



COURT OF APPEAL FOR ONTARIO

CITATION: Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149

DATE: 20190225

DOCKET: C65790

Hourigan, Miller and Paciocco JJ.A.

BETWEEN

Salvatore Benedetto

Plaintiff (Appellant)

and

2453912 Ontario Inc.

Defendant (Respondent)

AND BETWEEN

2453912 Ontario Inc.

Plaintiff by Counterclaim (Respondent)

and

Salvatore Benedetto
and Re/Max West Realty
    Inc., Brokerage

Defendants to the Counterclaim (
Appellant
)

Arieh Bloom, for the appellant

Vladimira M. Ivanov, for the respondent

Heard: February 8, 2019

On appeal from the order of Justice Benjamin T. Glustein
    of the Superior Court of Justice, dated July 24, 2018, with reasons reported at
    2018 ONSC 4524.

B.W. Miller J.A.:

I.        Overview

[1]

This appeal addresses the legal question of how the law governing
    deposits that secure contracts for the purchase and sale of real property
    interacts with section 21 of Ontarios
Business Corporations Act
, R.S.O.
    1990, c. B.16 (
OBCA
), which governs pre-incorporation contracts. On
    a motion for summary judgment, the motion judge found that the appellant
    forfeited the deposit when the transaction did not close, even though the
    pre-incorporation contract stated that the appellant was signing the contract without
    any personal liabilities. At the conclusion of the hearing of the appeal, the
    court announced that the appeal was dismissed with reasons to follow. These are
    those reasons.

II.       Background

[2]

The appellant signed an agreement for purchase and sale of real property,
    stipulating that he was signing as a buyer in trust for a company to be
    incorporated without any personal liabilities. The appellant provided a
    deposit of $100,000 to secure the purchase. Subsequently, he advised the vendor
    that he would not be closing the transaction, and he sought the return of the
    deposit. The respondent refused. The appellant brought an action. The
    respondent brought a motion for summary judgment.

[3]

The motion judge held that the provisions of the
OBCA
addressing pre-incorporation contracts do not displace the common law rules
    governing deposits in real estate transactions, and found that the deposit was
    forfeited to the respondent.

[4]

The appellant appealed on the basis that the motion judge erred in his interpretation
    of s. 21(4) and in his interpretation of the contract.

III.      Analysis

(1)

The law with respect to deposits

[5]

Where a payer (usually the purchaser) gives a vendor a deposit to secure
    the performance of a contract for purchase and sale of real estate, the deposit
    is forfeit if the purchaser refuses to close the transaction, unless the
    parties bargained to the contrary: see
Howe v. Smith
(1884), 27 Ch. D.
    89 (C.A.);
March Bothers & Wells v. Banton
(1911), 45 S.C.R. 338.  In
Howe v. Smith
, Fry L.J. stated at p. 101:

Money paid as a deposit must, I conceive, be paid on some terms
    implied or expressed. In this case no terms are expressed and we must therefore
    inquire what terms are to be implied. The terms most naturally to be implied
    appear to me in the case of money paid on the signing of a contract to be that
    in the event of the contract being performed it shall be brought into account,
    but if the contract is not performed by the payer it shall remain the property
    of the payee. 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.

[6]

The deposit stands as security for the purchasers 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:
H.W. Liebig Co. v.
    Leading Investments Ltd.
, [1986] 1 S.C.R. 70, at pp. 86-87.

[7]

The motion judge provided a helpful summary of the law: a deposit is not
    part of the contract of purchase and sale, but stands on its own as an
    ancient invention of the law designed to motivate contracting parties to carry
    through with their bargains, something which binds the contract and
    guarantees its performance, and 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
Tang v. Zhang
, 2013 BCCA 52,
    41 B.C.L.R. (5th) 69;
Comonsents Inc. v. Hetherington Welch Design Ltd.
,
    2006 CanLII 33779 (Ont. S.C.);
Howe v. Smith
.

(2)

Pre-incorporation contracts and s. 24 of the
OBCA

[8]

At common law, a purchaser who breaches a contract of purchase and sale
    by electing not to complete the purchase will generally be liable to the
    vendor, who can pursue damages or other remedies. But contracts that are
    executed by a person acting as a promoter or functionary  that is, executed on
    behalf of a company intended to be incorporated later  have an added
    complexity. Section 21 of the
OBCA
modifies the common law of contract
    to facilitate such transactions, clarifying the rights and obligations parties assume
    in pre-incorporation contracts.

[9]

The default rule is provided by s. 21(1) of the
OBCA
:

Contract prior to corporate existence

21
(1) Except as provided in this section, 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.

[10]

This
    court stated in
Szecket v. Huang
(1998), 42 O.R. (3d) 400 (C.A.), at
    para. 33 that, 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).

[11]

The
    default rule of personal liability is thus subject to an opt-out under s.
    21(4), where the parties make it clear that is what they have chosen:

Exception to subs. (1)

(4) If expressly so provided in the oral or written contract
    referred to in subsection (1), a person who purported to act in the name of or
    on behalf of the corporation before it came into existence is not in any event
    bound by the contract or entitled to the benefits thereof.

[12]

In
    the event of a breach of a pre-incorporation contract where s. 21(4) applies  such
    as in this case, where the promoter advised the vendor he would not be
    completing the purchase  the vendor has no remedy for the breach:
1394918
    Ontario Ltd. v. 1310210 Ontario Inc
(2002), 57 O.R. (3d) 607
.
The
    vendor cannot obtain damages against the intended corporation because the
    intended corporation  if it even came into existence - did not adopt the
    contract: para. 9. Neither can the vendor seek damages against the promoter
    because the vendor and the promoter contracted to the contrary: para. 7.

(3)

The application of s. 21(4) to a deposit

[13]

Does
    a deposit stand on a different footing? We were not directed to any authority
    directly on point. The appellant argued that under s. 21(4), where a contract
    provides that a promoter is not bound by the contract, neither can the promoter
    be bound by a deposit given to secure the performance of the contract. That is,
    if a promoter has no personal obligation to perform a contract, this
    necessarily entails the promoter is not bound by the terms of the deposit either.

[14]

The
    motion judge made no error in rejecting this argument. As stated above, a
    forfeited deposit does not constitute damages for breach of contract, but
    stands as security for the performance of the contract. A purchasers obligations
    under a contract of purchase and sale are thus distinct from the obligation
    incurred by the payer of the deposit. An implied term of a deposit is that on
    breach of the contract by the purchaser (or, in the case of a pre-incorporation
    contract, by the promoter on behalf of the intended purchaser), the deposit is
    forfeited to the vendor.

[15]

Of
    course, parties can contract otherwise with respect to the deposit. The appellant
    argues that in this case, where the contract expressly provides that the appellant
    was signing the contract without any personal liabilities, the language was
    broad enough to exclude personal liability not only for damages for breach of
    contract, but also with respect to the deposit.

[16]

It
    was reasonable for the motion judge to interpret the phrase without any
    personal liabilities in the context of the contract as a whole, as not
    applying to the deposit. As he noted, the contract had no express provisions
    concerning the deposit. In particular, (t)he terms of the Deposit do not
    include a provision that if the contract is not performed, the Deposit is to be
    returned to [the appellant]. Under settled law, such a contrary intention
    must be expressly stated if the deposit is not to be forfeited upon the failure
    of the purchaser to perform his or her obligations under the agreement of
    purchase and sale. As the motion judge found, the interpretation offered by
    the appellant would render a deposit meaningless, providing no incentive to
    close the transaction, and no compensation to the vendor for failure to close.

[17]

The
    motion judge also put some stock in the interpretation given to nearly identical
    contractual language in
Adamis v. Aviks
, 1983 CarswellOnt 3436 (Ont. Co.
    Ct.). That case, a decision of the County Court, addressed the liability of a
    trustee in a real estate contract of purchase and sale, who signed a contract with
    no personal liability. The trial judge in
Adamis
held that the trustee
    was not liable for damages for the breach of the contract, but forfeited the
    deposit.

[18]

The
    appellant argues that it was an error to rely on
Adamis
, as the
    transaction arose in a significantly different legal context: the purchaser was
    a trustee as opposed to a promoter, and the case pre-dated the enactment of s.
    21 of the
OBCA
.
Adamis
, however, was not binding on the
    motion judge and the motion judge did not suppose that it was. The motion judge
    made no error in taking comfort from the fact that the trial judge in
Adamis
interpreted similar contractual language  given in a different but
    similar context  in a similar manner.

IV.     Disposition

[19]

The
    appeal is dismissed. Costs are payable to the respondent in the amount of
    $10,000, inclusive of disbursements and HST.

Released: BWM FEB 25 2019

B.W. Miller J.A.

I agree. C.W. Hourigan J.A.

I agree. David M. Paciocco J.A.


