



COURT OF APPEAL FOR ONTARIO

CITATION: Redstone Enterprises Ltd. v. Simple Technology
    Inc.,

2017 ONCA 282

DATE: 20170404

DOCKET: C62489

Sharpe, Lauwers and Hourigan, JJ.A.

BETWEEN

Redstone Enterprises Ltd
.

Applicant (Appellant)

and

Simple Technology Inc. and CBRE Limited

Respondents (Respondents)

Adam J. Stephens, for the appellant

Judy Hamilton and Payam Ezzatian, for the respondent

Heard: March 2, 2017

On appeal from the judgment of Justice James C. Kent of the
    Superior Court of Justice, dated July 8, 2016, with reasons reported at 2016
    ONSC 4388.

Lauwers J.A.:

[1]

The seller, Redstone Enterprises Ltd., sold a warehouse in Brantford to
    the buyer, Simple Technology Inc., for $10,225,000. When the buyer failed to
    complete the transaction, the seller applied for a declaration that it was
    entitled to be paid the deposit of $750,000, which is being held in trust by
    CBRE Limited.

[2]

The motion judge found there was no legally acceptable justification for
    the purchaser not to close the transaction. As a result, he agreed that the
    deposit was to be forfeited to the seller, but he then exercised his equitable
    jurisdiction under s. 98 of the
Courts of Justice Act
, R.S.O. 1990, c.
    C.43, and reduced the sum to be forfeited from $750,000 to $350,000.

[3]

For the reasons set out below, I would allow the appeal and vary the
    judgment to increase the forfeiture from $350,000 to the contractual amount of
    $750,000, together with any accrued interest, to be paid to the seller.

A.

The Facts

[4]

The facts are not in dispute. The buyer wanted the property to establish
    a licensed marijuana grow-op business. In order to do that, the buyer required
    both financing and a licence from Health Canada.

[5]

The original Agreement of Purchase and Sale, entered into on July 8,
    2014, provided for a deposit of $100,000 and a closing date in October 2015.
    The buyer paid the initial deposit. If the buyer waived the conditions inserted
    for the buyers benefit by August 27, 2014, then it was obliged to pay an additional
    deposit of $200,000. The buyer waived the conditions on August 20, 2014 and
    paid the additional deposit of $200,000, bringing the total deposit paid to
    $300,000. At the same time, at the buyers request, the closing date was
    advanced to June 30, 2015 from October 2015.

[6]

In correspondence dated June 3, 2015, the buyer advised the seller that Health
    Canadas approval of its application for a licence was taking longer than
    expected, and requested an extension of the closing date to November 30, 2015.
    The buyer offered to pay an additional deposit to demonstrate its commitment,
    stating: [w]e fully intend to close, but require the completion of this final
    stage [of Health Canada approval]  We will submit deposit of $200,000.00, with
    approved signed amendment. This should solidify our commitment to you.

[7]

The parties negotiated, with the result that the June 30, 2015 closing
    date was extended to December 15, 2015, for which the buyer agreed to pay an additional
    deposit of $450,000. The amendment to the Agreement of Purchase and Sale
    provided, under the heading Release of Deposit:

I
n the event this agreement
    is not completed on or before the Completion Date, the Deposit and Additional
    Deposit held in +trust by CBRE Limited shall be released directly to the Seller
    following non-completion.

The term Deposit referred to the original $300,000
    deposit, and the term Additional Deposit was the additional $450,000.00
    deposit the buyer paid to secure the extension. The combined deposit paid by
    the buyer was then $750,000.

[8]

The buyer was unable to obtain the Health Canada licence or the
    necessary financing, and failed to close the transaction.

[9]

The seller asked CBRE to release the deposit to it under the terms of
    the amended Agreement of Purchase and Sale, but the buyer opposed, which led to
    this application.

B.

the application judges reasons for granting relief from forfeiture

[10]

The
    application judges complete reasons for granting partial relief from
    forfeiture are set out in his decision, at paras. 11-13:

In order to obtain relief from forfeiture, the purchaser is
    required to establish:

1.

That the proposed forfeited sum is out of proportion to the damages
    suffered by the claimant, and

2.

That it would be unconscionable for the vendor/ claimant to retain the
    deposit paid. See
Varajao v. Azish
, 2015 ONCA 218, at paragraph 11.

There is no evidence before the court that enables a
    determination of whether or not the vendors suffered any damages. It is,
    therefore, not possible to say that the sum proposed to be forfeited is or is
    not proportionate to any damages suffered by the vendor. It is, however,
    possible to say $750,000.00 is a very significant deposit even for a
    transaction of over $10,000,000.00. The final deposit of $450,000.00 to obtain
    an extension of the closing date from 30 June 2015 to 15 December 2015 is
    disproportionate. When combined with the first deposit of $100,000.00 and the
    second deposit of $200,000.00, the grand total reaches a level where complete
    forfeiture becomes unconscionable, in the absence of any evidence concerning
    damages suffered by the vendor.

For all of the above reasons, relief against forfeiture should
    be granted pursuant to Section 98 of the
Courts of Justice Act
and the
    sum to be forfeited should be reduced. A reduction to a total of $350,000.00 is
    appropriate in the circumstances to eliminate the level of unconscionability
    that the total deposit reached.

C.

the issue

[11]

The
    issue is whether the application judge erred in granting partial relief from
    forfeiture of the deposit to the buyer. The appellant does not challenge the
    application judges finding that there was no legally acceptable justification
    for the buyer not to close the transaction.

D.

The standard of review

[12]

The
    parties both cite a decision of this court on the applicable standard of review,
    but  for different positions:
Birch v. Union of Taxation Employees, Local
    70030
, 2008 ONCA 809, 93 O.R (3d) 1,
leave
    to appeal refused, [2009] S.C.C.A. No. 29
. The appellant cites para. 47
    of
Birch
where the court quoted McLachlin J.A. (as she then was) in
Principal
    Investments Ltd v. Thiele Estate,
37 D.L.R. (4th) 398, 1987 CarswellBC 76
    (C.A.), who said:
determination of whether
    the established facts support a conclusion of
unconscionability
on the applicable legal principles is primarily a
    question of law, with which this Court can interfere if it finds the conclusion
    to be wrong (at para. 18 (WL Can)).

[13]

The
    respondent urges deference, and cites para. 59 of
Birch
for the
    proposition that there could be no basis for this court to interfere with an
    application judges decision on
unconscionability
since he applied the correct test for unconscionability to the agreed facts
    and to the inferences which he drew from those facts.

[14]

I
    would take a different approach to the standard of review in this case. The
    exercise of equitable authority under s. 98 of the
Courts of Justice Act
is discretionary and ordinarily attracts this courts deference, except where
    it is demonstrated the application judge made a legal error or an error in
    principle or a palpable and overriding error of fact. The application of this
    general standard assumes the application judge explained his reasons for
    exercising the discretion. However, in this case, those reasons are sparse and
    do not permit meaningful appellate review. Consequently, it is open to this
    court to substitute its own decision on the basis of the facts found by the
    application judge.

E.

analysis

[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.). I will address each element in turn.

(1)

Is the Deposit Disproportionate?

[16]

The
    respondent points out accurately that the record contained no evidence that
    the appellant had suffered any loss as a result of the respondents breach of
    the agreement. The respondent submits the application judge accordingly came to
    the correct conclusion that the additional deposit of $450,000 to obtain the
    six-month extension of the closing date was disproportionate and therefore
    unconscionable, and rightly reduced it by $400,000, so that the total amount
    forfeited by the respondent was $350,000. Another way of seeing it is that the
    application judge thought the six-month extension was worth no more than
    $50,000.

[17]

Since
    the appellant provided no evidence of damages, it is fair to infer that it suffered
    none. As I will explain, that alone does not render the forfeiture
    unconscionable.

(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, 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 courts 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), 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] 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.

[31]

Consideration
    of these indicia show there was no unconscionability in this case.

[32]

This
    was a straightforward commercial real estate transaction undertaken in the
    expectation of profit by both sides, who were previously strangers. There was
    no inequality of bargaining power between them. There was no fiduciary
    relationship. Both parties were sophisticated.

[33]

The effect
    of fixing a price for the property created some risk for both parties because
    of the possibility of fluctuation in the market value of the property over a
    long closing period. The initial deposit demonstrated the buyers commitment to
    the property. That commitment was increased when the buyer waived the
    conditions inserted in the Agreement of Purchase and Sale for its benefit,
    requiring it to increase the amount of the deposit.

[34]

Later,
    when it appeared that the buyer needed an extension of the closing date, it
    sought that extension offering an additional $200,000 deposit, demonstrating it
    knew the seller would be concerned about the buyers ability to close the
    transaction and would seek to hedge against that risk. Further, by extending
    the closing date, the seller would lose any opportunity to sell the land for
    the then market price, which could change at a later date. Negotiations resulted
    in the additional deposit being set at $450,000, higher than the $200,000 figure
    the buyer initially offered. The total deposit at slightly more than 7% was not
    in an unfair range.

[35]

As
    the closing date approached, the buyer attempted to escape from the transaction
    by raising spurious complaints, which led to the application. The application
    judge rightly found that there was no merit to the complaints. At the same
    time, the seller remained ready and willing to close and was prepared to extend
    without additional payment.

[36]

In
    my view, nothing in this sequence suggests that the seller unconscionably
    abused its bargaining power. Perhaps its position might be described as hard
    bargaining, but it was not unconscionable in the commercial context.

[37]

I
    note in passing that the application judges reduction in the overall deposit
    to $350,000 was $150,000 less than what the total deposit would have been if
    the buyers voluntary offer of an additional $200,000 for the extension of the
    closing date had been accepted and added to the then total deposit of $300,000.
    There was no warrant in unconscionability for such a reduction.

F.

disposition

[38]

I
    would allow the appeal and vary the judgment to increase the forfeiture from $350,000
    to the contractual amount of $750,000, together with any accrued interest to be
    paid to the seller, plus costs to the respondent in the amount of $10,000 for
    the appeal and $15,000 for the application, both inclusive of disbursements and
    taxes.

Released: PL APR 05 2017

P. Lauwers J.A.

I agree. Robert J.
    Sharpe J.A.

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


