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Deposit - Pre-Incorporation Contract

. 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 corporate law regarding pre-incorporation contracts:

[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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(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.