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Relief from Forfeiture - Courts of Justice Act s.98. Furtado v. Underwriter
In Furtado v. Underwriter (Ont CA, 2024) the Ontario Court of Appeal dismisses an insurer's appeal, here "denying him coverage, or relief from forfeiture under his Directors and Officers insurance policy".
Here the court cites the Courts of Justice Insurance Act 'relief from forfeiture' provision:[65] Section 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43 (“CJA”), also provides that, “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.”
[66] Forfeiture is defined in Black's Law Dictionary, 11th ed. (Saint Paul: Thomson Reuters, 2019) as: "The loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty." Similarly, the Concise Oxford English Dictionary, 12th ed. (New York: Oxford University Press, 2011) defines "forfeit" as "lose or be deprived of (property or a right or privilege) as a penalty for wrongdoing" or "lose or give up as a necessary consequence".
[67] However, relief from forfeiture under s. 98 of the CJA only applies if the breach constitutes imperfect compliance with a policy term, not where the breach amounts to non-compliance with a condition precedent to coverage under the policy. . Brampton Worship Centre v. Montgomery
In Brampton Worship Centre v. Montgomery (Div Court, 2022) the Divisional Court considered relief from forfeiture where a defaulting purchaser sought return of a deposit:[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.
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Relief from forfeiture
[22] On the issue of relief from forfeiture, the application judge cited Shawqi and Signal Chemicals Ltd. v. Dew Man Marine Trade Inc., 2011 ONSC 3951.
[23] In Shawqi, at para. 47, the court approved a two-pronged test for relief from forfeiture: (1) whether the deposit is all out of proportion to the damages suffered; and (2) whether it would be unconscionable for the vendor to retain the deposit.
[24] In Dew Man Marine Trade, at para. 20, the court held that in determining whether it would be unconscionable for the vendor to retain the deposit, two factors must be examined: (1) whether there was an inequality of bargaining power between the parties; and (2) whether the impugned term or condition has a high degree of unfairness.
[25] The application judge found that the amount of the deposit was not disproportionate, that there was no evidence of inequality of bargaining power, and that it would not be unfair for Montgomery to retain the deposit. On the evidence before the court, it was open to her to do so. . 1854329 Ontario Inc. v. Cairo
In 1854329 Ontario Inc. v. Cairo (Ont CA, 2022) the Court of Appeal dismissed an appeal, in part on the appellant's request for relief from forfeiture of a $400,000 real estate deposit [under CJA 98]:[13] With respect to relief from forfeiture, the motion judge considered the issues of proportionality and unconscionability as articulated in each of Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 S.C.R. 490 and Stockloser v. Johnson, [1954] 1 Q.B. 476 (C.A. (Eng)). He determined that the deposit, at about 5.5% of the sale price, was commercially reasonable, not disproportionate to the respondent’s actual damages and that there was no evidence of inequality of bargaining power or of a substantially unfair bargain. Nor did the vendors act unreasonably.
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[16] We see no error in the motion judge’s analysis and conclusion that the appellant has not met the burden of showing that this was an exceptional case where relief from forfeiture should be granted. . City Star Roofers Inc. v. 2169462 Ontario Limited
In City Star Roofers Inc. v. 2169462 Ontario Limited (Div Ct, 2022) the Divisional Court considers 'relief from forfeiture' under CJA 98:[19] Pursuant to s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43, a court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.
[20] 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 denied, [2005] S.C.C.A. No. 420, Sharpe J.A. provided a useful summary of the law relating to the enforceability of penalties and forfeitures, both at common law and in equity. He referred to such provisions as “stipulated remedy clauses”, under which the parties agree in advance on the monetary or other consequences of a breach, should one occur: see Peachtree, at para. 1.
[21] By way of brief summary, a stipulated remedy clause may be characterized as a penalty (the payment of a sum of money) or a forfeiture (the loss of a right, property or money, often being held as security or part payment): Peachtree, at paras. 22 and 31. At common law, a stipulated remedy will be treated as an unenforceable penalty if, determined at the time of contract formation, it is “extravagant and unconscionable in amount” compared to the greatest conceivable loss upon breach; however, the remedy will be enforced if it is a genuine attempt to pre-estimate damages upon breach: at para. 24. If the stipulated remedy is a forfeiture, it will be enforced in equity when it is not unconscionable to do so, determined at the time of breach: at paras. 25-26. Sharpe J.A. went on to note the strong judicial preference for classifying a stipulated remedy clause as a forfeiture rather than a penalty, when faced with a choice: at para. 31. He also noted that courts should, whenever possible, favour analysis based on equitable principles and unconscionability over the strict common law rules relating to penalty clauses: at para. 32.
[22] The principles set out in Peachtree were also summarized in Chilikoff v. West Capital Placer Inc., 2016 ONSC 6354, at paras. 12-13, a decision that Stewart J. relied on in her Reasons for Judgment in this case. In Chilikoff, at para. 14, Kristjanson J. also added to the list of relevant factors “the general organizing principle of good faith in contract law, and the duty of honest performance” as set out by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para. 93.
[23] More recently, the Ontario Court of Appeal has restated the test for determining whether relief from forfeiture should be granted, in the following terms. The party seeking relief from forfeiture is required to establish that (i) the forfeited sum was out of proportion to the damages suffered by the other party upon breach, and (ii) it would be unconscionable for the other party to retain the money: see Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 413 D.L.R. (4th) 272, at paras. 10 and 15, citing Varajao v. Azish, 2015 ONCA 218, at para. 11.
[24] In Redstone, at para. 25, the Court of Appeal also indicated that “the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.” At para. 30, the court also made the following comments with respect to the indicia of unconscionability: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. . Jesan Real Estate Ltd. v. Doyle
In Jesan Real Estate Ltd. v. Doyle (Ont CA, 2020) the Court of Appeal considered CJA relief from forfeiture of a real estate purchase deposit:[54] When a purchaser fails to close an agreement of purchase and sale, the vendor is entitled to retain the deposit regardless of whether he or she suffers a loss, subject to the court’s ability to grant relief from forfeiture: Azzarello v. Shawqi, 2019 ONCA 820, 439 D.L.R. (4th) 127, at paras. 45-47, leave to appeal to S.C.C. refused, 38982 (April 16, 2020):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 (Eng. 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 (para. 47).
[55] In Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 374, the court stated at para. 25 that “the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.” Where there is no gross disproportionality in the size of the deposit, the court must consider other indicia of unconscionability. The list of the indicia of unconscionability is never closed and is context specific. Relevant factors include the gravity of the breach and the conduct of the parties: Redstone, at paras. 29-30. . 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:[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. . Dube v. RBC Life Insurance Company
In Dube v. RBC Life Insurance Company (Ont CA, 2015) the court sets out the test for relief from forfeiture under the Courts of Justice Act:A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just. Here the relief sought was with respect to a 30-day timeline for filing a Notice of Claim under an LTD group policy. The court characterized the test as follows:The relief under s. 98 is both equitable and discretionary. The test for relief is well established. It has three components. The court must consider:
- the conduct of the insured applicant
- the gravity of the breach
- the disparity between the value of the property forfeited and the damage caused by the breach, see: Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 S.C.R. 490.
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