Redstone Enterprises Ltd. v. Simple Technology Inc. et al.

[Indexed as: Redstone Enterprises Ltd. v. Simple Technology Inc.]

Ontario Reports

Court of Appeal for Ontario, Sharpe, Lauwers and Hourigan JJ.A.

April 4, 2017

137 O.R. (3d) 374 | 2017 ONCA 282

Case Summary

Contracts — Deposits — Forfeiture — Buyer and seller entering into agreement for purchase and sale of warehouse for $10,225,000 — Agreement originally providing for deposit of $300,000 — Buyer paying additional deposit of $450,000 to obtain six-month extension of time for closing — Buyer failing to close transaction — Application judge finding that amount of forfeiture was unconscionable in absence of any evidence of damages suffered by seller — Application judge reducing amount forfeited to $350,000 — Seller's appeal allowed and amount of forfeiture increased to $750,000 — Size of deposit not grossly disproportionate — No inequality of bargaining power existing — Application judge erring in finding unconscionability.

Facts

The applicant seller and the respondent buyer entered into an agreement for the purchase and sale of a warehouse for $10,225,000. The respondent intended to establish a licensed marijuana grow-op business in the warehouse. The agreement provided for a deposit of $300,000. The applicant paid an additional deposit of $450,000 to obtain a six-month extension of the time for closing. Ultimately, the respondent failed to obtain a Health Canada licence or the necessary financing and failed to close the transaction. The applicant applied for a declaration that it was entitled to be paid the deposit of $750,000, which was being held in trust. The application judge found that the amount of the forfeiture was unconscionable in the absence of any evidence concerning damages suffered by the applicant. He granted partial relief from forfeiture and reduced the amount forfeited to $350,000. The applicant appealed.

Held: The appeal should be allowed.

The fact that the applicant suffered no damages did not in itself render the forfeiture of the entire deposit unconscionable. A finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case. While in some cases a disproportionately large deposit, without more, could be found to be unconscionable, the deposit in this case was not grossly disproportionate. The application judge erred in law by failing to consider other indicia of unconscionability. This was a straightforward commercial real estate transaction undertaken in the expectation of profit by both sides. There was no inequality of bargaining power between them. There was no fiduciary relationship, and both parties were sophisticated. There was nothing to suggest that the applicant unconscionably abused its bargaining power in asking for an additional deposit of $450,000 to grant the requested extension. The amount of the forfeiture should be increased to the contractual amount of $750,000.

Authorities

Cases Considered

Peachtree II Associates - Dallas, L.P. v. 857486 Ontario Ltd. (2005), 76 O.R. (3d) 362, [2005] O.J. No. 2749, 256 D.L.R. (4th) 490, 200 O.A.C. 159, 10 B.L.R. (4th) 45, 140 A.C.W.S. (3d) 650 (C.A.) [Leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 420]

Tang v. Zhang, [2013] B.C.J. No. 180, 2013 BCCA 52, 332 B.C.A.C. 304, 41 B.C.L.R. (5th) 69, 29 R.P.R. (5th) 192, 359 D.L.R. (4th) 104, 223 A.C.W.S. (3d) 894

Other Cases Referred To

Birch v. Union of Taxation Employees, Local 70030 (2008), 93 O.R. (3d) 1, [2008] O.J. No. 4856, 2008 ONCA 809, 243 O.A.C. 6, [2009] CLLC ¶20-006, 305 D.L.R. (4th) 64, 171 A.C.W.S. (3d) 758 [Leave to appeal to S.C.C. refused [2009] S.C.C.A. No. 29]

Elsley Estate v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, [1978] S.C.J. No. 47, 83 D.L.R. (3d) 1, 20 N.R. 1, 3 B.L.R. 183, 36 C.P.R. (2d) 65, [1978] 1 A.C.W.S. 514, 1978 CarswellOnt 1235

Principal Investments Ltd. v. Thiele Estate, [1987] B.C.J. No. 586, 37 D.L.R. (4th) 398, 12 B.C.L.R. (2d) 258, 4 A.C.W.S. (3d) 123, 1987 CarswellBC 76 (C.A.)

Stockloser v. Johnson, [1954] 1 Q.B. 476, [1954] 1 All E.R. 630, [1954] 2 W.L.R. 439 (C.A.)

Union Eagle Ltd. v. Golden Achievement Ltd., [1997] UKPC 5, [1997] A.C. 514 (P.C.)

Workers Trust and Merchant Bank Ltd. v. Dojap Investments Ltd., [1993] 2 All E.R. 370, [1993] A.C. 573, [1993] 2 W.L.R. 702 (P.C.)

Statutes Referred To

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 98

Procedural History

APPEAL from the judgment of Kent J., [2016] O.J. No. 3689, 2016 ONSC 4388 (S.C.J.) granting partial relief from forfeiture.

Counsel:

Adam J. Stephens, for appellant.

Judy Hamilton and Payam Ezzatian, for respondent.

Judgment

The judgment of the court was delivered by

LAUWERS J.A.

A. The Facts

[1] The seller, Redstone Enterprises Ltd., sold a warehouse in Brantford to the buyer, Simple Technology Inc., for $10,225,000. When the buyer failed to complete the transaction, the seller applied for a declaration that it was entitled to be paid the deposit of $750,000, which is being held in trust by CBRE Limited.

[2] The motion judge found there was no legally acceptable justification for the purchaser not to close the transaction. As a result, he agreed that the deposit was to be forfeited to the seller, but he then exercised his equitable jurisdiction under s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43, and reduced the sum to be forfeited from $750,000 to $350,000.

[3] For the reasons set out below, I would allow the appeal and vary the judgment to increase the forfeiture from $350,000 to the contractual amount of $750,000, together with any accrued interest, to be paid to the seller.

B. The Facts

[4] The facts are not in dispute. The buyer wanted the property to establish a licensed marijuana grow-op business. In order to do that, the buyer required both financing and a licence from Health Canada.

[5] The original agreement of purchase and sale, entered into on July 8, 2014, provided for a deposit of $100,000 and a closing date in October 2015. The buyer paid the initial deposit. If the buyer waived the conditions inserted for the buyer's benefit by August 27, 2014, then it was obliged to pay an additional deposit of $200,000. The buyer waived the conditions on August 20, 2014 and paid the additional deposit of $200,000, bringing the total deposit paid to $300,000. At the same time, at the buyer's request, the closing date was advanced to June 30, 2015 from October 2015.

[6] In correspondence dated June 3, 2015, the buyer advised the seller that Health Canada's approval of its application for a licence was taking longer than expected, and requested an extension of the closing date to November 30, 2015. The buyer offered to pay an additional deposit to demonstrate its commitment, stating: "We fully intend to close, but require the completion of this final stage [of Health Canada approval] . . . We will submit deposit of $200,000.00, with approved signed amendment. This should solidify our commitment to you."

[7] The parties negotiated, with the result that the June 30, 2015 closing date was extended to December 15, 2015, for which the buyer agreed to pay an additional deposit of $450,000. The amendment to the agreement of purchase and sale provided, under the heading "Release of Deposit":

In the event this agreement is not completed on or before the Completion Date, the Deposit and Additional Deposit held in trust by CBRE Limited shall be released directly to the Seller following non-completion.

The term "Deposit" referred to the original $300,000 deposit, and the term "Additional Deposit" was the additional $450,000 deposit the buyer paid to secure the extension. The combined deposit paid by the buyer was then $750,000.

[8] The buyer was unable to obtain the Health Canada licence or the necessary financing, and failed to close the transaction.

[9] The seller asked CBRE to release the deposit to it under the terms of the amended agreement of purchase and sale, but the buyer opposed, which led to this application.

C. The Application Judge's Reasons for Granting Relief from Forfeiture

[10] The application judge's complete reasons for granting partial relief from forfeiture are set out in his decision, at paras. 11-13:

In order to obtain relief from forfeiture, the purchaser is required to establish:

1. That the proposed forfeited sum is out of proportion to the damages suffered by the claimant, and

2. That it would be unconscionable for the vendor/claimant to retain the deposit paid. See Varajao v. Azish, 2015 ONCA 218, at paragraph 11.

There is no evidence before the court that enables a determination of whether or not the vendors suffered any damages. It is, therefore, not possible to say that the sum proposed to be forfeited is or is not proportionate to any damages suffered by the vendor. It is, however, possible to say $750,000.00 is a very significant deposit even for a transaction of over $10,000,000.00. The final deposit of $450,000.00 to obtain an extension of the closing date from 30 June 2015 to 15 December 2015 is disproportionate. When combined with the first deposit of $100,000.00 and the second deposit of $200,000.00, the grand total reaches a level where complete forfeiture becomes unconscionable, in the absence of any evidence concerning damages suffered by the vendor.

For all of the above reasons, relief against forfeiture should be granted pursuant to Section 98 of the Courts of Justice Act and the sum to be forfeited should be reduced. A reduction to a total of $350,000.00 is appropriate in the circumstances to eliminate the level of unconscionability that the total deposit reached.

D. The Issue

[11] The issue is whether the application judge erred in granting partial relief from forfeiture of the deposit to the buyer. The appellant does not challenge the application judge's finding that there was no legally acceptable justification for the buyer not to close the transaction.

E. The Standard of Review

[12] The parties both cite a decision of this court on the applicable standard of review, but for different positions: Birch v. Union of Taxation Employees, Local 70030 (2008), 93 O.R (3d) 1, [2008] O.J. No. 4856, 2008 ONCA 809, leave to appeal to S.C.C. refused [2009] S.C.C.A. No. 29. The appellant cites para. 47 of Birch, where the court quoted McLachlin J.A. (as she then was) in Principal Investments Ltd. v. Thiele Estate, [1987] B.C.J. No. 586, 37 D.L.R. (4th) 398, 1987 CarswellBC 76 (C.A.), who said: "determination of whether the established facts support a conclusion of unconscionability on the applicable legal principles is primarily a question of law, with which this Court can interfere if it finds the conclusion to be wrong" (at para. 18 (WL Can)).

[13] The respondent urges deference, and cites para. 59 of Birch for the proposition that there could be no basis for this court to interfere with an application judge's decision on unconscionability since he "applied the correct test for unconscionability to the agreed facts and to the inferences which he drew from those facts".

[14] I would take a different approach to the standard of review in this case. The exercise of equitable authority under s. 98 of the Courts of Justice Act is discretionary and ordinarily attracts this court's deference, except where it is demonstrated the application judge made a legal error or an error in principle or a palpable and overriding error of fact. The application of this general standard assumes the application judge explained his reasons for exercising the discretion. However, in this case, those reasons are sparse and do not permit meaningful appellate review. Consequently, it is open to this court to substitute its own decision on the basis of the facts found by the application judge.

F. Analysis

(1) The Legal Framework

[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 v. Azish 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, [1954] 1 All E.R. 630 (C.A.). I will address each element in turn.

(2) Is the Deposit Disproportionate?

[16] The respondent points out accurately that the "record contained no evidence" that the appellant had suffered any loss as a result of the respondent's breach of the agreement. The respondent submits the application judge accordingly came to the correct conclusion that the additional deposit of $450,000 to obtain the six-month extension of the closing date was disproportionate and therefore unconscionable, and rightly reduced it by $400,000, so that the total amount forfeited by the respondent was $350,000. Another way of seeing it is that the application judge thought the six-month extension was worth no more than $50,000.

[17] Since the appellant provided no evidence of damages, it is fair to infer that it suffered none. As I will explain, that alone does not render the forfeiture unconscionable.

(3) 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] B.C.J. No. 180, 2013 BCCA 52, 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), 76 O.R. (3d) 362, [2005] O.J. No. 2749 (C.A.), leave to appeal to S.C.C. 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 "[j]udicial 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 [at para. 32] 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 Estate v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916, [1978] S.C.J. No. 47, at p. 937 S.C.R., 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 (P.C.) by Lord Hoffmann for the Judicial Committee of the Privy Council [who] 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, [1993] 2 All E.R. 370 (P.C.), at p. 578 A.C.:

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 per cent 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 seven per cent. 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.

[31] Consideration of these indicia show there was no unconscionability in this case.

[32] This was a straightforward commercial real estate transaction undertaken in the expectation of profit by both sides, who were previously strangers. There was no inequality of bargaining power between them. There was no fiduciary relationship. Both parties were sophisticated.

[33] The effect of fixing a price for the property created some risk for both parties because of the possibility of fluctuation in the market value of the property over a long closing period. The initial deposit demonstrated the buyer's commitment to the property. That commitment was increased when the buyer waived the conditions inserted in the agreement of purchase and sale for its benefit, requiring it to increase the amount of the deposit.

[34] Later, when it appeared that the buyer needed an extension of the closing date, it sought that extension offering an additional $200,000 deposit, demonstrating it knew the seller would be concerned about the buyer's ability to close the transaction and would seek to hedge against that risk. Further, by extending the closing date, the seller would lose any opportunity to sell the land for the then market price, which could change at a later date. Negotiations resulted in the additional deposit being set at $450,000, higher than the $200,000 figure the buyer initially offered. The total deposit at slightly more than seven per cent was not in an unfair range.

[35] As the closing date approached, the buyer attempted to escape from the transaction by raising spurious complaints, which led to the application. The application judge rightly found that there was no merit to the complaints. At the same time, the seller remained ready and willing to close and was prepared to extend without additional payment.

[36] In my view, nothing in this sequence suggests that the seller unconscionably abused its bargaining power. Perhaps its position might be described as hard bargaining, but it was not unconscionable in the commercial context.

[37] I note in passing that the application judge's reduction in the overall deposit to $350,000 was $150,000 less than what the total deposit would have been if the buyer's voluntary offer of an additional $200,000 for the extension of the closing date had been accepted and added to the then total deposit of $300,000. There was no warrant in unconscionability for such a reduction.

G. Disposition

[38] I would allow the appeal and vary the judgment to increase the forfeiture from $350,000 to the contractual amount of $750,000, together with any accrued interest to be paid to the seller, plus costs to the respondent in the amount of $10,000 for the appeal and $15,000 for the application, both inclusive of disbursements and taxes.

Appeal allowed.

End of Document