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Appeal Court Confirms Buyer’s Deposit Forfeited Despite OBCA Protections

A significant ruling we reported on in our December 2018 newsletter (Vol. 24, No. 4) has now been confirmed on appeal.  

In Benedetto v. 2453912 Ontario Inc. an individual acted as a promoter for a yet-to-be-incorporated company. In that role, he signed a purchase agreement for a $7 million commercial property, stipulating that he was signing as a buyer “in trust for a company to be incorporated without any personal liabilities”.   He provided a $100,000 deposit to secure the purchase on the pending corporation’s behalf.  

However, the buyer failed to complete the purchase and the corporation ultimately did not come into existence. Upon the deal being terminated, the promoter asked for the return of the deposit, pointing to the provisions of the Ontario Business Corporations Act (OBCA) dealing with pre-incorporation contracts. Those provisions allow individuals acting for a yet-unincorporated company to expressly opt-out of being personally bound by such contracts, and from being found liable for damages.

A lower court had ruled that (absent agreement provisions to the contrary) the promoter’s failure to close resulted in the $100,000 deposit being forfeited. The OBCA only protected the promoter from damages, or from being bound by the corporation’s contractual obligations; it did not impact the tendered deposit.

On the buyer’s appeal of the trial court ruling, the Court of Appeal affirmed the lower court’s interpretation.

The OBCA provisions did contain an “opt-out” provision, allowing the parties to a pre-incorporation contract to expressly circumvent the default rule making promoters liable for contracts they make on behalf of future corporation. But those provisions did not displace the common-law rules governing deposits in real estate transactions.  That law states that unless agreed otherwise, any buyer who refuses to close a transaction loses his or her deposit, since it stands not as damages for the contractual breach, but rather as security and incentive for the buyer’s performance. It also compensates the seller for lost opportunity in having taken the property off the market, and for the loss in bargaining power from having revealed the price at which it was willing to sell.

Here, the language of this particular contract – which expressly provided that the promoter was signing the contract “without any personal liabilities” – related to the contract as a whole, but it did not safeguard the deposit in particular.  In the context of the entire agreement, it was reasonable for the lower court judge to interpret that phrase as not applying to the deposit at all.  It was also noteworthy that the contract had no express provisions to the contrary on how the deposit was to be treated if a breach occurred.

The Appeal Court confirmed that since the promoter had cancelled the deal, the customary law applied so that the $100,000 deposit was forfeited to the seller. See Benedetto v. 2453912 Ontario Inc., 2019 ONCA 149.