the distinction – a reluctance to extend the strict common law rule refusing to enforce penalty clauses – is of some significance because it reinforces the growing tendency in the jurisprudence favouring the enforcement of stipulated remedy clauses that have been freely negotiated by the parties. Referring to the reluctance to extend the common law rule and to the enforcement of stipulated remedy clauses, Sharpe J.A. added the following, at para. 34 in Torrey Springs:
… The central pillar of the appellant’s argument, as I understand it, is that there is an iron-clad rule to the effect that all stipulated remedy clauses, whether penalties or forfeitures, assessed at the date of the contract as having penal consequences will not be enforced. In my view, that proposition does not represent an accurate statement of the law. Not all stipulated remedy clauses having penal consequences are unenforceable. In particular, the equitable doctrine of relief from forfeiture enforces such penalty clauses, where they are in the form of a forfeiture, where it is not unconscionable to do so. [Emphasis added.]
This is closely related to the fourth factor, namely, the policy of upholding freedom of contract. 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. As I have already noted, in Elsley, supra, Dickson J. labeled the penalty clause doctrine as “a blatant interference with freedom of contract,” a sentiment echoed by the English Court of Appeal in Else. What flows from this is that the trial judge was required to determine whether the CORe payment termination clause had penal consequences – a determination that is made as of the time of default – and, if so, whether relief from forfeiture should be granted because it would be unconscionable to permit Sun Life to retain the benefits of the unpaid CORe amounts. That is precisely the analysis in which she engaged.
Relief from Forfeiture
 After examining the provisions of the CORe agreements and arriving at her interpretation of their meaning, beginning at para. 44, the trial judge addressed the question whether the provisions disentitling the appellants to receive the CORe payments were “unenforceable as punitive forfeiture clauses or an unreasonable restraint of trade”. She held they were not.
 The appellants accept that trial judge applied the proper test for granting relief from forfeiture, as set out in Kozel v. Personal Insurance Co., 2014 ONCA 130 (CanLII), 119 O.R. (3d) 55, at para. 31:
In exercising its discretion to grant relief from forfeiture, a court must consider three factors: (i) the conduct of the applicant, (ii) the gravity of the breach, and (iii) the disparity between the value of the property forfeited and the damage caused by the breach. However, they submit that she erred in in applying the test. I disagree.
 Whether to grant or refuse relief from forfeiture, as an equitable remedy, is a purely discretionary decision: the Courts of Justice Act, R.S.O. 1990, c. C.43, s. 98; Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC),  2 S.C.R. 490, at para. 32. Here, the trial judge reviewed the record in the context of all three of the foregoing factors. In substance, the appellants simply disagree with the findings she made.
 For example, the appellants contend that the disparity between their loss of the CORe payments and any damage Sun Life suffered from the breach was entirely disproportionate. They submit that they lost over $1.8 million in CORe payments, while recovering only about $600,000 from the transferred business and that Sun Life benefitted additionally by receiving almost $675,000 from other Sun Life advisors who purchased portions of the Kechnies’ book of business. They say that Mr. Kechnie’s conduct was reasonable and did not constitute a blatant or intentional breach of the terms of the agreement, and that Sun Life treated the Kechnies badly.
 The trial judge did not see it that way, however. She accepted Sun Life’s evidence and held that its reconstructed data was “more reliable than the figures offered by the Plaintiffs” (para. 57). She found that: Mr. Kechnie had transferred over 600 Sun Life clients and 60 life insurance policies to his son’s firm; roughly $20 million of Mutual Funds assets were moved from Sun Life to the new business; the market value of the mutual funds and segregated funds in the book of business formerly serviced by Mr. Kechnie at Sun Life decreased by 84% between 2008 and 2014; and Mr. Kechnie could earn between $2-3 million in revenue from the transferred business with the result that he would earn from those clients revenue that was at least equal to or greater than the CORe payments he would otherwise have received (paras. 33-40). She also found that Mr. Kechnie “knew very well the nature of the provisions he had contracted to and their implications for conduct following termination” and, indeed, had been “directly involved in the various internal discussions which occurred surrounding the rollout of the new system” (paras. 49 and 52).
 On the basis of this evidence the trial judge characterized Mr. Kechnie’s activities as “a systematic attack on the goodwill in the former block of business” (para. 33) and (on his premise that he would be entitled to receive the CORe payments) as “a flagrant breach of contractual obligations” (para. 53).
 In the end, the trial judge determined that the CORe payment termination provisions were not punitive in nature or a penalty, nor were they contrary to public policy. Having so found, she correctly concluded that the principles of relief from forfeiture were not engaged. Nonetheless, she went on to address the appellants’ claim that the operation of the provisions was unconscionable, harsh and inequitable. Her findings led her to reject these claims as well.
 These conclusions were amply supported by the record and completely justify the trial judge’s conclusion that the appellants were not entitled to relief from forfeiture in the circumstances.
 Nonetheless, the trial judge’s decision is consistent with other authorities supporting the enforceability of forfeiture provisions in contracts of a similar nature to the CORe payment termination clause.
 For example, Inglis v. The Great-West Life Assurance Co., 1941 CanLII 85 (ON CA),  1 D.L.R. 99 (Ont. C.A.), involved a forfeiture clause respecting payments by an insurer to an insurance agent following termination of employment. The clause provided that the company would continue to pay the agent “the commissions on business written during the continuance of this agreement to which the Agent would have been entitled if this agreement had remained in force”; however, if the agent became “connected with or [did] business directly or indirectly for any other life insurance company” the commissions were forfeited. The agent subsequently began to work for another life insurance company. His claim to recover the commissions was unsuccessful. The Court of Appeal held that the forfeiture clause did not constitute a penalty. Its reasoning is instructive for the present appeal. At p. 102, Masten J.A. said:
We are of the opinion that the provisions of [the forfeiture clause] are not in the nature of a penalty. Whether it is to be considered as part of the remuneration provided by the agreement when read as a whole, or as a separate provision entered into in consideration of the right of either party to cancel on notice, appears to the Court to be immaterial. In either case it is the agreement of the parties, not a penalty. The plaintiff agreed that if he chose to join another life insurance company these payments would cease. He did so choose, and their cessation is not in the nature of a penalty but is in pursuance of the agreement by which the plaintiff voluntarily bound himself in the beginning. The Court also agreed that the clause was not in restraint of trade. Other authorities holding that similar forfeiture provisions are valid and enforceable against the defaulting party, either because they do not constitute a penalty or because they do not operate in restraint of trade, or both, include: Webster v. Excelsior Life Insurance Co. (1984), 1984 CanLII 682 (BC SC), 50 B.C.L.R. 381 (S.C.), at p. 382; Roy v. Assumption Mutual Life Insurance Co. (2000), 222 N.B.R. (2d) 316 (Q.B.), at paras. 56-61; Burgess v. Industrial Frictions & Supply Co. (1987), 1987 CanLII 2722 (BC CA), 12 B.C.L.R. (2d) 85 (C.A.), at pp. 89-90. These decisions support the trial judge’s conclusions.