British Columbia Court of Appeal Reaffirms Seller’s Right to Retain Defaulting Buyer’s Deposit Without Proof of Damages
On February 5, 2013, the British Columbia Court of Appeal (BCCA) released an important decision addressing the proper rules for interpreting the language of deposit forfeiture clauses in contracts for the purchase and sale of land.
In Tang v. Zhang (Tang), the BCCA was faced with the following question: where a buyer fails to complete the purchase as required and has paid a "deposit" that the contract states is to be forfeited to the seller "on account of damages," must damages be proven in order for the seller to retain the deposit?
A five-judge panel of the BCCA held that no proof of damages was required, as the phrase "on account of damages" does not alter the general rule that a deposit is forfeited to a seller where the buyer fails to complete the purchase. In doing so, the BCCA overturned its 2009 decision in Agosti v. Winter (Agosti). In Agosti, the BCCA held that, as the terms of the contract in that case provided that a deposit paid by the buyer would be forfeited "on account of damages," the seller was required to prove damages and, if the actual damages were less than the amount of the deposit, the seller could only retain an amount equal to the actual damages, rather than the entire deposit.
In Tang, the BCCA referred to long-standing principles concerning the dual purpose of a deposit as both part payment of the purchase price and as a performance guarantee that will be forfeited to the seller if the buyer does not complete the purchase. The BCCA held that a true deposit is, by definition, non-refundable, unless the contract specifies otherwise. A contract that states that the deposit is forfeited "on account of damages" (as does the standard form contract issued by the Greater Vancouver Real Estate Board that was at issue in Tang) simply guards against double recovery (i.e., if the seller sues to recover damages for the buyer’s failure to close, the amount of the deposit must be credited towards the damages).
The BCCA made the following general statements to clarify the proper approach to interpreting deposit forfeiture clauses:
- The question of whether a deposit or other payment made to a seller in advance of the completion of a purchase is forfeited to the seller upon the buyer’s repudiation of the contract requires interpreting the words of the contract to determine the parties’ intention.
- A true deposit is "an ancient invention of the law designed to motivate contracting parties to carry through with their bargains."
- Where the word "deposit" is used to describe a payment, it should be given its normal meaning in law, unless the contractual language clearly shows a contrary intention. A deposit is generally forfeited by a buyer who repudiates a contract, without any requirement that damages be proven by the seller. If the contract is performed, the deposit is applied to the purchase price.
- A deposit is an exception to the usual rule that an amount subject to forfeiture upon breach of contract is a "penalty" and, therefore, unlawful unless the amount represents a "genuine pre-estimate of damages." Only where the deposit is so large that its retention by the seller would be unconscionable (i.e., grossly unfair) should the buyer be relieved from the forfeiture.
In Tang, the BCCA has provided clear direction to buyers and sellers about the status of a deposit paid under a land contract where the purchaser fails to close, clearing up some confusion that had arisen in British Columbia case law in recent years due to arguments made based on the wording of specific deposit forfeiture provisions.