Court File and Parties

COURT FILE NO.: CV-18-589736 DATE: 20180724 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: SALVATORE BENEDETTO, Plaintiff AND: 2453912 ONTARIO INC., Defendant

AND BETWEEN: 2453912 ONTARIO INC., Plaintiff by Counterclaim AND: SALVATORE BENEDETTO and RE/MAX WEST REALTY INC., BROKERAGE, Defendants to the Counterclaim

BEFORE: Justice Glustein

COUNSEL: Shahzad Siddiqui, for the Plaintiff/Defendant to the Counterclaim, Salvatore Benedetto Jeremy Lum-Danson, for the Defendant/Plaintiff by Counterclaim, 2453912 Ontario Inc.

HEARD: July 12, 2018

Reasons for Decision

Nature of motion and overview

[1] On July 10, 2017, the plaintiff purchaser, Salvatore Benedetto (“Benedetto”) and the defendant vendor, 2453912 Ontario Inc. (the “Vendor”) entered into an Agreement of Purchase and Sale (the “APS”). Benedetto paid deposits totalling $100,000 (collectively, the “Deposit”) under the APS. The Deposit was held by Re/Max West Realty Inc., Brokerage (“Re/Max”).

[2] Benedetto failed to close the APS.

[3] The Vendor brings a motion for summary judgment and seeks an order directing Re/Max to release the Deposit, plus any interest accrued thereon, to the Vendor. Benedetto does not bring a motion for summary judgment, but seeks an order directing Re/Max to return the Deposit plus any accrued interest to him. [^1]

[4] Re/Max takes no position on the motion and did not appear at the hearing.

[5] Benedetto signed the APS as the “Buyer” described as “Salvatore Benedetto In Trust For A Company to be Incorporated without any Personal liabilities”. [^2] The APS was for the purchase of three adjacent houses at 661, 663, and 665 Huron Street in Toronto (the “Properties”), from the Vendor, at a price of $7 million. The Deposit was to be paid under the APS.

[6] Benedetto relies on s. 21(4) of the Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”). Benedetto submits that because he complied with s. 21(4) and entered into the APS on behalf of a company to be incorporated without personal liability, the Deposit and accrued interest must be returned to him despite his failure to close the transaction.

[7] The Vendor relies on settled law that a purchaser’s failure to close a real estate transaction results in the forfeiture of a deposit, unless the contrary is expressly stated in the agreement of purchase and sale. The Vendor submits that a deposit is not a pre-incorporation contract which is subject to the exclusion of personal liability under s. 21(4), but instead an earnest to secure performance which is forfeited if the purchaser does not close the agreement of purchase and sale.

[8] Consequently, the issue before this court is whether a purchaser who uses the express language in s. 21(4) forfeits a deposit to the vendor if the purchaser fails to close an agreement of purchase and sale.

[9] For the reasons that follow, I agree with the Vendor’s position and find that a purchaser who uses the express language in s. 21(4) forfeits a deposit to the vendor if the purchaser fails to close an agreement of purchase and sale. Consequently, I find that the Deposit is forfeited to the Vendor.

[10] I also address in these reasons (i) Benedetto’s submission that the APS is a “nullity” under the decision in Westcom Radio Group Ltd. v. MacIsaac, 1989 CarswellOnt 134 (Div. Ct.) (“Westcom”) and (ii) the Vendor’s reliance on an “assignment clause” in Schedule “A” of the APS. For the reasons I discuss below, I do not accept either of these submissions.

Facts

[11] The facts of this case are straightforward and uncontested.

[12] On June 23, 2017, Benedetto made an offer to purchase the Properties. The purchase price was $7 million.

[13] The offer was accepted on July 10, 2017, forming the APS. The “Buyer” was “Salvatore Benedetto In Trust For A Company to be Incorporated without any Personal liabilities”.

[14] Under the APS, Benedetto advanced $100,000 from his personal accounts to Re/Max (collectively referred to as the “Deposit”).

[15] The APS also provided in Schedule “A” that:

The Buyer shall have the right at any time prior to closing, to assign the written Offer to any person, persons or corporation either existing or to be incorporated, and upon delivery to the Seller of notice of such assignment, the Buyer herein before named shall stand released from all further liability here under. [^3]

[16] The closing under the APS was set for September 28, 2017, and there were no conditions. The Properties were taken off the market from June to September 2017.

[17] On September 14, 2017, two weeks before the closing, counsel for Benedetto advised counsel for the Vendor that Benedetto “has decided not to proceed” with the transaction and asked for the return of the Deposit. On September 18, 2017, counsel for the Vendor responded that “We disagree that the deposit should be returned”.

[18] Benedetto did not incorporate a company to adopt the APS.

Analysis

[19] I first address the interaction between the law of deposit and s. 21(4).

[20] I then address the remaining submissions of the parties (i.e. Benedetto’s reliance on Westcom and the Vendor’s reliance on the Assignment Clause).

(i) The interaction between the law of deposit and s. 21(4)

[21] Two legal concepts are at issue on this motion. The law with respect to each of these concepts is not in dispute.

[22] The Vendor relies on settled law that a deposit is forfeited if the purchaser fails to perform an agreement of purchase and sale, unless expressly stated otherwise.

[23] Benedetto relies on s. 21(4), which provides that if a contract is made by a person on behalf of a company to be incorporated without personal liability, that person is not “bound” by the contract and, as such, cannot be exposed to personal liability under the contract.

[24] I address each of these legal principles below and then set out my analysis of the interaction between them.

The applicable law on deposit

[25] In H.W. Liebig & Co. v. Leading Investments Ltd., , [1986] 1 S.C.R. 70 (“Liebig”), La Forest J. held that a deposit in an agreement of purchase and sale is a “recompense to [the vendor] for the fact that his property was taken off the market for a time as well as for his loss of bargaining power resulting from the revelation of an amount that he would be prepared to accept” (Liebig, at para. 33; see also Justice Perell, Real Estate Transactions, Second Edition (Canada Law Book: Toronto, 2014), at 292, and Baker v. Wynter, 2006 CarswellOnt 4194 (S.C.J.), at para. 35).

[26] In Comonsents Inc. v. Hetheringtom Welch Design Ltd., (“Comonsents”), Echlin J. reviewed the history of the law of deposit. He summarized that history in the opening paragraph of his reasons (Comonsents, at para. 1):

The practice of giving a sum of money to signify the formation of a contract is said to have originated in Phoenician times; passed through the Greeks to the Romans (where it was called arrha), then onto the current common law, and is now referred to as a "deposit" or "earnest money".

[27] Echlin J. reviewed the law of deposit at length. He set out the relevant principles as follows (Comonsents, at para. 14, citing Gallagher v. Shilcock, [1949] 2 K.B. 765, at 768):

(i) A deposit is “something which binds the contract and guarantees its performance”; and (ii) “If it is a deposit or both a deposit and prepayment, and the contract is rescinded, it is not returnable to the person who pre-paid it if the rescission was due to his default”.

[28] Echlin J. relied on the settled law that money is paid on a deposit as an “earnest”, with its own implied or expressed term that it is to remain the property of the payee if the contract is not performed by the payer. Echlin J. adopted the following passage from Howe v. Smith, (1884), 27 Ch. D. 89 (C.A.), at 101 (cited at Comonsents, at para. 15):

Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract. [Emphasis added.]

[29] In Tang v. Zhang, 2013 BCCA 52, Newbury J.A. similarly held that “[a] true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargain” (see also Mikhalenia v. Drakhshan, 2015 ONSC 1048, at para. 33).

[30] Consequently, a purchaser’s failure to close an agreement of purchase and sale results in the forfeiture of the deposit, without proof of actual damages. In J.E.R. Harrison Estates Ltd. v. 1205458 Ontario Ltd. (“J.E.R. Harrison”), , 2003 CarswellOnt 2127 (C.A.), the court held (at para. 20):

As a matter of law, where the purchaser fails to perform the contract, and the contract does not otherwise provide for the return of the deposit, the deposit is forfeit.

[31] In Iyer v. Pleasant Developments Inc., , 2006 CarswellOnt 2050 (Div. Ct.), M.F. Brown J. set out the following principles governing the law of deposit (at paras. 8-9):

(i) The use of the word “deposit” implies that the payment is intended for forfeiture upon the purchaser’s breach; and (ii) Unless an agreement indicates an intention that the deposit is not to be forfeited, the vendor has an implied right to retain it upon default by the purchaser.

[32] A party who breaches an agreement cannot take advantage of his or her own wrong and recover the deposit (J.E.R. Harrison, at para. 20; see also De Palma v. Runnymede Iron & Steel Co., [1949] O.J. No. 495 (C.A.), at para. 17).

The applicable law on s. 21(4)

[33] Section 21(1) sets out the general rule that a person will be “personally bound” by a pre-incorporation contract entered into in the name of or on behalf of a corporation to be incorporated. [^4]

[34] Section 21(4) provides that a person who enters into a pre-incorporation contract in the name of or on behalf of a corporation to be incorporated is “not in any event bound by the contract”, “if expressly so provided”.

[35] The relevant sections provide:

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.

(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.

[36] In Szecket v. Huang, 1998 CarswellOnt 4783 (C.A.) (“Szecket”), the defendant Huang entered into a contract “on behalf of a company to be formed”, but did not expressly exclude personal liability (Szecket, at para. 1).

[37] The court held that “[t]o limit the liability of a person who enters into a pre-incorporation contract, an express provision to that effect must be contained in the pre-incorporation contract”, and as such, the defendant was personally liable since “the contract itself contained no express provision relieving Mr. Huang from personal liability under s. 21(1) if the company was not incorporated, or if it was incorporated, and failed to adopt the contract” (Szecket, at para. 31).

[38] In 1080409 Ontario Ltd. v. Hunter, 2000 CarswellOnt 2399 (S.C.J.) (“Hunter”), the defendant Hunter entered into an agreement of purchase and sale on behalf of a company which did not exist. While Hunter incorporated a new company after the closing date, the transaction did not close and the agreement was not adopted by the new company (Hunter, at paras. 6, 13).

[39] Pepall J. (as she then was) held that Hunter was personally liable under the agreement for losses on the resale of the property. Pepall J. held that Hunter “could have expressly provided that he was not personally bound by the terms of the agreement of purchase and sale as contemplated by s. 21(4) of the OBCA” but “[h]e chose not to do so” (Hunter, at para. 35).

[40] The parties before me at this hearing provided no case law in which a party avoided personal liability by complying with s. 21(4), i.e. by an express statement in a pre-incorporation contract that the party was entering the contract in the name of or on behalf of a corporation to be incorporated without personal liability. However, the clear statutory language of s. 21(4) and the comments of the courts in Szecket and Hunter establish that a person can exclude personal liability under a pre-incorporation contract by expressly stating that he or she enters into that contract in the name of or on behalf of a corporation to be incorporated without personal liability.

The interaction between the law of deposit and s. 21(4)

[41] The parties before me at this hearing provided no authority directly on point as to whether a deposit under an agreement of purchase and sale is forfeited when a purchaser, who contracts in the name of or on behalf of a corporation to be incorporated and excludes personal liability under s. 21(4), fails to close the agreement.

[42] However, based on (i) the approach taken by the court on almost identical contractual language in Adamis v. Aviks, 1983 CarswellOnt 3436 (Co. Ct.) (“Adamis”) and (ii) the interaction of the relevant principles of law, I conclude that a deposit under an agreement of purchase and sale is forfeited when a purchaser, who contracts in the name of or on behalf of a corporation to be incorporated and excludes personal liability under s. 21(4), fails to close the agreement.

1. The decision in Adamis

[43] In Adamis, Matlow J. considered almost identical contractual language when a trustee who purchased a property under an agreement of purchase and sale as “D. Adams [^5] in Trust with no personal liability” brought an action for the return of the deposit after he failed to close the transaction. The defendants in Adamis counterclaimed for (i) forfeiture of the deposit and (ii) damages from the failed transaction.

[44] Matlow J. found that the plaintiff was responsible for the failed transaction (Adamis, at para. 25).

[45] Matlow J. noted that “the agreements of purchase and sale clearly provided that [the plaintiff] would be exposed to no personal liability” (Adamis, at para. 35). That language is virtually identical to the express language required under s. 21(4).

[46] Matlow J. held that the plaintiff could not recover the deposit despite signing the agreement with “no personal liability”, since the plaintiff was not justified in refusing to close the agreement of purchase of sale (Adamis, at para. 26):

It follows that the plaintiff is not entitled to recover the deposits paid by him which have been forfeited and the plaintiff’s action must be dismissed. […]

[47] Matlow J. relied on the exclusion of personal liability to dismiss the defendants’ counterclaim for damages over and above the deposit, while reiterating that the deposit was forfeited as a result of the purchaser’s breach. Matlow J. held (Adamis, at para. 35):

[…] The limitation of liability set out in the agreements was sufficient to safeguard the plaintiff from any personal liability and that all the defendants were entitled to recover for any breaches or defaults by the plaintiff prior to completion of the transactions was forfeiture of the deposits.

[48] In the present case, the Vendor seeks no damages arising out of the breach of the APS, but only a declaration of forfeiture of the Deposit.

[49] Benedetto seeks to distinguish Adamis on the basis that it was decided before the promulgation of s. 21 of the OBCA. I do not agree with that submission.

[50] There is no basis to submit that the decision in Adamis would be different after the promulgation of the OBCA, as s. 21(4) has no relevance to the law of personal liability of trustees.

[51] Further, s. 21(4) is consistent with the decision in Adamis. Section 21(4) (using the same express wording as in Adamis) avoids the uncertainty which arose at common law (and also upon the approach in Westcom, as I discuss below) as to personal liability under pre-incorporation contracts without an express exclusion of personal liability. That history was reviewed by Pepall J. in Hunter (at para. 22):

This section was in part designed to address the unsatisfactory state of the common law relating to pre-incorporation contracts and more particularly the tension between Kelner v. Baxter (1866), L.R. 2 C.P. 174 and Black v. Smallwood (1965), 117 C.L.R. 52. The former was thought to have established personal liability for a promoter who entered a contract on behalf of a non-existent company: "where a contract is signed by one who professes to be signing "as agent", but who has no principal existing at the time, and the contract would be otherwise inoperative unless binding on the person who signed it, he (the agent) is bound thereby." per Erle C.J. at p. 183. The Black v. Smallwood decision interpreted Kelner v. Baxter as having only decided that a promoter would be personally liable if the facts disclosed an intention by the parties that the promoter be bound. As such, the court rejected the notion that Kelner v. Baxter established a principle or rule that a promoter is always personally liable on a pre-incorporation contract, and suggested that in each case, one should examine the intentions of the parties so as to determine liability.

[52] To avoid that uncertainty, s. 21(4) made it clear that a person could enter into a pre-incorporation contract without personal liability if expressly so provided, just as a trustee had been able to do when entering a contract on behalf of a beneficiary. Such a statutory authorization under s. 21(4) requires the same language as used by the trustee in Adamis, and the rationale in Adamis would still apply to forfeit the deposit upon the failure to close an agreement of purchase and sale either by a trustee or by a person under s. 21(4).

[53] Consequently, there remains some uncertainty arising from Westcom (see my reasons below) as to whether s. 21(1) applies when a person enters into a pre-incorporation agreement without complying with s. 21(4) when there is a mutual mistaken intention as to the existence of the corporation at the date of the contract. However, s. 21(4) codifies the ability of a person entering into a pre-incorporation contract in the name of or on behalf of a corporation to be incorporated to exclude personal liability, as set out in both Szecket and Hunter and in the same language considered in Adamis. That identical language exempting a trustee from personal liability did not obviate the forfeit of a deposit in Adamis, nor should it do so in this case.

[54] For the above reasons, I adopt the approach in Adamis and find that a restriction against personal liability under s. 21(4) does not prevent the forfeiture of a deposit.

2. Analysis of the interaction of the relevant principles of law

[55] I find that the approach taken in Adamis is consistent with the interaction of the relevant principles of law. The purpose of a deposit is to guarantee performance to the payee if the payer fails to complete the transaction.

[56] A deposit is compensation for the vendor taking its property off the market for a time as well as for the vendor’s loss of bargaining power resulting from the revelation of an amount that the vendor would be prepared to accept. A deposit is an “earnest” in the event that the contract is never performed. Consequently, I find that a deposit on an agreement of purchase and sale is not a pre-incorporation contract, but rather the “ancient invention of the law designed to motivate contracting parties to carry through with their bargain”.

[57] A deposit is not related to damages. It is a sum of money to signify formation of the contract. It is not a pre-incorporation contract to which a purchaser could be “bound” to its obligations or otherwise exposed to personal liability under the contract. Instead, a deposit is a payment to secure performance.

[58] Consequently, I find that when a pre-incorporation contract is entered into with an express provision that the purchaser acts in the name of or on behalf of a corporation to be incorporated, without personal liability, the deposit remains the property of the vendor if the purchaser fails to close the agreement of purchase and sale.

[59] Section 21(4) does not vitiate a deposit upon the purchaser’s breach. Rather, it prevents a purchaser who complies with the provision from being “bound” by the contract, and, as such, no claim for damages can be brought against such a purchaser seeking personal liability under a failed agreement of purchase and sale. The Vendor in the present action makes no such claim for damages.

[60] If Benedetto’s position were accepted, the Deposit would be meaningless. Under Benedetto’s approach, the Deposit provides no security. If the APS closes, the Deposit is applied to the purchase price. If the APS does not close, the Vendor receives no “recompense” for taking the Properties off the market and disclosing a willingness to accept a purchase price, as the Deposit would be returned to Benedetto. Such an interpretation would be commercially unreasonable.

[61] The purpose of the Deposit was to protect the Vendor from the risk that Benedetto would breach his obligation to close the APS. I adopt the following submission of the Vendor in its factum:

Benedetto appears to be taking the position that the deposit was for his sole benefit. If he breaches, he gets the deposit back. If he closes the deposit gets credited to the purchase price. This position is untenable. The Vendor receives nothing for the deposit, despite taking the property off the market, revealing a price it was willing to accept and incurring potential liability to the purchaser if it breached. The deposit was not for Benedetto’s sole benefit of allowing him to secure the transaction with absolutely no downside – this was not the objective intention of the parties or any parties entering into these types of transactions.

[62] I do not accept Benedetto’s submission that the use of the term “without personal liability” is an expression of contrary intention that the Deposit is not to be forfeited if the APS is not concluded.

[63] The terms of the Deposit do not include a provision that if the contract is not performed, the Deposit is to be returned to Benedetto. 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.

[64] Benedetto submits that since the court in Szecket expressly confirmed that a contracting party can avoid personal liability for a pre-incorporation contract, then a deposit must be returned if the purchaser does not complete an agreement of purchase and sale. I do not agree.

[65] The court in Szecket did not consider the law of deposit and how it interacted with exclusion of personal liability in contracts. That issue was raised in Adamis, which I adopt based on my analysis of the interaction of the law of deposit and s. 21(4).

[66] I do not agree with Benedetto’s submission that the effect of s. 21(4) is to usurp the settled law on forfeiture of deposit solely by a person excluding “personal liability”. That position, based on the same language used by the trustee, was not accepted in Adamis, and I find that the law of deposit is similarly not altered under s. 21(4). A deposit is not a matter of “personal liability” or being “bound” under a contract, but rather an earnest to secure performance.

[67] For the above reasons, I find that a deposit is not a pre-incorporation contract. Rather, it stands on its own as an “ancient invention of the law designed to motivate contracting parties to carry through with their bargains”, “something which binds the contract and guarantees its performance”, and is an “earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract”.

[68] Consequently, I find that the Deposit is forfeited as a result of Benedetto’s failure to close the APS.

(ii) Other arguments raised by the parties

[69] As I discuss above, there are two additional arguments raised by the parties as to whether the Deposit is forfeited upon the purchaser’s failure to complete the APS.

[70] Benedetto relies on the decision in Westcom to submit that the APS became a “nullity” when Benedetto (i) did not close the real estate purchase, and (ii) did not incorporate a company to adopt the APS. Consequently, Benedetto submits that there was, in effect, no deposit, and it must be returned to him.

[71] The Vendor relies on the Assignment Clause to submit that since Benedetto agreed to no “further” liability if he assigned the APS, Benedetto acknowledged that his obligations under the “Deposit” provisions remained personally owing even if the APS did not close.

[72] For the reasons I discuss below, I do not accept either submission.

The decision in Westcom

[73] Benedetto submits that Westcom stands for the proposition that a pre-incorporation contract entered into using the express language required under s. 21(4) is a “nullity” if the corporation is not incorporated (and, as such, does not adopt the contract under s. 21(2) of the OBCA). I do not agree.

[74] In Westcom, the defendant MacIsaac signed a contract for services from the plaintiff Westcom Radio Group Ltd. (“Westcom”) on behalf of a corporation that she believed existed. MacIsaac also believed that she was a part owner, a director, and a signing officer of that non-existent company (Westcom, at para. 2). Consequently, MacIsaac did not state in the contract that she was entering into the contract on behalf of a corporation to be incorporated without personal liability.

[75] The plaintiff, Westcom, also believed that it was signing a contract with a company that existed.

[76] Westcom rendered a series of accounts to the business and MacIsaac paid the first accounts but not the balance. Westcom brought an action for payment of the outstanding amount against both the non-existent company and MacIsaac, but abandoned the action against the business before trial (Westcom, at para. 3).

[77] The purported company was never incorporated.

[78] The court in Westcom did not take a “one-step” approach of applying the language of s. 21(1) and s. 21(4). Since MacIsaac did not expressly state that she was signing the contract on behalf of a corporation to be incorporated without personal liability, she would have been personally liable under such a “one-step” approach, given the general principle in s. 21(1) and the inapplicability of s. 21(4).

[79] Instead, the court in Westcom followed a two-step approach. It first considered “whether the plaintiff intended to contract with the non-existent company exclusively” (Westcom, at para. 26), before the “second step” of considering s. 21. Having found a mutual intention under the first step to contract with a non-existent company, the court held that the contract was a nullity. Austin J. (as he then was) stated (Westcom, at paras. 26 and 28):

In coming to any conclusion about the case at bar, the starting point must be to determine whether the plaintiff intended to contract with the non-existent company exclusively. If so, then the purported "contract" is a nullity. […]

In my view, one should begin by determining whether the arrangement, when considered as a whole, indicates an intention to look to the defendant personally or solely to the company. The learned trial judge found that the evidence indicated that the plaintiff was looking solely to the company. On the basis of the Black principle, the plaintiff's action must fail at common law.

[80] Consequently, Austin J. held that “the literal wording of [s. 21] does not apply” (Westcom, at para. 30) to impose personal liability on the defendant even though she had not complied with the requirement for express exclusion of personal liability under s. 21(4).

[81] Benedetto relies on the decision in Westcom to submit that when an agreement of purchase and sale is not closed, and the proposed company does not become incorporated (and, as such, does not adopt the contract), the agreement is a nullity such that any obligation under the agreement “may be treated as nothing, as if it did not exist or never happened”. [^6]

[82] I do not agree since (i) the two-step approach in Westcom has not been adopted by appellate and other courts; and (ii) in any event, the basis of the purported “nullity” in Westcom (even if correctly decided) is a failure of the meeting of the minds which did not occur in the present case.

[83] The Vendor also seeks to rely on Westcom, or at a minimum, submit that Benedetto cannot rely on Westcom, since the court in Westcom did not order the return of funds already paid by MacIsaac under that agreement. I do not accept that submission.

[84] I address each of these issues below.

1. The two-step approach in Westcom has not been adopted by appellate and other courts

[85] The “two-step approach” in Westcom has not been followed by appellate and other courts, who have chosen instead to distinguish the case on its facts.

[86] In Szecket, the court was asked to adopt the approach in Westcom (which had been applied by the trial judge) and apply a two-part test, i.e. to first consider the intentions of the parties and then consider the application of s. 21. The court expressly refused to comment on whether Westcom was correctly decided. The court held (Szecket, at para. 32):

We feel obliged to comment on the analysis undertaken by the trial judge in determining the appellant's liability. With respect, we question his reliance on the Westcom case, supra, which made his analysis of the evidence and s. 21(1) unnecessarily complex. We have not been asked to consider the correctness of the decision in Westcom, and, therefore, we decline to do so. […]

[87] The court in Szecket adopted the dissenting reasons of Borins J.A. in Sherwood Design Services Inc. v. 872935 Ontario Ltd. (1998), , 39 O.R. (3d) 576 (C.A.) summarized in Szecket as “where the company is not incorporated and the contract is not performed, liability for breach of the pre-incorporation contract depends on the application of s. 21, which was enacted to replace the common law” (Szecket, at para. 32). Consequently, the court did not adopt the two-step approach in Westcom.

[88] Similarly, in Hunter, Pepall J. conducted a thorough review of the commentary and other case law which considered Westcom. Pepall J. noted that while some legal scholars supported the Westcom approach, other legal scholars and courts preferred that “effect should be given to the clear legislative intent and absent a s. 21(4) disclaimer, the individual should be bound” (Hunter, at paras. 26-33, and in particular, at para. 27).

[89] Pepall J. did not decide whether the decision in Westcom was correct. Pepall J. held (Hunter, at para. 34):

[…] [Section] 21 of the OBCA still is capable of construction in a manner consistent with the undeniable legislative intent which was its genesis. In my view, that legislative intent should be realized.

[90] I follow the approach of the courts in Szecket and Hunter. I do not adopt a two-step approach and do not comment on the correctness of the approach in Westcom. Instead, as I discuss below, I apply the same distinction raised by the courts in Szecket and Hunter and find that even if such a two-step approach were correct, it would not apply in this case.

2. The basis of the purported “nullity” in Westcom (even if correctly decided) is the failure of the meeting of the minds which did not occur in the present case

[91] In Szecket, the court held that the decision in Westcom could be distinguished on the basis that in Szecket, there was no mistaken belief as to the existence of a corporation. In Szecket, both parties to the contract understood, correctly, that the defendant Huang was contracting on behalf of a company to be incorporated. Consequently, the court did not adopt the two-step approach from Westcom upon which the trial judge relied, and instead held Huang personally liable under s. 21(1).

[92] The court reviewed the decision of the trial judge (Szecket, at paras. 19-20):

This appeal deals with a pre-incorporation contract. An analysis of the reasons of Conant J. discloses that he appears to have based his finding of personal liability on a combination of common law principles of liability for pre-incorporation contracts and the application of s. 21(1) of the OBCA. Why he chose to take this approach is not entirely clear. However, it would appear that he did so on the basis of his understanding of the reasons of the Divisional Court in Westcom Radio Group Ltd. v. MacIsaac (1989), 70 O.R. (2d) 590. Conant J. interpreted this decision to require the court, before considering whether s. 21(1) applied, “to decide whether there is any evidence tending to demonstrate that the parties intended that Huang be personally liable for the obligations of [the company to be incorporated] to the plaintiffs”. It seems that his ultimate finding on this question was that it was not the intention of Huang to be personally liable for the obligations of the company to be incorporated. However, in our view, nothing turns on this finding as the liability of Mr. Huang ultimately is to be determined pursuant to s. 21 of the OBCA, which the legislature enacted to overcome the confusing state of the common law pertaining to pre-incorporation contracts.

Because of our view of this appeal, there is no need to deal further with Conant J.’s analysis which led to his finding of liability pursuant to s. 21(1) of the OBCA. […]

[93] The court in Szecket relied upon the mutual intent of the parties to the contract that Huang was contracting on behalf of a company to be incorporated, based on the express language in the contract that Huang was “acting on behalf of a company to be formed” (Szecket, at para. 11). The court held (Szecket, at paras. 32-33):

[…] In any event, [Westcom] is distinguishable on its facts from this appeal where there is no evidence that Mr. Huang believed he was contracting on behalf of an existing company that, in fact, did not exist, as was the case in Westcom. In this appeal, all the evidence pointed to only one conclusion – that the respondents and Mr. Huang knew, and, indeed, intended, that Mr. Huang, and his associates, were contracting on behalf of a company to be incorporated. As Borins J.A. concluded in his analysis of the law pertaining to pre-incorporation contracts in the Sherwood case, in a situation like this where the company is not incorporated and the contract is not performed, liability for breach of the pre-incorporation contract depends on the application of s. 21, which was enacted to replace the common law.

Accordingly, Westcom was of no assistance to the trial judge in resolving the issue of Mr. Huang’s personal liability. There was no need for him to undertake the two stage analysis suggested by Westcom and first determine whether it was the intention of the parties to the pre-incorporation contract that Mr. Huang incur personal liability before determining the ultimate issue of his liability through the application of s. 21(1). This represented one of the problems arising from the common law of pre-incorporation contracts, which the legislature intended to remedy by the enactment of s. 21. As we have stated, 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). Indeed, on its facts this is a simple and straightforward case, which clearly attracts the application of s. 21(1).

[94] Similarly, in Hunter, Pepall J. followed the approach in Szecket and held that MacIsaac was personally liable under s. 21(1). Pepall J. distinguished the decision in Westcom on the basis that in Hunter, there was no common mistaken intention. Pepall J. held (Hunter, at para. 33):

The facts in this case are not identical to the facts in either Westcom or Szecket. In Westcom, both contracting parties believed the corporation to be in existence when it was not. In Szecket both contracting parties knew the corporation was not in existence. Here, Mr. Drabinsky, believed Furama to be in existence and Mr. Hunter knew it was not. […]

[95] In the present case, Westcom does not apply as there is no mutual error as to the existence of the corporation. To the contrary, as in Szecket, both the Vendor and Benedetto understood that there was no existing purchaser corporation. Further, in the present case, the parties also both understood that Benedetto was acquiring the Properties on behalf of that corporation to be incorporated without personal liability. The APS was clear.

[96] Consequently, if Westcom is correctly decided, it stands for the proposition that if the parties share a mutual mistaken intention as to the identity of the contracting parties in a pre-incorporation contract, the court will not apply the statutory language of s. 21, but rather find that the contract is a nullity such that personal liability under s. 21(1) would not apply despite the person not expressly stating so when entering into the contract. Those facts do not arise in the present case and did not arise in either Szecket or Hunter.

[97] While not necessary to my analysis given the above reasons, I also find that Benedetto’s position as to nullity (based on Westcom) is inconsistent with Benedetto relying on his express exclusion of personal liability under the APS. Section 21(4) allows parties to enter into the contract with a common understanding of the terms of the contract, which expressly exclude personal liability for the party entering the contract on behalf of the corporation to be incorporated. The person who sets out the express language in s. 21(4) then relies on that contract to avoid the personal liability that would otherwise arise if the company was not incorporated and did not adopt the pre-incorporation contract. It is not a situation where the contract never existed.

3. The Vendor’s reliance on the fact that the court in Westcom did not order the return of monies previously paid by MacIsaac

[98] The Vendor submits that Benedetto cannot rely on Westcom since (in addition to the reasons I discuss above) the court in Westcom made no order returning the monies that had already been paid by MacIsaac to Westcom in the first accounts delivered. The Vendor submits that at a minimum, Benedetto cannot rely on Westcom based on this partial payment issue.

[99] However, the issue of the return of such monies does not appear to have been raised by the parties in Westcom – all that was at issue was whether MacIsaac was required to pay the additional amounts claimed. Further, issues concerning payments of accounts under a contract (which raise the issue of personal liability) do not assist the court in considering the law of deposit, for the reasons I discuss above.

The Vendor’s reliance on the Assignment Clause

[100] The Vendor relies on the Assignment Clause to submit that the APS is consistent with the law of deposit. In particular, the Vendor submits that by agreeing in the Assignment Clause that Benedetto “shall stand released from all further liability here under”, Benedetto acknowledges that he had an existing obligation to forfeit the Deposit.

[101] However, I do not find that the Vendor’s reliance on the Assignment Clause is helpful to my analysis. Benedetto still signed Schedule “A” (which contained numerous provisions including the Assignment Clause) as “Salvatore Benedetto In Trust For A Company to be Incorporated without any Personal liabilities”, so it does not advance the analysis as to whether s. 21(4) usurps the law of deposit.

Order and costs

[102] I grant the Vendor’s motion for summary judgment and dismiss Benedetto’s claim for judgment. I direct Re/Max to release the Deposit plus any interest accrued thereon to the Vendor.

[103] Both parties incurred similar costs, demonstrated by the costs outlines provided to the court at the hearing. However, the parties asked the court (by brief email request after the hearing) to permit them to deliver written submissions as to costs, so that the court could consider offers to settle.

[104] Consequently, if the parties cannot agree on costs, the Vendor may deliver brief written costs submissions of no more than two pages (excluding its bill of costs and any documents upon which it relies), no later than August 8, 2018. Benedetto may deliver brief responding written costs submissions of no more than two pages (excluding its bill of costs and any documents upon which it relies), no later than August 22, 2018. The Vendor may deliver a brief reply written costs submission of no more than one page, if necessary, no later than August 29, 2018.

GLUSTEIN J. Date: 20180724

Footnotes

[^1]: Benedetto can seek judgment in response to the Vendor’s motion (*Hunter-Rutland Inc. v. Huntsville (Town)*, 2015 ONCA 353, at para. 5). [^2]: The description is verbatim from the APS. [^3]: I refer to this provision as the “Assignment Clause”. [^4]: Under s. 21(2), a corporation may, within a reasonable time after it comes into existence, adopt a pre-incorporation contract made in its own name or on its own behalf, such that the person who purported to act in the name of or on behalf of a pre-incorporated company ceases to be bound by the contract upon adoption (s. 21(2)(b)). However, under s. 21(3), a party to the contract can apply to the court for an order fixing obligations under the contract as joint or joint and several or apportioning liability between the corporation and the person who purported to act in the name of or on behalf of the corporation to be incorporated. These subsections do not apply in the present case as (i) Benedetto relies on s. 21(4) (which avoids the issue of adoption of the contract) and (ii) in any event, Benedetto did not incorporate a corporation, and, as such, there was no corporate adoption of the APS. [^5]: “Adams” was the anglicized version of the plaintiff’s surname (Adamis, at para. 7). [^6]: (as submitted by Benedetto in his written submissions)