CITATION: 2021 ONSC 4005
DIVISIONAL COURT FILE NO.: 120/21
DATE: 20210614
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Sachs, Penny and Kurke JJ
BETWEEN:
GRANDEUR HOMES INC., Plaintiff/Respondent
– and –
HONG ZENG, Defendant/Appellant
COUNSEL:
Anne E. Posno for the Appellant
Richard B. Swan, Jeliah Y. Chan and William A. Bortolin for the Respondent
HEARD by videoconference at Toronto: June 1, 2021
Penny J.
Overview
[1] This an appeal from the December 15, 2020 decision of Chozik J. (2020 ONSC 7827) granting the plaintiff summary judgment on unpaid invoices for the partial construction of a home. The sole issue on appeal is whether a non-refundable deposit paid at the outset of construction is, as held by the motion judge, forfeit in its entirety or must be applied as a credit against the judgment granted. For the reasons that follow, the appeal is dismissed.
Background
[2] Hong Zeng owns property located on Lakeshore Road on the waterfront in Oakville, Ontario. The property was purchased for $15.5 million and was, prior to these proceedings, free and clear of all encumbrances. Zeng resides in China but has relatives and agents here in Canada.
[3] Zeng entered into an agreement with Grandeur Homes to design and construct a luxury residential home on the property. The total “Work Price” under the contract was $38,008,440 plus HST, payable in eight installments as the construction progressed. The contract also provided for a non-refundable deposit equal to ten percent of the “Work Price”. The defendant paid the $3.8 million deposit prior to the commencement of construction.
[4] By the end of October 2019, stage 1 of the construction was completed. In November 2019, Grandeur Homes issued an invoice in the amount of $4,294,953.72. Zeng failed to pay the invoice. Through her local representative, Zeng promised that the payment would be made by November 25, 2019. Based on this assurance, Grandeur Homes proceeded to stage 2 of construction. On November 26, 2019, Zeng made a partial payment of $1 million toward the stage 1 invoice. A further partial payment of $2 million was made on December 6, 2019. A sum of $1,294,953.72 remains unpaid on the first invoice.
[5] Stage 2 construction progressed and was substantially completed by early March 2020. Grandeur Homes issued an invoice on March 4, 2020 in the amount of $6,841,510.20 plus HST, as well as invoices for work completed on stages 3 and 4, which had overlapped with stage 2, in the amount of $1,284,959.68. Invoices were also issued for “Planning Work” in the amount of $80,530.39 and $42,375. To date, Zeng has made no payments towards any of these invoices.
[6] On March 5, 2021, Grandeur Homes registered a lien against the property. On March 27, 2020 it exercised its right to suspend construction and took steps, at its own expense, to mitigate against weather damage to the partially completed structure. Zeng continued to promise to pay the invoices. On April 21, 2020 the plaintiff commenced this action under the Construction Act for payment of all outstanding invoices in the amount of $10,433,735.49 plus pre- and post-judgment interest and costs. It then moved for summary judgment on the claim.
[7] Zeng resisted the summary judgment by bringing a motion to stay the action and refer the matter to arbitration under s. 7 of the Arbitration Act, 1991. She did not file any substantive response to the summary judgment motion.
[8] All these facts are admitted. There is no issue as to the quality of the work and no dispute that the invoiced amount of $10,433.725.49 remains unpaid.
[9] The motion judge concluded, based on Zeng’s admissions and Grandeur Homes’ unchallenged evidence, that Zeng breached the contract by non-payment of invoices for the work done in the amounts claimed. She also concluded that Zeng had no tenable defence. The motion judge dismissed Zeng’s motion for a stay and granted summary judgment.
[10] The main issue in dispute was the disposition/application of the deposit. Zeng argued, among other things, that the deposit of $3.8 million must be applied towards the judgment. Grandeur Homes took the position that, under the terms of the contract, the deposit was security for performance of Zeng’s future obligations under the contact and could only be applied against the final invoice rendered under the agreement. Accordingly, Grandeur Homes took the position that the deposit was forfeit and could not be applied against the amount of the judgment, which represented only partial payment under the agreement for only part of the work contracted for.
[11] The motion judge concluded, based on her analysis of the agreement, that the intention of the parties was that the deposit would be applied to the completion stage only. This was, of course, contingent on the agreement actually being completed. The purpose of the deposit was to stand as security for getting to that final stage. Due to Zeng’s breach, Grandeur Homes lost the benefit of the second half or more of the agreement. The non-refundable deposit was intended by the parties to act as a disincentive against precisely what happened in this case; it was intended as security for Zeng’s obligation to take the contract through to its end. Accordingly, Grandeur Homes was entitled to keep the non-refundable deposit without crediting the amount of the deposit against the judgment for non-payment of the invoices that were rendered.
[12] It is from the motion judge’s decision on this issue, and this issue alone, that Zeng appeals.[^1]
Analysis
[13] The interpretation of an agreement is a question of mixed fact and law, for which the standard of review is usually palpable and overriding error. However, Ms. Posno (who was not counsel for Zeng at the motion) argues there is an extricable issue of law raised in this case in respect of which the standard of review is correctness: the appeal, she says raises an extricable question of law relating to damages.
[14] Zeng relies on authority decided by the Court of Appeal for Ontario in the context of failed real estate deals, Azzarello v. Shawqi, 2019 ONCA 820 at paras 53-55, leave to appeal at SCC ref’d; Bang v.Sebastian, 2018 ONSC 6226 at paras 68-69, aff’d 2019 ONCA 501. She concedes that the deposit indeed stands as security for the performance of the contract and that its forfeiture provides an incentive for the payor to complete its obligations. However, when damages are claimed and suffered, the deposit must be treated as a partial payment toward the damages. The claim for unpaid invoices in this case is a claim for damages for breach of contract. As such, based on the principles set out by the Court of Appeal in Azzarello and Bang, the deposit must be applied as a credit against the judgment.[^2]
[15] Notwithstanding Ms. Posno’s able submissions, I am unable to agree with this argument.
[16] In this case, the deposit is defined in the contract in para. 2.11, which states:
The Owner shall pay to the Contractor the following non-refundable
deposit at the following times set out below. The non-refundable deposit
shall be applied towards the final progress payment and other final
amounts to be invoiced by the Contractor in respect of the Project.
[17] The final progress payment is set out in Schedule B to the agreement. It is the final payment or “Completion Work” (Stage 8).
[18] I agree with the motion judge. The contract makes clear that the intention of the parties was that the deposit would be applied to the completion stage. This was contingent on the contract reaching the completion stage. That stage was never reached because of Zeng’s breach. And, because of that breach, Grandeur Homes lost the benefit of the second half or more of the contract.
[19] The argument Ms. Posno has raised turns on the nature of the underlying claim. What the Court of Appeal is saying in cases like Azzarullo and Bang is that, if there is a claim for expectation damages, it will be reasonable to apply the deposit as a credit against any judgment award for that claim. The classic definition of the purpose of expectation damages is to put the plaintiff in the same position it would have been if the contract had been performed. In a claim for expectation damages, damages represent a monetary “replacement” for performance. Where a deposit is to be applied against the final invoice on completion, the principle of expectation damages would suggest that the deposit be credited against any judgment for expectation damages.
[20] The problem for Zeng’s legal argument on this appeal is that there is no claim for expectation damages for the loss of the bargain arising out of Zeng’s breach. Grandeur Homes is not seeking to be placed in the same position it would have been if the contract had been performed. It is not seeking, for example, damages for its loss of profit on the agreement. Grandeur Homes has only advanced a claim for payment of invoices representing less that half the work already performed on the project. The clear intention of the non-refundable deposit in this case was not to provide Zeng some protection against what is, in effect, a restitutionary claim for unpaid interim invoices in the event Zeng failed to complete the contract. It was clearly (and admittedly) intended to motivate Zeng to complete the contract.
[21] 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: Tang v. Zhang, 2013 BCCA 52 at ¶30, cited in Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282 at ¶20. See also: Aylward v. Rebuild Response Group Inc., 2018 ONSC 4800, paras. 66-74, aff'd 2020 ONCA 62.
[22] In the circumstances, it would only be appropriate to apply the deposit towards interim invoices if the deposit was intended as a pre-payment of interim invoices. Here, the agreement is explicit that the deposit is not for prepayment of ongoing invoices; the agreement expressly states that the deposit is to be applied only against the final invoice upon completion of the project. If Zeng were permitted to apply the deposit against her obligations arising from the early stage invoices, the entire purpose of the deposit under this agreement would be vitiated.
[23] For these reasons, the appeal is dismissed.
Costs
[24] Partial indemnity costs were agreed at $20,000 (plus HST) to the winning party. Grandeur Homes is therefore entitled to costs in that amount.
Penny J.
I agree _______________________________
Sachs J.
I agree _______________________________
Kurke J.
Released: June 14, 2021
CITATION: 2021 ONSC 4005
DIVISIONAL COURT FILE NO.: 120/21
DATE: 20210114
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Sachs, Penny and Kurke JJ
BETWEEN:
GRANDEUR HOMES INC., Plaintiff/Respondent
– and –
HONG ZENG, Defendant/Appellant
REASONS FOR JUDGMENT
Released: June 14, 2021
[^1]: Zeng’s factum also raised the issue of relief from forfeiture. This was abandoned at the hearing (properly, in our view, as there was, among other things, a complete lack of any evidence upon which to base such a claim).
[^2]: I should add that these cases were not cited, and this argument was not made, to the motion judge.