The Basic Law about Deposits in Ontario

Deposit Forfeiture Clause: Does it have any Meaning? | Ontario Real Estate  Source
Runnymede ats De Palma

Although the issue comes up from time to time, the leading case on the subject of deposits is De Palma v Runnymede (1949) in the Ontario Court of Appeal.

The issue keeps coming up, over and over again. While there are important recent cases like Redstone in the Ontario Court of Appeal in April 2017, that case simply quotes with approval De Palma, which relies upon Howe v. Smith an English case which was decided in 1884. Basically, there’s nothing new, but the issue constantly resurfaces with some surprise to Buyers who are about to forfeit their deposits.

In 2017, the Spring real estate market was “hot” and many Buyers found that they were unable to close. As each of those many cases reach the point of resolution, it’s important to know the law, and it’s particularly important for those Buyers to know when their cases fall within an exception and forfeiture is not required.

The De Palma case reviewed

De Palma, an experienced investor was having a building constructed. De Palma declined to proceed with the construction and he wanted the $2,500 that he had paid returned to him.

So, the essential question was whether the payment was to be viewed as:

  1. a part payment towards the purchase price, or
  2. a deposit.

The rules were different, so the classification was very important. And, as luck would have it, there was nothing in the agreement that said what it was, one way or the other.

Before plans were prepared, De Palma negotiated with Joseph Tanenbaum, the President of Runnymede Steel for the supply and erection of structural steel. It was understood by both parties that final and complete drawings were essential to enable the respondent to make shop drawings before proceeding with the work.

The Order was placed and this is the document from Runnymede:

“Order No. 280

September 9th, 1946.

A.E. DePalma, 293 Bay Street, Toronto.

Dear Sir(s), Re; Structural Steel for Office Bldg — Avenue Rd.

“We confirm having this day placed your order for the above job, in accordance with plans as follows:–

“Supplying and erecting all Structural Steel for the above job, as per drawings No. 4671 Sheets 1-2-3 & 4.

“Price based on 125 tons, adjustment to be made on completion of Steel erection, for credit or debit.

“for the sum of $17,500.00 (Seventeen Thousand Five Hundred Doll)

Received cheque 2500.00 Balance ‘J.T.’ 15000.00

‘J.T. Tanenbaum’

ACCEPTED this 9th day of September 1946.

‘A.E. DePalma’

All orders accepted or contracts made by us are subject to strikes or other delays beyond our control.”

De Palma advised Tanenbaum:

“that he was not going ahead with it on account that they got some prices from the general contractor and it was running into much more than what he expected that it was going to be, and that with the market going down as fast as it was that he would sooner use his money in that than invest in a building”.

Runnymede responded:

“With reference to your recent enquiry concerning steel ordered from us September last year.

“You were advised in the spring the order cancelled itself by your failure to take the goods.

“We subsequently discussed an order for the same amount of steel subject to adjustments of price but this order did not materialize and consequently we are not holding any steel for your account at this time.

“A deposit on the original order in the sum of $2500.00 was made. This deposit was, of course, forfeited when the original order lapsed.

Yours very truly, “RUNNYMEDE IRON & STEEL COMPANY. “‘Wm. Skelly'”

In this case, the trial judge found that the contract was repudiated by the appellant and also found that the respondent suffered no damages as a result of the repudiation. He held that the appellant’s claim for recovery of the deposit failed.

Laidlaw a Justice on appeal stated:

It is to be observed at once that the appellant was a man of much business experience, and I think he would fully understand and appreciate the meaning and consequences which attach to the use of the word “deposit”.

The leading case on the jurisprudence of deposits is Howe v. Smith (1884), 27 Ch. D. 89, where Bowen L.J., at p. 98, says:

“We have therefore to consider what in ordinary parlance, and as used in an ordinary contract of sale, is the meaning which business persons would attach to the term ‘deposit.’ Without going at length into the history, or accepting all that has been said or will be said by the other members of the Court on that point, it comes shortly to this,

that a deposit, if nothing more is said about it, is, according to the ordinary interpretation of business men, a security for the completion of the purchase.”

                                                          (underlining mine)

Laidlaw states:

“Apart altogether from the evidence quoted and relied upon by counsel for the appellant, there is an inference that the deposit was paid as a guarantee for the performance of the contract”.

                                                                   (underlining mine)

Howe v. Smith, stated as follows:

“According to the law of vendor and purchaser the inference is that such a deposit is paid as a guarantee for the performance of the contract, and where the contract goes off by default of the purchaser, the vendor is entitled to retain the deposit.”

                                                                   (underlining mine)

According to Laidlaw:

“ I, therefore, hold that the payment of $2,500 by the appellant was a deposit paid as a guarantee for the performance of the contract.”

“I think the true principle to be applied is found in Howe v. Smith, supra, as stated by Fry L.J. at p. 101, as follows:

“Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed, and we must therefore inquire what terms are to be implied.

The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee.

It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.”

“No case has departed from Howe v. Smith, and it is applicable to the facts of the present case.”

It was argued on behalf of De Palma that: “The money paid could be retained only if the defendant suffered loss in excess of that amount.”

According to Laidlaw:

“I think there is nothing in the decision in Howe v. Smith, supra, or in the cases that followed it, which supports that argument when it appears that the money paid was a deposit to guarantee the performance of the contract.

The appellant did not suggest at any time before the contract was made that the payment of $2,500 should be regarded in any other way than as the usual guarantee that he would perform his part of the contract.

He did not suggest that the payment should be returned to him if the contract fell through for any reason.

He did not ask that any such provision be included in the written document showing the bargain made by the parties.

The appellant has no expressed right to the return of the money, and I am quite unable to find any implied right in his favour.

 It is to be observed, too, that in the statement of claim, in the statement of defence, and in the proceedings in the court below, the payment made by the appellant to the respondent was described and treated as a deposit and not as part payment on account of the total contract price.

I conclude that the appellant receded from his contract and abandoned it. He cannot now take advantage of his own wrong and cannot recover the deposit of $2,500 paid by him to the respondent at the time the contract was made between the parties.

I would dismiss the appeal with costs.”

Another Appeal Court Judge, Justice Hogg noted:

The judgment of this Court, consisting of Meredith C.J.O. and Maclaren, Magee and Ferguson JJ.A. in Sanderson v. Morton (1923), 54 O.L.R. 479, held that…

“….when a contract is put an end to by a purchaser by repudiation or abandonment, an amount paid on account of purchase price may be forfeited and need not be repaid to such purchaser by the vendor.

The contract between the parties in that case provided for instalments on account of purchase price to be paid every quarter by the respondent, and he failed to make some of these payments.

There was nothing in the agreement that referred to a deposit or an amount paid to guarantee payment of the balance due.

It is of some interest to note that the judgments in that appeal do not cite the Howe v. Smith case.”

Mr. Justice Hogg also quoted the Supreme Court of Canada:

“In Cronholm v. Cole, 1928 CanLII 499 (SCC) in the Supreme Court of Canada, the purchaser Cronholm requested a return of the money paid on account of the purchase price of certain mining leases, because of the rescission of the sale agreement by the vendors, the Coles.

It was held that the vendors were not entitled, on cancellation of the contract by them, to retain instalments of purchase money in the absence of any terms in the agreement giving them such right.

Anglin C.J.C. stated that the moneys paid on account of purchase price were not a deposit.

Mignault J. said, at p. 322, that the contract did not provide that in the event of a default or breach by the purchaser an amount paid on account of purchase price could be retained by the vendor as liquidated damages, and that without such provision, or unless the money paid was a deposit made by the purchaser, a vendor who cancelled an agreement of sale because of breach by the purchaser could not retain instalments of the purchase price which the purchaser had already paid.”

Hogg also stated:

“In Mayson v. Clouet [1924] A.C. 980, a contract for the sale of land provided that a deposit should be paid and instalments and the balance of purchase price be paid, on certain dates; also if default was made the deposit might be forfeited.

The purchaser made default and the vendor rescinded the contract. The headnote reads in part: ” … although the purchaser was in default, the instalments were recoverable, since the contract distinguished between the deposit and the instalments and provided for a forfeiture of the deposit only.”

Lord Dunedin, who delivered the judgment of the Judicial Committee, said that the contract under consideration distinguished in terms between deposit and instalments and dealt with what was to happen if the purchasers made default, namely: “The deposit is forfeited, and that is all. It would seem to their Lordships quite clear that the instalments are not to be forfeited. The truth is that the defendants’ contention really amounts to a claim to keep the instalments as liquidated damages for the breach of contract for which they are entitled to sue.”

In the present case it is not expressed in the contract in writing between the parties, signed by them on the 9th September 1946, that the $2,500 paid by the appellant is “a deposit” or a guarantee, or that it is to be forfeited if the appellant fails to perform his obligation under the agreement.

At the time the contract was executed Joseph Tanenbaum, in answer to the appellant’s query whether a cheque in the full amount of the contract price was requested, answered that he merely asked to have a deposit and the balance when the “job is completed”.

Tanenbaum’s testimony, in part, on this matter, is as follows: “So he gave me a cheque for $2,500 and I marked on there that I received it.” Although it is clear that immediately before the money was received Tanenbaum referred to the payment as a deposit, he did not describe it as such in the contract.

In the present case no assistance is to be derived from the language of the contract itself. The word deposit is not used.”

Justice Hogg stated further:

“Although the general rule is that contracts in writing cannot be varied by extrinsic evidence of the intention of the parties, I think that the circumstances surrounding the payment of the $2,500 show an agreement made contemporaneously with the written contract as part of the transaction, without being incorporated in it, which may be considered as collateral to the agreement in writing, such collateral agreement being that the payment was considered by both parties as a deposit.

Not only had the appellant (De Palma) abandoned and put an end to the contract, but I think the payment made by him must be held to be a deposit. He is therefore not entitled to recover it back from the respondent (Runnymede).”

Justice Aylesworth, the third Justice on appeal stated:

“The single question upon which this appeal turns is the nature of the payment made by the appellant and now sought to be recovered by him.

 If the payment was in fact merely a part payment, then, upon the authorities, it would seem that appellant’s action was well founded. If, however, the payment was in the nature of a deposit, entirely different considerations would seem to apply and he cannot recover.

For many years the law remained uncertain upon this important subject and it is necessary to examine some of the authorities to ascertain the true rule.

Turning now to the contract in question in this appeal and to the evidence relied upon by the learned trial judge, it seems to me abundantly clear that the payment in question was a deposit and not merely a payment on account, and I so hold. As a deposit it was clearly forfeitable by reason of appellant’s default, unless the contract itself otherwise provided, and the contract actually did not otherwise so provide: Howe v. Smith, supra.”

The Law of Deposits

  • If the purchaser is in default:
    • The vendor can retain the deposit
    • No proof of damages is required
  • The deposit is a guarantee for the purchaser’s performance of the agreement
  • The deposit is security for the purchaser’s performance of the agreement

Real Estate Transactions

The standard form Agreement of Purchase and Sale from OREA, makes it quite clear that there is a “deposit”. It’s also a term, that if the deal goes ahead, then the deposit will be credited towards the purchase price.

Where there are more than one simple payment at the outset being referred to as a “deposit”, then the agreement should be made quite clear that the subsequent payments are “deposits”. Don’t leave this to chance. Sometimes, they are small, and other times they are quite large. Consider a pre-construction condo, the purchaser may be expected to advance 25% to 30% of the purchase price, two years in advance of completion. How many of those payments are to be deposits?

Also, remember that there’s an overall cap on what might be a proper deposit before you get to a clause which is considered to be a penalty.

In some cases, the initial deposit is modest, ie. $100.00, but the second payment is $24,900.00. It should be clear on the face of the document that the deposit is $25,000 to be paid in two installments.

Legal Counsel

The lawyers in this case who acted for Runnymede were:

Solicitors for the defendant, respondent: Mason, Foulds, Davidson & Arnup, Toronto as represented by J.T. Weir.

This firm later became Arnup, Weir, Foulds, and is now known as Weir, Foulds, an excellent law firm in downtown Toronto.

*As a sidenote, I caddied for Jack Weir at the Islington Golf Club in 1961 or 1962. He encouraged me to become a lawyer, and in 1972 offered me an articling position.

Brian Madigan LL.B., Broker

Leave a Reply

Your email address will not be published. Required fields are marked *