The Ontario Court of Appeal’s ruling in Benedetto v. 2453912 Ontario Inc. is set to dampen the hopes of buyers looking to shield their deposits in the purchase of property through a corporation. In this case, the court decided that the use of the phrase “without any personal liabilities” in a pre-incorporation contract does not prevent the forfeiture of a deposit when a buyer fails to perform his/her obligations under the Agreement of Purchase and Sale.
Salvatore Benedetto signed an Agreement for Purchase and Sale as a buyer “in trust for a company to be incorporated without personal liabilities”. He provided the listing brokerage with a $100,000 deposit to secure the purchase. When the transaction did not close, he sought the return of the deposit.
When the seller, 2453912 Ontario Inc., refused, Benedetto sued. The seller brought a motion for summary judgment, and the motion judge ruled in favour of the seller. Benedetto appealed on the basis that the motion judge erred in his interpretation of the contract and section 21 (4) of the Ontario Business Corporation Act, which reads: “If expressly so provided in the oral or written contract referred to in subsection (1), a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.”
The law with respect to deposits states that, unless the parties agreed otherwise, where a purchaser provides a deposit to secure the performance of a contract for the purchase of real estate, the deposit is forfeited to the seller if the purchaser refuses or is unable to close the transaction.
The Court of Appeal said that section 21 of the Act modifies the common law by defining the rights and obligations parties assume in pre-incorporation contracts. Pre-incorporation contracts are contracts executed by a person on behalf of a company intended to be incorporated at a later date. The Court of Appeal said that in applying section 21 (4) of the act to a pre-incorporation contract, a forfeited deposit does not constitute damages for breach of contract but stands as security for the performance of the contract. There is an implied term on the deposit, that on breach of the contract by the buyer, the deposit is forfeited to the seller, especially since the seller is unable to obtain damages against the intended corporation because the intended corporation, if it even came into existence, did not adopt the contract.
Benedetto argued that signing the contract with the express provision of “without any personal liabilities” should be broad enough to exclude personal liability, not only for damages for breach of contract, but also with respect to the deposit.
The Court of Appeal disagreed. It found that the phrase “without any personal liabilities” was to be interpreted in the context of a contract as a whole, not applying just to the deposit. Benedetto’s argument, if accepted, would render a deposit meaningless, providing no incentive to a buyer to close the transaction, and no compensation to the seller for the buyer’s failure to close. In order for Benedetto’s argument to be accepted, there had to be an express provision in the Agreement of Purchase and Sale concerning the deposit stating that the deposit was “not to be forfeited upon the failure of the purchaser to perform his or her obligations under the Agreement of Purchase and Sale”. The Court of Appeal concluded that the provisions of the Act addressing pre-incorporation contracts does not displace the common law rules governing deposits in real estate transactions. These are the same rules that govern individual buyers and sellers, applied to pre-incorporated entities.
The Court of Appeal dismissed Benedetto’s appeal and the seller was allowed to keep the deposit.
In summary, the phrase “without any personal liabilities” does not satisfy the express provision stipulated by section 21 (4) of the act. Therefore, buyers beware. If you want your deposits returned for any reason, spell it out in the contract.