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The Second Opinion: Can You Get Your Money Back? The B.C. Court of Appeal Addresses The Forfeiture of Deposits (Again)

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Posted in The Second Opinion
Hovsep Afarian

Can a party who has failed to consummate a transaction get back a “deposit”?  The British Columbia Court of Appeal considered this issue once again in the recent case of Amiri v. One West Holdings Ltd., 2013 BCCA 155.

The facts of the Amiri decision were as follows.  A businessman (“Purchaser”) purchased, in 2005, a condominium that was to be built for a total price of almost $3 million.  The purchase agreement (the “Agreement”) provided for the payment of a total “deposit” in the amount of approximately $750,000.  The Agreement specifically stated that “[i]f the Purchaser is in breach of any of the covenants or obligations hereunder, the Vendor may, at its election, retain the Deposit…as liquidated damages.”  The Agreement went on to state that “[t]he parties…agree that [the Deposit] constitutes a genuine pre-estimate of the minimum damages suffered by the Vendor” and that the “Vendor reserves the right to claim for further damages.”  Time was of the essence for the Agreement.

The Vendor provided notice to the Purchaser that the closing date was going to be March 15, 2010.  The Purchaser was abroad and received the notice in early March.  However, he suffered a motor vehicle accident and was hospitalized.  Moreover, he had significant business obligations arising from his foreign company’s financial year-end.  The Vendor agreed to extend the closing date to March 29, 2010 (the “Extension Agreement”).  The Extension Agreement provided for the release of the Deposit to the Vendor in the event that the Purchaser failed to complete the purchase.

The Purchaser, who had since return from abroad, encountered further difficulty in obtaining the necessary financing (e.g., the lending institution had insisted that the documentation be signed by his wife — who was still abroad — in person,).  The closing date was extended further to April 8, 2010.  Again, as a condition of the extension, it was reiterated that time was of the essence and that the deposit would be forfeited if the purchase was not completed on the new closing date.

The Purchaser was ultimately eight days late in securing the necessary funds to close the deal. The Vendor took the position that the Purchaser was in default, and asserted its right to the deposit.  The transaction was not consummated.

The Purchaser sought to recover his significant deposit.  The trial judge ruled in favour of the Vendor, stating that the Purchaser was in default of his contractual obligations and that the forfeiture provisions in the Agreement were enforceable.

By the time the appeal was heard, a five-member panel of the B.C. Court of Appeal had issued its momentous ruling in Tang v. Zhang, 2013 BCCA 52, which set out the following “general principles” regarding deposits (para. 30):

1.   …[T]the question of whether a deposit or other payment made to a seller in advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract, is a matter of contractual intention;

2.   Where the parties use the word “deposit” to describe such a payment, that word should in the absence of a contrary provision be given its normal meaning in law;

3.   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;

4.   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…;

5.   A contractual term that a deposit will be forfeited “on account of damages” on the buyer’s failure to complete does not alter the nature of a deposit, but may be construed to mean that if damages are proven, the deposit will be applied against (“on account of”) them. If no damages are shown, the deposit is nevertheless forfeitable, subject always to the expression of a contrary intention.

The Purchaser argued that the payment of the $750,000 was not a “true” deposit, pointing to the reference in the Agreement describing that amount as “liquidated damages” which “constitute[d] a genuine pre-estimate of the minimum damages suffered by the vendor.”  The B.C. Court of Appeal rejected this argument, ruling that the contracts between the parties described the funds as a “deposit”, and that it was “clear that the parties intended the deposit to be held on account of the purchase price, and to be forfeited to the vendor in the event that the purchaser did not complete” (at para. 32).   The Court went on to state (at para. 32):

The fact that the parties attempted to buttress the forfeiture provisions by also stating that the deposit constituted a genuine pre-estimate of damages does not preclude the characterization of the funds as a ‘true deposit’.

In the result, the forfeiture of the deposit was given effect by the Court of Appeal.  The decision in Amiri reflects a judicial preparedness to affirm the forfeiture of even a significant sum of money which has the indicia of a deposit, particularly its express characterization as such by sophisticated parties.