Deposit is Irrelevant to Contract Formation in Ontario

What Is an Earnest Money Deposit?

The concept of a deposit is irrelevant to contract formation. It is just purely and simply another term in the contract. In fact, it’s not even a necessary term.

There are two separate and distinct ways to confirm that a contract exists:

  1. Document executed under seal, or
  2. Consideration.

The standard OREA Form contains both. On rare occasion, the seals will be removed. If that’s the case, then you have to look to the issue of consideration in order to ensure that there’s a contract.

Consideration is the mutual exchange of promises. In respect to the sale of goods, it will be the delivery of money in exchange for delivery of the goods. It occurs simultaneously. Payment of the purchase price at the cashier is the contract. The goods are delivered at the same time.

Consideration is particularly important when it comes to executory contracts, that is, a contract which is to be performed later. Executory contracts deal with delayed delivery. The deal will be closed, consumated or completed later on. So, over the intervening time interval, we do need to make sure that there’s a proper contract in place.

In order for consideration to be present, each party must give something and receive something. If that’s the case, then we have a contract, not simply the indication of a gift:

  • The Buyer promises to pay the purchase price and receive the property.
  • The Seller promises to convey the property and receive the purchase price.

That’s enough, we have a contract.

Most formal commercial contracts will include the following:

“In consideration of the sum of two dollars and such other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows.”

Courts will not question the actual amount, nor will they look into the fact as to whether the two dollars was indeed exchanged. It says “acknowledged” so that’s good enough.

For some reason, the standard Form OREA contract does not include that statement.

There are numerous terms in an agreement including, for example, the ability to change the closing date, the obligation to provide a s.116 Certificate, the obligation to accept title following expiration of the requisition date etc. The deposit is simply another contract term like those others. Just because it happens to be present in a contract, or it involves money has absolutely nothing to do with the formation of the contact in the first place.

The deposit is not “consideration” for the purposes of contract formation.

Brian Madigan LL.B., Broker

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