Real Estate Deposits & Pre-Incorporation ContractsBenedetto v. 2453912 Ontario Inc., 2019 ONCA 149 (CanLII)
Keywords: Deposits; Business Corporations Act, R.S.O. 1990, c. B.16
The Appellant, acting on behalf of a pre-incorporated business, signs an agreement for the purchase and sale of real property which stipulates he is signing as a buyer “in trust for a company to be incorporated without any personal liabilities”. (See para. 2).
The Appellant provides a $100,000 deposit to secure the purchase. The transaction does not close. The Appellant then seeks a return of the deposit. The Respondent refuses.
A Motion Judge finds the Respondent should keep the deposit; the provisions of the Business Corporations Act, R.S.O. 1990, c. B.16 addressing pre-incorporation contracts do not displace the common law rules governing deposits in real estate transactions.
The Appellant appeals on the basis that the Motion Judge erred in his interpretation of s. 21(4) of the Business Corporations Act and in his interpretation of the contract itself. The Court of Appeal dismisses the appeal (from the bench, with reasons to follow; these are the reasons).
This decision speaks to fundamental concepts in contractual relationships. For example, what is the real function and purpose of a deposit? For the Court the risk that a deposit may be forfeit in the event of non-performance provides an incentive to complete the purchase. In the event the deal doesn’t close, it also provides compensation 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”. (See para. 6).
The Court of Appeal cited with approval the following propositions with respect to deposits as set out by the Motions Judge and derived from Tang v. Zhang, 2013 BCCA 52 (CanLII), Comonsents Inc. v. Hetherington Welch Design Ltd., 2006 CanLII 33779 (Ont. S.C.); and Howe v. Smith, 27 Ch D 89, 53 LJ Ch 1055:
· a deposit is not really part of a contract of purchase and sale, it “stands on its own”;
- a deposit is an “ancient invention of the law designed to motivate contracting parties to carry through with their bargains”;
- a deposit is “something which binds the contract and guarantees its performance”; and
- a deposit 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” (See para. 7).
It is generally understood that, where a purchaser provides a deposit to secure performance of a contract but later fails to close the transaction, the deposit is forfeit unless the parties bargained to the contrary. For the Court of Appeal, this proposition of law rests on the following jurisprudence: Howe v. Smith (1884), 27 Ch. D. 89 (C.A.) and March Bothers & Wells v. Banton (1911), 1911 CanLII 74 (SCC), 45 S.C.R. 338. (See para. 6).
In this case, the Court of Appeal was also dealing with the fact the Appellant was a person acting as a promotor or functionary within the meaning of s. 21(1) of the Business Corporations Act applies. That section provides “…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.” (See para. 9).
Citing its previous decision in Szecket v. Huang (1998), 1998 CanLII 4425 (ON CA) at para. 33, the Court of Appeal repeated that the “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).” (See para. 10).
Notwithstanding what might be perceived as the harshness of these rules, the Court of Appeal explained that parties can always contract otherwise. The question in this case was whether the language expressly contained in the agreement was broad enough to exclude the Appellant’s personal liability with respect to the deposit. In other words, do the words “without any personal liabilities” exclude the deposit in this case? (See para. 15).
For the Court of Appeal, the answer is “no”. The Motion Judge made no error in interpreting “without any personal liabilities” as not applying to the deposit. (See para. 16). Furthermore, the Court of Appeal found the Motion Judge did not err in citing and relying on the decision in Adamis v. Aviks,  CarswellOnt 3436 (for the Court of Appeal, a decision which interprets “similar language” in a “similar matter”). (See para. 18).
Counsel for the Appellant: Arieh Bloom (Tupman & Bloom LLP, Toronto)
Counsel for the Respondent: Vladimira Ivanov (Ross Barristers, Toronto)