Anonymised, illustrative composite. London, Ontario. The letter of intent was non-binding on everything except a $75,000 walk-away fee — and when the buyer walked, that clause was the only thing either side actually had.
At a glance
A letter of intent for the sale of a specialty electrical contracting business in London, Ontario set out a $3,200,000 enterprise value and was, by its own terms, non-binding — except for three carved-out provisions expressly stated to survive and bind regardless: confidentiality, 60 days of exclusivity, and a $75,000 break fee, framed as mutual expense reimbursement payable by whichever party walked away without cause during the exclusivity period. No deposit changed hands; the $75,000 was a promise to pay on a defined trigger, not money held in escrow.
At day 47 of the 60-day exclusivity window, the buyer walked, citing a material adverse change in the business. The seller’s later inquiries suggested the real reason was that the buyer’s own acquisition financing had fallen through with its lender — a fact about the buyer’s own capital stack, not the target. The seller invoiced the $75,000. The buyer refused to pay on two grounds: first, that the LOI was non-binding and nothing in it was enforceable; and second, in the alternative, that $75,000 was an unenforceable penalty, since the seller could not point to $75,000 of actual, provable loss from 47 days of exclusivity.
$3,200,000 enterprise value; a $75,000 break fee, 2.3% of that value. The seller’s documented out-of-pocket cost during the exclusivity period — advisory and accounting fees for the process, plus at least one declined inquiry from another interested party turned away because of the exclusivity commitment — came to roughly $18,000, a real cost, but well under the $75,000 figure the LOI fixed.
The buyer’s first argument failed on the document’s own words: the LOI expressly carved out the exclusivity and break-fee provisions as binding notwithstanding the non-binding character of everything else, a standard and enforceable drafting pattern. There was no ambiguity to resolve; the parties said plainly which parts bound them.
The real fight was the second argument, and there is a statute in play here, contrary to how this mechanic first reads: s. 98 of the Courts of Justice Act provides that “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” That is the statutory vehicle a party resisting a stipulated payment on breach actually invokes in Ontario — it is the provision the application judge exercised, and was later corrected on, in the leading deposit case discussed below. It supplies the court’s power; the common-law penalty test supplies the standard the court applies under it. Because no deposit changed hands here, the special rule that protects a true deposit from ordinary penalty scrutiny was never in play; that exception, as the Court of Appeal for Ontario has put it, exists precisely because “a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages, being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach” — and a deposit is simply the one, ancient exception to that ordinary rule. A break fee that was never paid up front and never held by anyone gets no benefit from that exception; it is tested under the ordinary rule, on the s. 98 court’s own terms.
Tested there, modern Canadian courts do not rush to grant that relief. The Court of Appeal has said plainly that “the strict rule of the common law refusing to enforce penalty clauses should not be extended”, for a reason rooted in “the policy of upholding freedom of contract”, and that “judicial enthusiasm for the refusal to enforce penalty clauses has waned in the face of a rising recognition of the advantages of allowing parties to define for themselves the consequences of breach.” The Supreme Court of Canada had already made the same point about penalties generally: refusing to enforce them is “blatant interference with freedom of contract.” A $75,000 figure, on a $3,200,000 deal, roughly four times the seller’s documented pull-away cost but far from disproportionate to the value at stake, is exactly the kind of modest, commercially ordinary number a court asked for s. 98 relief protects rather than strikes down.
Facing a weak position on both arguments — a surviving-provisions clause that defeated the non-binding defence, and a s. 98 penalty analysis unlikely to disturb a proportionate, negotiated figure — the buyer paid the $75,000 rather than litigate it.
Had the LOI not carved out the break fee and exclusivity as binding — had it left the document entirely non-binding, a drafting choice some sellers accept for the sake of a simple, fast-to-sign LOI — the seller would have had no contractual claim at all for the 47 days of exclusivity it granted, the advisory cost it incurred, or the other buyer it turned away. That loss would have been entirely uncompensated, with no fallback theory to recover any of it.
The stated reason for walking — a material adverse change — did not match the real one, a financing failure on the buyer’s own side. That mismatch is a useful early signal in any walk-away dispute, but it was not what decided this file; the outcome turned on the document’s own drafting, not on catching the buyer in an inconsistent story.
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