ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
SERENA JOSI GAGLIARDI and KYLE SPILLANE
Plaintiffs
-and-
SULAF AL-KARAWI
Defendant
Micah Remedios, for the Plaintiffs
Demar Hewitt, for the Defendant
Heard: May 11, 2023, by video conference; additional submissions received October 20, 2023
Justice. R. Chown
REASONS FOR JUDGMENT
1This motion for summary judgment arises from a failed residential real estate deal. The main issue is over forfeiture of the deposit. There are dozens of such cases in the jurisprudence. Two features in the facts in this case make it unique:
The buyer backed away from the deal almost immediately after delivering her acceptance of the sellers’ counteroffer. She changed her mind within hours.
The buyer never paid the agreed-upon deposit of $40,000 as required.
The first of the above factors is exceptional. The second occurs infrequently.
2After the defendant buyer repudiated the agreement, the house remained on the market and in one week the plaintiff sellers found another buyer who paid $12,473 less than the defendant had agreed to pay. The defendant admits that she entered into a binding agreement of purchase and sale (APS) and that she breached the contract when she backed away from the deal. The main question in this action is whether the defendant must pay $12,473 (the damages incurred) or $40,000 (the deposit she agreed to pay).
3My subjective reaction to the facts is that it is unfair for the plaintiffs to receive judgment for $40,000. The events between the parties amounted to little more than a hiccup for the plaintiffs. For about ten overnight hours, they thought they had a deal. During those hours, the listing status on MLS never changed from “for sale” to “sold.” Judgment for $40,000 is a $27,527 windfall to the plaintiffs. However, in circumstances where the deposit was reasonable and the defendant agreed to pay it, it cannot be concluded that forfeiture of the deposit is unconscionable. A thorough review of the jurisprudence shows that in cases like this one, when the sale does not proceed due to the fault of the buyer, it is all but impossible for the buyer to recover its deposit. Neither the defendant’s position nor my sense of fairness in this case are reasonably supported in law. I therefore grant judgment to the plaintiffs for $40,000.
4I have done a deep review of relief from forfeiture in deposit cases. The jurisprudence contains unsettling disharmony. The area would benefit from further appellate analysis. Having said that, Canadian courts do not seem to struggle with deposit cases: when a sale does not proceed due to the buyer’s default, buyers are routinely required to forfeit their deposits.
Background
5The negotiations proceeded as follows: the defendant buyer offered $615,000; the plaintiff sellers signed back with a counteroffer of $638,800; the defendant then signed that back with a counteroffer of $635,000; the plaintiffs accepted that counteroffer. The plaintiffs’ real estate agent communicated acceptance to the defendants’ real estate agent in an email sent at 9:03 p.m. on April 3, 2022.
6At 7:38 a.m. the next morning, the defendant’s real estate agent emailed the plaintiffs’ real estate agent to say that the defendant would not be proceeding with the deal for personal reasons. In her brief materials, the defendant explains that she negotiated for a unit in a nearby building for herself and at the same time negotiated with the plaintiffs for the subject unit. She intended to help her daughter buy the subject unit, but her daughter withdrew from the process. No detail is provided about her daughter’s position or role in what was apparently a misunderstanding, but the defendant does say she was unable to finance the purchase without her daughter’s involvement.
7As indicated, the listing status for the property on MLS never changed from “for sale” to “sold” and it remained on the market until it sold for $622,527 a week later.
8The APS is on a standard Ontario Real Estate Association form that deals with the deposit as follows:
Deposit: Buyer submits upon acceptance Forty Thousand Dollars (CDN$) 40,000.00 by negotiable cheque payable to RE/MAX PROFESSIONALS INC., BROKERAGE “Deposit Holder” to be held in trust pending completion or other termination of this Agreement and to be credited toward the Purchase Price on completion. For the purposes of this Agreement, “Upon Acceptance” shall mean that the Buyer is required to deliver the deposit to the Deposit Holder within 24 hours of the acceptance of this Agreement.
Buyer agrees to pay the balance as more particularly set out in Schedule A attached.
9The plaintiffs seek judgment for $72,473, being $12,473 for the reduced purchase price, $40,000 for the unpaid deposit, and $20,000 in punitive damages.
10The parties agreed to have the claim determined by summary judgment under rule 20.04(2)(b) of the Rules of Civil Procedure and I agree that this is an appropriate matter in which to grant summary judgment.
Are the plaintiffs entitled to the deposit?
11The headings below set out general rules surrounding deposits. These rules are always subject to the language in the contract: March Brothers & Wells v. Banton (1911), 1911 74 (SCC), 45 S.C.R. 338, at p. 340, and the possibility of relief from forfeiture: Azzarello v. Shawqi, 2019 ONCA 820, at paras. 45-47, leave to appeal refused, [2019] S.C.C.A. No. 521; Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282.
Deposits are forfeited on the default of buyer.
12“According to the law of vendor and purchaser the inference is that … a deposit is paid as a guarantee for the performance of the contract, and where the contract goes off by default of the purchaser, the vendor is entitled to retain the deposit”: Collins v. Stimson (1883), 11 Q.B.D. 142 at 143, as cited in Howe v. Smith (1884), [1881-5] All E.R. Rep. 201, at p. 204.
13The classic statement of the purpose of a deposit is that of Fry L.J. in Howe v. Smith, at p. 208: “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.” In Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149, at para. 6, the Ontario Court of Appeal identified the rationale for forfeiture of a deposit in these terms:
The deposit stands as security for the purchaser’s performance of the contract. The prospect of its forfeiture provides an incentive for the purchaser to complete the purchase. Should the purchaser not complete, the forfeiture of the deposit compensates the vendor for lost opportunity in having taken the property off the market in the interim, as well as the loss in bargaining power resulting from the vendor having revealed to the market the price at which the vendor had been willing to sell. [Emphasis added; citation omitted.]
These considerations were described as “the purposive underpinnings of forfeiture of deposits” in the recent Ontario Court of Appeal decision of Rahbar v. Parvizi, 2023 ONCA 522, at para. 51.
14Here, the “compensation” rationale is inapplicable because the property was never taken off the market and the listing status on MLS never changed from “for sale” to “sold.” However, Canadian courts have placed more emphasis on the “security” and “incentive” rationales and less on the “compensation” rationale.1
Deposit, penalty, liquidated damages, or part payment?
15The defendant does not dispute that the required $40,000 payment (6.3% of the purchase price) was a reasonable deposit. However, it is important for later discussion to understand the “penalty doctrine” and the distinction between deposits, penalties, liquidated damages, and part payments.
16A good explanation is found in Workers Trust & Merchant Bank Ltd v. Dojap Investments Ltd., [1993] 2 All E.R. 370, at p. 373:
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% 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.2
17Part payments or instalments (sometimes called payments on account) are treated differently than deposits. In general, and subject to the language in the contract, part payments are recoverable by the buyer if the sale does not proceed, subject to the seller’s right to damages: see March, at p. 340 to 341; Stevenson v. Colonial Homes Ltd., 1961 163 (ON CA), [1961] O.R. 407 (C.A.), at p. 409; De Palma v. Runnymede Iron & Steel Co. (1949), 1949 73 (ON CA), [1950] O.R. 1 (C.A.).
Use of the word “deposit” is not determinative.
18The use of the word “deposit” in a contract is evidence of the parties’ intentions but is not determinative of whether a payment is a deposit: Tang v. Zhang, 2013 BCCA 52, at para. 26; Workers Trust, at p. 373.3
Buyer not liable for deposits due after seller accepts buyer’s repudiation.
19If an innocent party accepts the other party’s repudiation, both parties are discharged from their future obligations under the contract, but the contract is not void ab initio. Rather, rights that have already accrued under the contract are not extinguished. This includes the right of the seller to receive and keep a deposit. Thus, a buyer is not liable for deposits that are due only after the seller accepts the buyer’s repudiation of the agreement: Vanvic Enterprises Ltd. v. Mack (1985), 1985 588 (BC CA), 66 B.C.L.R. 211 (C.A.), at paras. 15-16; Argo Ventures Inc. v. Choi, 2020 BCCA 17, at paras. 9-12.
20In this case, the defendant argues that her repudiation of the contract before payment of the deposit became due brought the contract to an end and she had no obligation to pay the deposit. This argument must be rejected because, although the defendant repudiated the agreement before the deposit was due, the seller did not accept that repudiation until after the deposit was due. The innocent party is entitled to a reasonable amount of time to consider its position before accepting or rejecting the other party’s repudiation: Ching v. Pier 27 Toronto Inc., 2021 ONCA 551, at para. 39; Canada Egg Products Ltd. v. Canadian Doughnut Co., 1955 90 (SCC), [1955] S.C.R. 398, at p. 407, 413. Here, the correct analysis is that the plaintiffs accepted the defendant’s repudiation but only after the defendant failed to pay the deposit.
Deposits are applied to reduce the damages seller can claim.
21Where the seller sustains damages, the deposit is credited toward the damages. That is, the deposit is applied to reduce the damages that the seller can claim: Azzarello, at para. 55; Telsec Developments Ltd v. Abstak Holdings Inc., 2020 ABCA 40, at paras. 89-93, leave to appeal refused, [2020] S.C.C.A. No. 81; 10068071 Canada Limited v. Bordbar, 2021 ONSC 4232, at paras. 38-47; Thangarasa v. Aziz, 2022 ONSC 6355, at paras. 71-76; Bilotta v. Booth, 2020 ONCA 522, at para. 28.
Seller cannot recover damages and, in addition, retain the deposit.
22Where the seller sustains damages that are less than the deposit, the seller cannot recover damages beyond the amount of the forfeited deposit. Courts have consistently acted to avoid double recovery. In cases like this one, where the deposit exceeds the damages, courts treat it as self-evident that double recovery should not be permitted: Bang v. Sebastian, 2018 ONSC 6226, at paras. 68-69, aff’d 2019 ONCA 501; 1854329 Ontario Ltd. v. Cairo, 2021 ONSC 99, at paras. 44, 58, and 85, aff’d 2022 ONCA 744; and Arista Homes (Boxgrove Village) Inc. v. Lakhany, 2019 ONSC 5189, at paras. 26-33.
23Like all the other rules surrounding deposits, this rule is subject to the language of the contract and the circumstances of the case.4 There is nothing within the contract in this case to suggest the seller can keep the deposit and collect damages. In fact, the contract suggests the contrary intention. Schedule A to the APS says that the buyer agrees to pay the balance of the purchase price, subject to adjustments, on closing (i.e., the deposit is part of the agreed purchase price). I therefore reject the plaintiffs’ argument that they can recover both the deposit and the damages.
Deposits are forfeited even if seller suffers no loss.
24There is no requirement that the seller prove its damages. “Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependent on proof of damages by the other party”: Tang, at para. 30; Redstone, at paras. 17, 20. Even where the seller has incurred no loss at all, it is entitled to the deposit. The Ontario Court of Appeal explained one reason for this rule in Rahbar, at para. 59: “if purchasers were allowed to reclaim their deposits in a rising real estate market simply because vendors resold their property at a higher price it would eviscerate the very purpose of deposits.”
25Often in these kinds of cases, the seller will incur additional expenses associated with re-selling the house, such as additional mortgage payments, bridge financing, or additional utilities and insurance. In this case, the seller makes no such claims. Other than the $12,473 price reduction, for which the defendant admits liability, the plaintiffs claim no loss.
Buyer is not in a better position if it does not pay an agreed-upon deposit.
26The defendant argues that an unpaid deposit loses its status as a true deposit, but she cites no authority for this proposition. She argues that forfeiture of unpaid deposits would run contrary to the common understanding of the purpose and intent of deposits. The rationale for forfeiture of a deposit is that a deposit is a guarantee for the performance of the contract. But until a deposit is paid, it does not serve as a guarantee at all. This is all the more so when the deposit is due within 24 hours and is not paid. I was advised that the common practice among realtors is not to change the listing status on MLS until after the deposit is paid, and if this is true it reflects the uncertain status of the deal until the deposit is paid. Furthermore, if a deposit is intended to be a demonstration of the seriousness of a buyer’s intentions, the demonstration fails when the purchaser does not pay the deposit.
27However, there are at least five Canadian cases where courts have held that the seller should recover judgment for an unpaid deposit that the buyer agreed to pay but did not pay: (1) Vanvic; (2) Agosti v. Winter, 2009 BCCA 490,5 (3) Argo; (4) Kwan v. Mackenzie Premium Properties Corp., 2021 BCSC 173; and (5) KEB Hana Bank Canada v. Gil Shcoylar, 2023 ONSC 2746. A somewhat similar example from an old case is Hinton v. Sparkes (1868), 16 W.R. 360, where an I.O.U. was given instead of a deposit, and it was held that this did not affect the matter. The Supreme Court of Canada cited Hinton with approval in Waugh v. Pioneer Logging Co., 1949 23 (SCC), [1949] S.C.R. 299, at p. 325.
28None of these cases reflect the nearly immediate repudiation by the buyer that occurred here. But the logic that has emerged is that a buyer should not be in a better position by breaching its agreement to pay a deposit than it would be in if it complied with its obligation. That reasoning affords no exception for a buyer that changes its mind immediately after making a binding agreement.
Unpaid deposits are recoverable as a debt.
29It was not argued by the defendant that the non-payment of the deposit gives rise to a claim in damages only, and not a claim for debt. However, for the sake of completeness, I will note that this argument was attempted and failed in Argo, at paras. 45 to 46.
Application of the Rules Surrounding Deposits in this Case
30As can be seen from the foregoing discussion, the rules surrounding deposits favour the plaintiffs’ claim for judgment in the amount of the deposit, but not for the deposit plus the damages. I conclude that, subject to relief from forfeiture, the plaintiffs are entitled to judgment in the amount of the deposit.
Is the defendant entitled to Relief from Forfeiture?
31The defendant asks for relief from forfeiture of the deposit under s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43. This section gives courts the power to “grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.”
Penalty and Forfeiture Clauses
32Forfeiture and penalty clauses typically trigger negative consequences to a party that commits a breach or other defined conduct. Generally, a penalty clause requires the breaching party to pay or give something to the other party, whereas a forfeiture clause requires the breaching party to forfeit something it has already given to the other party. In this sense, an unpaid deposit cannot be forfeited. The plaintiffs argue that relief from forfeiture is not available on this basis. The responding argument is that there is an analogy between an unpaid deposit and a penalty, and s. 98 of the CJA also permits relief from penalties. I do not base my decision on these arguments.
The Penalty Doctrine
33English courts analyze forfeiture-of-deposit cases under the penalty doctrine. Recall from the discussion above that under the law of penalties, the crucial question is whether the payment “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” (Workers Trust, p. 373). If not, the payment is a penalty and can be recovered by the party who paid it, subject to the other party’s damages. Recall further that there is an exception to this general rule for deposits paid by the purchaser on a contract for the sale of land.6
34However, the deposit must be a “true deposit.” In Workers Trust, at p. 376, the Privy Council found that a 25% deposit “was not a true deposit by way of earnest”. This amount was much larger than the 10% deposit found to be customary in Jamaica at the time. As a result, the provision in the contract calling for forfeiture of the deposit “was a plain penalty.” It was not necessary to resort to a relief from forfeiture analysis.
35This approach was confirmed recently in a U.K.S.C. decision that addressed the law of penalties, Cavendish, at paras. 234 to 238, where Hodge L.J. said that an extravagant non-refundable deposit may be challenged as a penalty.
Relief from Forfeiture is Available in Deposit Cases
36In Canada, a few cases have analyzed deposit cases using the penalty doctrine: Hinkson Holdings Ltd. v. Silver Sea Developments Ltd. Partnership, 2007 BCCA 408, at para. 33; Liu v. Coal Harbour Properties Partnership, 2006 BCCA 385, at para. 24; Williamson Pacific Developments Inc. v. Johns, Southward, Glazier, Walton and Margetts (1997), 1997 4074 (BC CA), 35 B.C.L.R. (3d) 180 (C.A.), at paras. 16-17, citing (1996), 1996 2233 (BC SC), 24 B.C.L.R. (3d) 169 (S.C.), at para. 13. But Canadian courts have legislatively granted general power to relieve against forfeiture,7 so a relief from forfeiture analysis cannot be avoided in deposit cases here. In addition, the Ontario and B.C. Courts of Appeal have made it clear that relief from forfeiture is available in deposit cases: Redstone, at para. 26; Tang, at paras. 26-27. With that said, cases where relief from forfeiture of a deposit has been granted are exceedingly rare. Among dozens of cases, I have found only one example where relief from forfeiture of a deposit would have been granted in a contested real estate purchase: Kirshenblatt v. Kriss, 2012 ONSC 6568. Even then, it was an alternative basis for the decision as the court had found it was the defendant seller, not the plaintiff buyer, who had repudiated the agreement.
The Test for Relief from Forfeiture
37The leading relief from forfeiture case in Canada is Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 100 (SCC), [1994] 2 S.C.R. 490. The Supreme Court of Canada set out two slightly different sets of three factors courts should consider in claims for relief from forfeiture.8 The first set derived directly from Shiloh Spinners v. Harding, [1973] 1 All E.R. 90. The second set was originally articulated by McKinlay J. in Liscumb v. Provenzano (1985), 1985 2051 (ON SC), 51 O.R. (2d) 129, although also ultimately derived from Shiloh Spinners. The two sets of factors were:
Shiloh Spinners
Liscumb
The conduct of the applicant.
The gravity of the breaches.
The disparity between the value of the property forfeited and the damage caused by the breach.
Was the conduct of the plaintiff reasonable in the circumstances?
Was the object of the right of forfeiture essentially to secure the payment of money?
Was there a substantial disparity between the value of the property forfeited and the damage caused the vendor by the breach?
38The Supreme Court did not say which set of factors should be preferred. Some courts have applied the first set, and others the second. But a review of Shiloh Spinners reveals that the two sets of factors are distillations from Wilberforce L.J.’s speech. He said, at p. 722, that courts had “from the earliest times …asserted the right to relieve against the forfeiture of property.” He then said:
[W]here it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs.
39And later, at p. 723:
[W]e should reaffirm the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. The word ‘appropriate’ involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach. [Emphasis added.]
40In Shiloh Spinners, the covenants that had been breached were intended to protect the interests of the assignor of a piece of property by limiting what the assignee could do with the assigned land. The covenants included, for example, not to diminish support for a structure on the assignor’s neighbouring land. A subsequent assignee had continuously disregarded the rights of the assignor. This conduct militated against the request for relief from forfeiture.
41In Liscumb, the defendant mortgagee had taken possession of the subject property without offering a right of redemption to the plaintiff who, at the time of trial, was in the position of a second mortgagee. The plaintiff stood to lose her equity in the property. McKinley J., as she then was, granted relief from forfeiture. The Court of Appeal upheld her decision.
42In Saskatchewan River Bungalows the plaintiffs did not pay the premiums on a life insurance policy until three months after becoming aware they were long overdue. As a result of this conduct, the Supreme Court of Canada denied relief from forfeiture of the insurance policy.
43As can be seen, none of these cases were deposit cases.
The Test for Relief from Forfeiture in Deposit Cases
44Despite the status of Saskatchewan River Bungalows as the leading authority in Canada on relief from forfeiture, in deposit cases, Canadian courts “typically”9 apply the formulation for relief from forfeiture that Denning L.J. set out in Stockloser v. Johnson, [1954] 1 All E.R. 630, at p. 638. Under his formulation, two things are necessary for equity to relieve the buyer from forfeiture: (1) the sum forfeited must be out of all proportion to the damage; and (2) it must be unconscionable for the seller to retain the money. It should be noted that Stockloser was a part payment case, not a deposit case, and that the court held the forfeiture clauses in the subject contract (which called for forfeiture of the part payments) were not penalties. As a result, Denning L.J.’s formulation of the test for relief from forfeiture was obiter dicta in that it was not required for the decision. In addition, Stockloser was not mentioned in either Shiloh Spinners or Saskatchewan River Bungalows.
45In a recent article,10 Eric Andrews states that in Saskatchewan River Bungalows, the Supreme Court:
did not clarify which set of factors it preferred and did not specify in what cases either set of factors should apply. Courts have struggled with the resulting uncertainty, particularly the relationship between the Saskatchewan River Bungalows/Liscumb factors and Denning L.J.’s test from Stockloser. Nevertheless, Canadian courts have responded more favourably to Stockloser than English courts.
46Several courts have noted the two different tests and have said that there is not a great deal of difference between them. The Court of Appeal, in Ching, at para. 71, acknowledged two “arguably different” tests but found that, in that case, it was unnecessary to determine which test applies.
47Mr. Andrews’ article, at p. 223, criticizes the Canadian doctrine of relief against forfeiture as seeming “to lack a clearly articulated rationale.” He goes on to say, at p. 225-226, that Canadian courts:
have not consistently identified the governing principles. In pre-payment cases involving deposits and instalments, for example, while courts have typically applied Denning L.J.’s two-part test from Stockloser, the Saskatchewan River Bungalows/Liscumb factors have also been applied. To complicate things further, in some cases, courts seem to have applied all the above-mentioned tests and factors. In their defence, without a clear rationale, it is unclear which set of principles is most appropriate. [Emphasis in original, footnotes omitted.]
48Considering the various factors reveals additional disharmony. And in this case, considering all the various factors does not reveal the result. It will be necessary to select between the Saskatchewan River Bungalows and Stockloser formulations.
Factors in the Tests
Conduct of the Applicant
49This factor “requires an examination of the reasonableness of the breaching party’s conduct as it relates to all facets of the contractual relationship, including the breach in issue and the aftermath of the breach”: Ontario (Attorney General) v. 8477 Darlington Crescent, 2011 ONCA 363, at para. 89. It is a broad inquiry.
50We know from Shiloh Spinners, at p. 101, that the wilfulness of the breach is particularly important, and from Monk, at para. 93, that “the breaching party’s conduct lies at the heart of the relief from forfeiture analysis.”
51In insurance cases, courts consider all the circumstances, including “the nature of the breach, what caused it and what, if anything, the insured attempted to do about it”: Williams v. Paul Revere Life Insurance Co. (1997), 1997 1418 (ON CA), 34 O.R. (3d) 161 (C.A.), at p. 175; Kozel v. The Personal Insurance Company, 2014 ONCA 130, at para. 61. The insured’s subjective knowledge and the insured’s reaction upon learning of the breach is important.11
52In deposit cases, relief from forfeiture has been declined in cases featuring the following factors:
An attempt to back out of a purchase because of a falling market: Grandfield Homes (Kenton) Ltd. v. Li, 2021 ONSC 2670, at para. 57.
A refusal to pay a modest amount to cover the seller’s additional legal fees: McGregor v. Tucci, 2021 ONSC 4379, at para. 23.
A failure to make a timely request to extend closing: Rahbar, at paras. 16, 26.
A failure to promptly reply to inquiries from the seller about the status of financing: Bluerobin Inc v. Kilian, 2023 ONSC 3391, at para. 41.
53Courts are no more forgiving where the buyer has candidly acknowledged it has been unable to secure financing: Sinha v. Shabestari, 2018 ONSC 298, at para. 2.
54In the case before me, the defendant states she was unable to finance the purchase, although she provides little detail to support this. The defendant can be criticized for not ensuring her daughter was on board before entering into the contract.
55However, her conduct is not comparable to the wilful and continued disregard of the plaintiffs’ rights that occurred in Shiloh Spinners. Her conduct after realizing her error generally seems reasonable. She let the plaintiffs know immediately. She acknowledged liability to pay the difference between the amount of her offer and the ultimate sale price. Having said that, I have no evidence as to when the defendant made that acknowledgement. Also, she did not advance the funds for the damages, but on this point, I have no evidence as to when she was made aware of the amount of the plaintiffs’ damages.
56Overall, this element weighs against the claim for relief from forfeiture, but not strongly.
Gravity of the Breach
57This element “looks at both the nature of the breach itself and the impact of that breach on the contractual rights of the other party”: Monk, at para. 95; 8477 Darlington Crescent, at para. 91. The cases tend to focus on the impact of the breach on the party opposing relief from forfeiture.12 This makes sense, because the previous element focuses on the conduct of the party seeking relief from forfeiture.
58In this case, in one sense, the gravity of the defendant’s breach of the APS was serious. She fully walked away from the deal with little explanation to the plaintiffs. The 7:38 a.m. email from her agent to the plaintiffs’ agent simply said: “I spoke with my client last night and she [has a] family issue, she won’t be able to proceed with the deal. My sincere apologies for the inconvenience. Please find attached signed mutual release. Good luck.” However, the consequences to the plaintiffs were minimal. They simply carried on with their efforts to sell the property. It took them a further week to sell the property, and they had to go through another negotiation. Those are minor consequences. I find the “gravity of the breach” element here comparable to the circumstance in Kozel, where the insured breached not only a statutory condition of her policy but also the licencing regulations for Ontario drivers. Nevertheless, the insurer received its premium on time and never faced an increased risk because of the breach. The breach caused no meaningful consequences to the insurer, just as here the breach caused no meaningful consequences to the plaintiffs (apart from the damages for which the defendant has acknowledged liability).
59This factor does not weigh against the request for relief from forfeiture in this case.
Securing the Payment of Money
60Wilberforce L.J. in Shiloh Spinners considered this element a pre-condition to the courts in England having jurisdiction to grant relief from forfeiture. McKinlay J. in Liscumb described this element as a question to be considered in whether relief from forfeiture should be granted. Either way, since the purpose of a deposit is always to secure the payment of money (Benedetto, at para. 14), this element of the Liscumb formulation is always met in deposit cases.
61This factor does not weigh against the request for relief from forfeiture in this case.
Disparity Between Damages and Amount Forfeited
62The “disparity” factor is found in both the Saskatchewan River Bungalows and the Stockloser formulations. In insurance cases, when courts consider this element, the inquiry “involves comparison of the disparity between the loss of coverage and the extent of the damage caused by the insured’s breach”: Kozel, at para. 69. In deposit cases, courts frequently consider the size of the deposit compared to the purchase price of the property. This is incorrect if done when addressing the disparity element, because both the Saskatchewan River Bungalows and the Stockloser tests refer to the discrepancy between the value of the property forfeited and the damages suffered. However, as I will discuss below, the disparity between the deposit and the purchase price is an appropriate consideration when assessing the “unconscionability” element.
63It is difficult to reconcile the “disparity” element and Canadian law surrounding deposits: as noted above, the seller can keep the deposit even if the seller sustains no damages. There are many cases where the damages are zero or where the seller in fact benefitted from the breach by obtaining a higher price from a subsequent buyer. In proportion to the damages suffered, the forfeiture is huge in these cases. When relief from forfeiture is denied in these cases (which almost always occurs), Canadian courts effectively place no weight on the “disparity” element.
64In the case before me, the amount to be forfeited is $40,000 and the plaintiffs’ damages are $12,473. This is a large discrepancy in that the deposit is over three times the damages. This factor weighs in favour of relief from forfeiture.
Unconscionability
65In Redstone, at para. 25, the Court of Appeal stated that “the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.” It is indeed the case that a finding of unconscionability in deposit cases is exceptional. I have reviewed dozens of deposit cases and have yet to find a case in which it was considered unconscionable for the seller to keep the deposit.
66In the one deposit case I did find where a court would have granted relief from forfeiture (Kirshenblatt), the court applied the test in Saskatchewan River Bungalows, not the test in Stockloser. In fairness, although Goldstein J. did not specifically make a finding of unconscionability, he did remark that the defendant may have been “playing a game of some kind.” Under the described facts, it might be said that the defendant had “somewhat sharply” exercised her rights, as Denning L.J. described in Stockloser, at p. 638. Goldstein J. also said that if the defendant was allowed to keep the deposit it would be a $190,000 windfall. As a result, the plaintiff in Kirshenblatt would likely have been entitled to relief from forfeiture even if the Stockloser test had been applied.
67The doctrine of unconscionability was recently reviewed and explained in Uber v. Heller, 2020 SCC 16. Under that doctrine, a contract may be unenforceable if it is unconscionable. This requires both an inequality of bargaining power and a resulting improvident bargain: Uber, at para. 65. Unequal bargaining power and vulnerability feature strongly in the doctrine. But as Brown J. noted in his concurring judgment in Uber, unconscionability refers not only to the doctrine, but “may also refer, in a more general sense, to a unifying theme or organizing equitable principle, or to a constituent element of a distinct legal test”: Uber, at para. 149.
68In Stockloser, Denning L.J. used the term “unconscionable” “in a broad, non-technical sense”: Ontario Law Reform Commission, Report on Amendment of the Law of Contract (Toronto: Ministry of the Attorney General,1987), at p. 149. A careful review of the cases to which he referred reveals that, for Denning L.J., the term “unconscionable” alluded to oppression, extraction of an extravagant sum, and sharp exercise of contractual rights. The facts of Stockloser and the cases cited by Denning L.J. did not involve vulnerable persons or significant unequal bargaining power. Denning L.J. was not referring to the doctrine of unconscionability.
69However, in Canadian deposit cases, courts frequently reference elements relevant to the unconscionability doctrine 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”: Redstone, at para. 30; Azzarello, at para. 67; Rahbar, at para. 56; Aylward v. Rebuild Response Group Inc., 2020 ONCA 62, at para. 11. Parties are never able to establish these factors in real estate purchase deposit cases. In one recent case, the buyer requested relief from forfeiture and raised her vulnerability (because of her mental state) in support of her claim: Mouralian v. Grouleau, 2022 ONSC 2925, at para. 17. She was not successful.
70Can a disproportionately large deposit be unconscionable? In Redstone, at para. 26, the Ontario Court of Appeal (relying on Workers Trust) said it could: “While in some circumstances a disproportionately large deposit, without more, could be found to be unconscionable, this is not such a case.” This statement is consistent with an illustration given by Denning L.J. in Stockloser, at p. 638:
[S]uppose that a vendor of property, in lieu of the usual ten per cent. deposit, stipulates for an initial payment of fifty per cent. of the price as a deposit and a part payment, and later, when the purchaser fails to complete, the vendor re-sells the property at a profit and, in addition, claims to forfeit the fifty per cent. deposit. Surely the court will relieve against the forfeiture. The vendor cannot forestall this equity by describing an extravagant sum as a deposit, any more than he can recover a penalty by calling it liquidated damages.
71No Canadian case that I could find has found a deposit so large as to be unconscionable. Canadian courts have found that deposits of 20%, 25% and 28% were reasonable deposits and declined relief from forfeiture: Liu; Hinkson Holdings; Nawara v. Riverstone, 2019 ONSC 111.
72The reason it is so difficult to establish unconscionability in a deposit case is that the buyer has always agreed to pay the deposit. In addition, real estate deals rarely involve vulnerable parties or significant unequal bargaining power. If the deposit is for a reasonable amount in relation to the purchase price, and if the contract does not proceed due to the breach of the buyer, it is difficult to see how it could be unconscionable to make the buyer pay what it agreed and expected to pay.
73Unconscionability is not a factor in this case. At 6.3% of the purchase price, the deposit was reasonable. The plaintiffs can in no way be accused of oppression, extraction of an extravagant sum, or sharp exercise of contractual rights. Under the Stockloser formulation, this factor weighs against from relief from forfeiture.
The Correct Test for Relief from Forfeiture in Deposit Cases
74In my view of this case, the result is dictated by the selection of the test. Weighing the factors in the Saskatchewan River Bungalows test favours relief from forfeiture, but application of the Stockloser test requires that relief from forfeiture be denied.
75In their supplementary submissions, both parties said I should apply the Shiloh Spinners formulation of the test for relief from forfeiture, although they each claim that application of the test yields the result that favours their position. I disagree with both parties’ submissions on this point. I find the correct approach in this case is to apply the Stockloser test.
76It is true that in Saskatchewan River Bungalows, the Supreme Court of Canada referred to the Alberta equivalent of s. 98 of the CJA and appeared to be stating a general test for relief from forfeiture. However, there are good reasons to think deposit cases are an exception, including the following.
Saskatchewan River Bungalows was not a deposit case and none of the cases it referred to were deposit cases. Prior to Saskatchewan River Bungalows the Supreme Court, the British Columbia Court of Appeal, and the Alberta Court of Appeal had all relied on, applied, or at least responded favourably to Stockloser in deposit or part payment cases. (S.C.C.: Dimensional Investments Limited v. The Queen, 1967 85 (SCC), [1968] S.C.R. 93, at p. 98-99. B.C.C.A.: Hughes v. Lukuvka (1970), 1970 800 (BC CA), 14 D.L.R. (3d) 110, at p. 112; B.C. Development Corp. v. NAB Holdings Ltd. (1986), 1986 977 (BC CA), 6 B.C.L.R. (2d) 145, at para. 36. Alta. C.A.: 216927 Alberta Ltd. v. Fox Creek (Town), 1990 ABCA 29, at para. 42-45; Popyk v. Western Savings and Loan Association (1969), 1969 717 (AB CA), 3 D.L.R. (3d) 511, at p. 518-519.) This is not to mention the numerous lower court decisions that had applied Stockloser before Saskatchewan River Bungalows was decided in 1994. Based on the absence of any mention of Stockloser in Saskatchewan River Bungalows, it may be inferred that the Supreme Court did not intend to address deposit and part payment cases.
Since Saskatchewan River Bungalows was decided, a large majority of the deposit cases, including appellate cases, have applied the Stockloser test.
Application of the Saskatchewan River Bungalows test can be awkward in deposit cases. If we consider a case in which the seller sustains no damages, for the outcome of the Saskatchewan River Bungalows test to align with deposit law, the “disparity” element cannot be applied or must be given no weight.
In contrast, Stockloser aligns nicely with deposit law. The “unconscionability” element permits consideration of the expectation of the buyer surrounding forfeiture of the deposit as well as the amount of the deposit relative to the purchase price. Forfeiture of the deposit will rarely be unconscionable.
77As I have already noted, the Court of Appeal has not resolved the question of which test for relief from forfeiture ought to be applied in deposit cases. In Ching, the court said, at para. 74, that resolution of the question “is best left for another time and another case where the subject is fully argued and briefed.” The court applied Saskatchewan River Bungalows as that is how the parties had framed the case. But in the subsequent decision of Rahbar, the court applied the test from Stockloser.
Application
78As I said at the outset, it does strike me as unfair for the plaintiffs to recover $40,000 in the circumstances of this case. The fact that the MLS listing never changed from “for sale” to “sold” suggests that it was unlikely the plaintiffs sustained any “loss in bargaining power resulting from the vendor having revealed to the market the price at which the vendor had been willing to sell” (Benedetto, at para. 6). The deposit is more than three times the damages incurred, and I consider that to be a large discrepancy between the amount forfeited and the damages incurred. A $40,000 award represents a $27,527 windfall to the plaintiffs. The defendant’s immediate change of heart, communicated immediately, is a unique circumstance.
79However, I have not been referred to, nor have I found, any case to suggest that an immediate change of heart is a significant factor to be considered in the relief from forfeiture analysis. Forfeiture of the deposit cannot be said to be unconscionable. It was a modest deposit and the defendant agreed to pay it. Much larger discrepancies have been found to be “not unconscionable” by many other superior courts and courts of appeal. Unconscionability should be measured by reference to precedent, not an individual judge’s notion of what is fair in any particular case. Practitioners and the public require predictable outcomes, not solely determined by reference to the conscience of the judge assessing the claim for relief from forfeiture.
80The vast weight of authority supports the plaintiffs’ position. The request for relief from forfeiture is therefore dismissed.
Is the plaintiff entitled to punitive damages?
81The plaintiff says punitive damages should be ordered to punish the defendant’s conduct and as a deterrent for others. I disagree. The defendant has been required to pay $40,000. That is ample disincentive to anyone considering an intentional breach of contract. The defendant’s conduct does not meet the requirements for punitive damages.
Costs
82At the hearing, counsel agreed that I ought to proceed to decide costs without requiring additional written submissions. They agreed that I should determine the costs based on the offers to settle and costs outlines that they have filed. The parties exchanged offers on March 17, 2023. The plaintiff offered to settle for $35,000. The offer was silent on costs. Applying rule 49.07(5)(b), this would mean $35,000 plus costs. The defendant offered to settle for $12,500 inclusive of prejudgment interest and costs.
83The plaintiffs’ offer was more favourable for the defendant than the result, so the plaintiffs are presumptively entitled to substantial indemnity costs from the date of the offer.
84In Payer v. Peerless Plating Rack Co. (1998), 1998 1172 (ON CA), 37 O.R. (3d) 781 (C.A.), the Court of Appeal declined to award costs to a party that had received a windfall. In Ching, the Court of Appeal followed and applied Payer, even though the Ching trial judge had declined to characterize the respondent’s recovery as a windfall in the relief from forfeiture analysis. However, in Rahbar, at para. 68, the Court of Appeal distinguished Ching, saying: “this case is distinguishable from the costs decision of this court in Ching since unlike in Ching, the buyers’ loss was in no way the responsibility of the sellers.” In this regard, this case is similar to Rahbar and the plaintiffs are entitled to their costs on a partial indemnity basis to the date of the offer to settle and on a substantial indemnity basis from the date of the offer to settle.
85The plaintiffs claimed $9,911.50 in total on a full indemnity basis. This does not include the efforts directed at the supplementary submissions I required. It is a reasonable full indemnity bill. Unfortunately, from the bill of costs I cannot with confidence separate the work done before and after the offer, other than to say the summary judgment motion attendance was after the offer. In the circumstances I find that $8,000 all inclusive is an appropriate award for costs.
Disposition
86The plaintiffs shall have judgment as follows.
The defendant shall pay the plaintiffs $40,000.
The defendant shall pay the plaintiffs prejudgment interest on the above amount from April 2, 2022 to today’s date at the applicable prejudgment interest rate.
The defendant shall pay the plaintiffs the costs of this application, fixed in the all-inclusive amount of $8,000.00.
Chown J.
Released: December 5, 2023
Footnotes
- Even in Benedetto, the Court of Appeal de-emphasized the compensation rationale, saying, at para. 14: “As stated above, a forfeited deposit does not constitute damages for breach of contract, but stands as security for the performance of the contract.” As discussed below, the seller can keep a deposit even if the buyer’s breach does not cause the seller any damages.
- Also see the speech of Hodge L.J. in Cavendish Square Holding BV v. El Makdessi; ParkingEye Ltd v. Beavis, [2015] UKSC 67, at para. 238: “I conclude therefore that in both English law and Scots law (a) a deposit which is not reasonable as earnest money may be challenged as a penalty and (b) where the stipulated deposit exceeds the percentage set by long established practice the vendor must show special circumstances to justify that deposit if it is not to be treated as an unenforceable penalty.” See also Linggi Plantations Ltd. v. Jagatheesan, [1972] 1 M.L.J. 89, at p. 94, as cited in Workers Trust, at p. 374: “[A] reasonable deposit has always been regarded as a guarantee of performance as well as a payment on account, and its forfeiture has never been regarded as a penalty in English law or common English usage.”
- Similarly, use of the words “liquidated damages” instead of “penalty” is prima facie evidence of the parties’ intention but is not determinative: Dunlop Pneumatic Tyre Co Ltd v. New Garage and Motor Co Ltd, [1914-15] All E.R. Rep. 739 at p. 741 (H.L.).
- For example, in Grandeur Homes Inc. v. Zeng, 2021 ONSC 4005 (Div. Ct.), where the contract in question was a construction contract and the defendant owner did not pay progress draws as required, and where the contract said that the deposit was to be credited “towards the final progress payment,” the deposit did not reduce the damages payable for the earlier unpaid progress draws. Rather, the deposit was forfeit in its entirety.
- It should be observed that relying on Agosti for the proposition that it does not matter whether the deposit is paid or unpaid is a little convoluted. The trial judge denied the seller’s claim for the deposit. On appeal, the B.C.C.A. said, at para. 8, that “the focus of the chambers judge on whether the deposit was paid or unpaid when the appellants terminated the contract was misplaced,” but dismissed the appeal on other grounds. Four years later, in Tang, a five-member panel of the B.C.C.A. re-considered Agosti and held it was wrongly decided, but Tang did not involve an unpaid deposit and the court did not address the holding that the chambers judge was wrong to have focussed on whether the deposit was paid or unpaid. In result, that holding was not overturned in Tang.
- See para. [16], above.
- Every common law jurisdiction in Canada has a statutory provision empowering courts to grant relief from forfeiture.
- A controversy over whether the three elements are factors to weigh or a three-part test requiring satisfaction of each part was resolved, at least in Ontario, in Monk v. Farmers’ Mutual Insurance Company (Lindsay), 2019 ONCA 616, at paras. 88-93. They are factors that should be considered and balanced, and “the examination of the reasonableness of the breaching party’s conduct lies at the heart of the relief from forfeiture analysis.”
- Eric Andrews, “The Penalty Doctrine, Relief against Forfeiture, and Unconscionability in Anglo-Canadian Law” (2023) 86:2 Sask. L. Rev. 198, at p. 222, 225 and 239. Based on my own research I agree with this conclusion.
- Ibid., at p. 222.
- Thus, in Kozel, where the applicant was unaware of her breach until after the loss (a car accident) but had paid her premiums, the Court of Appeal granted relief from forfeiture. In Saskatchewan River Bunglaows, where the plaintiffs did not pay the premiums until three months after becoming aware they were overdue, the Supreme Court of Canada did not grant relief from forfeiture. And in Paul Revere, the Court of Appeal did not grant relief from forfeiture due to the insured’s ongoing negligence in failing to pay the premiums.
- For example, in Kozel, at para. 68, the breach “had no impact on the respondent’s ability to drive safely or on the contractual rights of the insurance company.” In 1497777 Ontario Inc. v. Leon’s Furniture Ltd. (2003), 2003 50106 (ON CA), 67 O.R. (3d) 206, at paras. 75-78, leave to appeal refused, [2003] S.C.C.A. No. 506, to decide whether breach was serious (subleasing without permission), it was necessary to consider whether the tenant would be successful on an application to determine whether the landlord was withholding leave to sublet unreasonably. In Dube v. RBC Life Insurance Company, 2015 ONCA 641, the breach (late reporting of and late application for a disability claim) resulted in no or little prejudice to the defendant, and the “prejudice was outweighed by the harm” to the plaintiff.