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Purchase Deposit Forfeited Despite OBCA Protections

On the sale of three adjacent homes with a total price of $7 million, the seller negotiated an agreement of purchase and sale with Benedetto, who planned to incorporate a new company to be named as the buyer.  The agreement reflected that Benedetto acted “In Trust For A Company to be Incorporated without any Personal liabilities," mimicking section 21(4) of the Ontario Business Corporations Act (OBCA). Under that provision, a person in Benedetto’s position is not personally bound by such contracts, and is not exposed to personal liability under them.

Benedetto never took steps to incorporate the company as intended, and later advised the seller that he had decided not to proceed.   Relying on the OBCA-based liability exclusion – and despite his own decision to abort the deal – he asked for the return of $100,000 in personal funds that he had paid the seller as a deposit.

The seller refused, and asked the court for summary judgment and a declaration that it could keep the $100,000.  It argued simply that, by law, a buyer’s failure to close a real estate transaction results in the deposit being forfeited, unless stated otherwise in the agreement.

The court sided with the seller.  The agreement’s OBCA-based language did protect Benedetto from personal liability under pre-incorporation contracts.  However, it protected him only from being bound by the contract, and from being personally sued for damages if it failed to close. It did not impact a tendered deposit, which protects the seller from risk by guaranteeing the performance of a contract and recompensing the seller for having to take the property off the market.  To hold otherwise would not be commercially reasonable, since it would render the concept of a deposit meaningless.

In light of Benedetto’s own failure to close the deal, the deposit on behalf of the yet-to-be-incorporated company was declared forfeited to the seller. See Benedetto v. 2453912 Ontario Inc., 2018 ONSC 4524.