When The Deal Goes South: Deposits, Unconscionability, And Relief From Forfeiture

Recent cases from the Ontario Court of Appeal address issues regarding deposits in failed purchase and sale transactions. An examination of these cases provides guidance regarding the circumstances in which the forfeiture of a deposit may be deemed to be unconscionable, and the circumstances in which a court may be moved to grant relief from forfeiture.

Deposits and Relief from Forfeiture

In a purchase and sale transaction, the purchaser often pays an amount of money in advance as a deposit. The theory is that a deposit will motivate the contracting parties to complete the transaction. If the contract is performed, the deposit is applied to the purchase price. Conversely, a deposit is generally forfeited by a buyer who repudiates the contract. However, the court has the discretion to grant relief from forfeiture in circumstances that it considers appropriate.

The jurisdiction to grant relief from forfeiture is succinctly stated in s. 98 of the Courts of Justice Act. It provides: "A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just."

To assess whether relief from forfeiture is appropriate, the Court of Appeal has adopted a two-step test: (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: Varajao v. Azish, 2015 ONCA 218 (para. 11).

Jensen v. Chicoine

In Jensen v. Chicoine, 2018 ONCA 793, the Court of Appeal upheld the trial judge's finding that the $100,000 paid toward the agreed-upon purchase price of $500,000 was a deposit that could be retained by the seller when the transaction for the sale of a small business that supplied and installed granite countertops broke down without legal fault on either side. The parties had entered into a one-page termination agreement that, although it did not specifically refer to the $100,000, reflected an intention that the funds would stay with the seller.

The trial judge in Jensen (2018 ONSC 95, paras. 42-50) declined to grant relief from forfeiture. In finding that it would not be unconscionable for the seller to retain the deposit, the trial judge made various findings that included the following: (1) both individual parties previously ran their own businesses and the evidence did not show an inequality of bargaining power; (2) the acquisition arrangements were negotiated over an extended period of time; (3) the...