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Deposits - Relief from Forfeiture
COMMENT
Relief from Forfeiture is a frequently-related legal topic in deposit cases, as that doctrine can except the strict application of deposit law. As well, the interaction of deposit and 'relief from forfeiture' law usually involves the law of Contract - Unconscionability.
. Pleasant Developments Inc. v. Iyer
In Pleasant Developments Inc. v. Iyer (Div Ct, 2006) the Divisional Court held that a deposit towards the purchase of a home may be retained by the vendor on breach by purchaser unless expressly agreed otherwise. There is an exception where the amount of deposit forfeited is punitive or out of proportion to the losses suffered, in which the case law of contractual penalties applies, or where forfeiture is unconscionable:(ii) Were the Respondents entitled to relief against forfeiture?
[11] The trial judge found that relief from forfeiture of the deposit was available to the Respondents in the circumstances of this case. The trial judge found the reason the Appellant proved no damages was because there were no losses or very minimal ones and keeping the deposit would result in a $10,000 windfall for the vendor.
[12] I accept that there are circumstances where the loss of a deposit may be subject to relief from forfeiture. If there is relief, the deposit is returnable, in whole or in part, to the defaulting purchaser. If the Court regards the forfeiture of the deposit as a penalty, then regardless of the wording of the contract, the Court retains the power to relieve the penalty. See Perell v. Engell, supra, at p. 187.
[13] The Courts will award relief from forfeiture of the purchaser’s deposit only where it is established that the sum is out of all proportion to the losses suffered and that it would be unconscionable for the vendor to retain the money. See Stockloser v. Johnson, [1954] 1 Q.B. 476. Where these requirements are not made out, the Courts will allow the forfeiture of the deposit without an inquiry into the extent of the vendor’s damages. See Craig v. Mohawk Metal Ltd. (1975), 1975 CanLII 1172 (ON SC), 61 D.L.R. (3d) 588 (Ont. H.C.J.).
[14] The onus is on the party seeking to invalidate a clause to show that it inflicts a penalty, rather than determines the damages payable by the guilty party. But even where a clause does inflict a penalty, it will not always be unenforceable where, for example, it is not unconscionable. See Fridman, The Law of Contracts in Canada, 4th ed. (Toronto: Carswell, 1999) at p. 817.
[15] I am of the view that the trial judge erred in awarding the Respondents relief from forfeiture of the deposit. In my view, there was not a sufficient evidentiary basis to suggest, as the trial judge did, that the reason the Appellant proved no damages was because there were no losses or very minimal ones and keeping the deposit would result in a $10,000 windfall for the Appellant. As I have indicated previously in these reasons, it was not necessary for the Appellant to prove damages in order to forfeit the Respondents’ deposit. Accordingly, it was an error for the trial judge to infer that the failure of the Appellant to prove damages was evidence of a windfall for the Appellant.
[16] The onus was on the Respondents to prove that the sum of the deposit is out of all proportion to the losses suffered and that it would be unconscionable for the Appellant to retain the deposit. In my view, on the facts in this case, it was an error to conclude that the Respondents had met that onus. At the date of the Agreement of Purchase and Sale the Respondents were required to pay a deposit of $10,000 towards a purchase price of $280,900 or 3.6% of the purchase price. In all the circumstances, I am not satisfied there was a sufficient evidentiary basis for the trial judge to have concluded that the Respondents’ deposit is out of all proportion to the losses suffered and that it would be unconscionable for the Appellant to retain the deposit. Accordingly, I am of the view the trial judge erred in finding that relief from forfeiture of the deposit was available to the Respondents in the circumstances of this case. . Rahbar v. Parvizi
In Rahbar v. Parvizi (Ont CA, 2023) the Court of Appeal considered relief from forfeiture of a deposit (here of an APS deposit):[51] Mindful of the purposive underpinnings of forfeiture of deposits, this court has considered two factors in assessing whether relief from forfeiture pursuant to s. 98 of the Courts of Justice Act is appropriate, namely whether (i) the deposit is “out of all proportion” to the damages suffered by the vendor, and (ii) it would be unconscionable for the vendor to retain the deposit: Redstone Enterprises, at paras. 15ff; Jesan Real Estate Ltd. v. Doyle, 2020 ONCA 714, at paras. 54ff; and Azzarello v. Shawqi, 2019 ONCA 820, 439 D.L.R. (4th) 127, at para. 47, leave to appeal refused, [2019] S.C.C.A. No. 521. As noted in Redstone, “the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case”: at para. 25. . Naeem v. Bowmanville Lakebreeze West Village Ltd. [RFP-deposit test]
In Naeem v. Bowmanville Lakebreeze West Village Ltd. (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal, here considering the test for relief from forfeiture in an APS deposit context:[5] The appellant’s main argument is that the motion judge applied the wrong legal test for granting relief from forfeiture. Citing Shah v. Southdown Towns Ltd., 2017 ONSC 5391 and Wang v. 2426483 Ontario Limited, 2020 ONSC 3368, the appellant submits that “relief from forfeiture is not available to a party as a remedy where the contractual breach was entirely [that party’s] fault and within [that party’s] control”.
[6] We disagree. The motion judge correctly referred to and relied on the factors set out by this court in Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 137 O.R. (3d) 374, which has been followed in numerous other cases: see e.g., Ching v. Pier 27 Toronto Inc., 2021 ONCA 551; Azzarello v. Shawqi, 2019 ONCA 820, leave to appeal refused [2019] S.C.C.A. No. 521; Rahbar v. Parvizi, 2023 ONCA 522, 485 D.L.R. (4th) 239. Redstone directs judges to consider two main factors: (i) whether the forfeited deposit is “out of all proportion to the damages suffered” by the vendor; and (ii) whether it would be unconscionable for the vendor to retain the deposit. As Lauwers J.A. explained in Redstone, at para. 30:The list of the indicia of unconscionability is never closed, especially since they are context-specific. But the cases suggest several useful factors such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach and the conduct of the parties. [7] Significantly, Redstone does not make it a precondition for obtaining relief from forfeiture that the party seeking relief demonstrate that they were not to blame for the contractual breach. Although the would-be buyer’s conduct will often be highly relevant to the question of whether it would be unconscionable to permit the vendor to keep the deposit, it is only one factor to be considered.
[8] As Pepall J.A. noted in Ching, at para. 78:[R]elief from forfeiture is an equitable and discretionary remedy. Absent a legal or palpable and overriding error, it is not for this court to substitute its discretion for that of the trial judge. [9] We are not persuaded that the motion judge in this case committed any palpable and overriding errors. Citing Redstone, she correctly noted that “[a] finding of unconscionability must be exceptional and strongly compelled on the facts of the case”. She found that this high standard was met on the facts here.
[10] One factor the motion judge relied on was her conclusion that the appellant is a sophisticated party that is “in the business of negotiating agreements of purchase and sale with prospective homebuyers”, whereas the respondent “is a widow who worked two jobs while undergoing cancer treatment in order to save enough money to put the deposit down on a home for her family”. Another factor she took into account was that the appellant had apparently suffered no loss as a result of the transaction not closing.
[11] Perhaps most significantly, however, the motion judge was sharply critical of the appellant’s conduct in the years before the transaction fell through. After extending the closing date twice in accordance with the notice provisions of the APS, the appellant purported to extend the “firm” closing date of May 14, 2018 to a date in March 2019, despite giving the respondent insufficient notice.
[12] When the respondent then requested a few months later to have the closing date pushed back further to late April or the first week of May 2019, the appellant replied that the date could not be moved past April 23, 2019, or else the respondent would lose her right to compensation for the delay in completing the house. The motion judge found as a fact that when the respondent agreed to the April 23, 2019 closing date she “was not told, nor was she aware, that she did not have to sign the amendment and that the APS was voidable at this juncture.” The motion judge found further that the appellant’s representative had “deliberately” misled the respondent “into thinking she had no choice but to set a new date”.
[13] In our view, the motion judge was entitled to conclude as she did, on the facts as she found them, that it would be unconscionable to permit the appellant to keep the deposit. . Redstone Enterprises Ltd. v. Simple Technology Inc.
In Redstone Enterprises Ltd. v. Simple Technology Inc. (Ont CA, 2017) the Court of Appeal sets out the considerations involved in determining whether a contractual deposit may be forfeited and when statutory (CJA) relief from forfeiture may be granted, here focussing particularly on the issue of unconscionability:[15] Section 98 of the Courts of Justice Act provides simply that: “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” The application judge referred to Varajao in specifying the two steps of the test as:
1. whether the forfeited deposit was out of all proportion to the damages suffered, and
2. whether it would be unconscionable for the seller to retain the deposit.
This is sometimes referred to as the test in Stockloser v. Johnson, [1954] 1 Q.B. 476 (C.A.). .....
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(2) Is the Forfeiture Unconscionable?
[18] The analysis of unconscionability requires the court to step back and consider the full commercial context.
[19] Deposits are commonplace in the operation of the market, especially for larger assets such as residential and commercial real estate. Their purpose was explored at learned length by Newbury J.A. speaking for a five-person panel in Tang v. Zhang, 2013 BCCA 52 (CanLII), 359 D.L.R. (4th) 104. At issue in the case was the forfeiture of a deposit of $100,000 on a residential real estate purchase of slightly more than $2 million. The trial judge relieved against forfeiture on the basis that the vendor had been able to re-sell the property for more than the original purchase price so that he had not suffered any loss. The court of appeal reversed the trial decision.
[20] While Newbury J.A. rejected the argument that simply labelling a payment as a deposit immunized it against the court’s equitable jurisdiction to relieve from forfeiture, she declined relief. She distilled several relevant principles from English and Canadian case law, at para. 30. Two are especially pertinent to this appeal:A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependant on proof of damages by the other party. If the contract is performed, the deposit is applied to the purchase price;
The deposit constitutes an exception to the usual rule that a sum subject to forfeiture on the breach of a contract is an unlawful penalty unless it represents a genuine pre-estimate of damages. However, where the deposit is of such an amount that the seller's retention of it would be penal or unconscionable, the court may relieve against forfeiture…. [21] The decision of this court in Peachtree II Associates-Dallas L.P. v. 857486 Ontario Ltd. (2005), 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A.), leave to appeal refused, [2005] S.C.C.A. No. 420, is instructive, even though it involved stipulated penalty clauses, not deposits. The case explored the distinction between penalties and forfeitures.
[22] Justice Sharpe noted, at paras. 31-32:[C]ourts should, if at all possible, avoid classifying contractual clauses as penalties and, when faced with a choice between considering stipulated remedies as penalties or forfeitures, favour the latter.
[C]ourts should, whenever possible, favour analysis on the basis of equitable principles and unconscionability over the strict common law rule pertaining to penalty clauses. Accordingly, he pointed out that: “the strict rule of the common law refusing to enforce penalty clauses should not be extended” (at para. 33). The reason, he explained, is “the policy of upholding freedom of contract” (at para. 34).
[23] Justice Sharpe continued, noting that: “Judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowing parties to define for themselves the consequences of breach” (at para. 34). He cited in support Dickson J., who decried the prohibition of penalties as “blatant interference with freedom of contract”, and advocated treating both penalties and forfeitures under the rubric of unconscionability: Elsley v. J.G. Collins Insurance Agencies Ltd., 1978 CanLII 7 (SCC), [1978] 2 S.C.R. 916 at p. 937, 83 D.L.R. (3d) 1, 1978 CarswellOnt 1235, at para. 47 (WL Can).
[24] The point is well made in Union Eagle Ltd. v. Golden Achievement Ltd., [1997] UKPC 5, [1997] A.C. 514, by Lord Hoffmann for the Judicial Committee of the Privy Council said, at p. 519 (A.C.)[I]n many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be "unconscionable" is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic. [25] I would agree that the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.
[26] Can unconscionability be established purely on the basis of a disproportionality between the damages suffered and the amount forfeited? While in some circumstances a disproportionately large deposit, without more, could be found to be unconscionable, this is not such a case.
[27] As to quantum, Newbury J.A. quoted, at para. 24 of Tang, the statement of the Privy Council in Workers Trust & Merchant Bank Ltd v. Dojap Investments Ltd., [1993] A.C. 573 (P.C.), at p. 578:In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages, being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10 per cent of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract. [Emphasis in Tang.] [28]Justice Newbury cited one case in which a deposit at 20% was found to be reasonable, but added, at para. 27, the amount of the deposit must not be excessive. I agree, but I would be reluctant to specify a numerical percentage, since much turns on the context. I note, however, that in this case the deposit was slightly more than 7%. There is no evidence that this was a commercially unreasonable deposit.
[29] Where, as here, there is no gross disproportionality in the size of the deposit, the court must consider other indicia of unconscionability. This is an analysis the application judge did not undertake. By failing to do so, the he erred in law.
[30] The list of the indicia of unconscionability is never closed, especially since they are context-specific. But the cases suggest several useful factors such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties. . Mouralian v. Groleau
In Mouralian v. Groleau (Ont CA, 2024) the Ontario Court of Appeal considers the test for forfeiture of a contractual deposit, here respecting an real estate APS:[6] The motion judge properly considered the applicable two-part test for forfeiture from Stockloser v. Johnson, [1954] 1 Q.B. 476 (C.A.): (1) whether the forfeited deposit was out of all proportion to the damages suffered; and (2) whether it would be unconscionable for the seller to retain the deposit.
[7] The motion judge assumed that the first part of the test was made out, primarily because the respondent did not suffer a loss, and turned to the question of unconscionability. Having considered a variety of indicia of unconscionability, she determined that it would not be unconscionable for the respondent to retain the deposit. She was not persuaded that the appellant lacked capacity to sign the APS. She found that there was no inequality of bargaining power: the parties had never met when the APS was concluded, the respondent was unaware of the appellant’s circumstances, each party had an agent advising them, the APS was negotiated at arms-length, and the appellant had some past experience buying real estate. Moreover, the motion judge observed that the appellant did not seek to repudiate the agreement at any time until her financing fell through and had admitted on cross-examination that she had intended to complete the transaction. Relatedly, the motion judge concluded that the bargain between the appellant and the respondent was not improvident, as reflected by the appellant’s stated intention to close the transaction.
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