Anonymised, illustrative composite. Ontario, a share purchase, a buyer who walked with no live financing condition, and a $150,000 deposit — kept without the seller ever having to prove a dollar of loss.
At a glance
A retiring owner agreed to sell all the shares of a mid-sized specialty auto-parts distributor to a competitor for $3,100,000. The share purchase agreement was signed with a $150,000 deposit, held in the parties’ respective counsel’s joint trust account pending closing, and a standard financing condition in the buyer’s favour. Two weeks before the scheduled closing date, the buyer’s counsel confirmed in writing that the financing condition was satisfied and waived. Five days before closing, the buyer’s lender withdrew its term sheet over a covenant issue in the buyer’s own existing credit facility — unrelated to the target. The buyer told the seller it would not be closing.
With the financing condition already waived and no material adverse change asserted against the target, the seller had no obligation to accommodate an extension and instructed the escrow agent to release the $150,000 to it under the SPA’s default clause. The buyer objected and commenced an application for return of the deposit. Its argument was not that the seller had no claim at all — it was that a sum described as a “deposit” is, in substance, still a payment on account of the purchase price, recoverable to the buyer subject only to whatever actual damages the seller could prove it had suffered from the failed closing. On that theory the seller would have had to plead and prove lost resale value, carrying costs and professional fees, not simply keep the cheque.
Ontario deposit forfeiture runs on two tracks. First: is this payment, on the wording and mechanics of the clause, a true deposit — security for performance — or merely an instalment of price? The Ontario Court of Appeal in Redstone, quoting Newbury J.A.’s five-judge panel in Tang v. Zhang, 2013 BCCA 52, put the deposit doctrine this way: “A true deposit is an ancient invention of the law designed to motivate contracting parties to carry through with their bargains. Consistent with its purpose, a deposit is generally forfeited by a buyer who repudiates the contract, and is not dependant on proof of damages by the other party.” A true deposit does not need the seller to prove anything.
Second, and only if it is a true deposit: can the buyer still get relief against forfeiture? Ontario’s statutory hook is a single sentence — “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” — s.98 of the Courts of Justice Act, R.S.O. 1990, c. C.43. Redstone restates the operative test as “whether the forfeited deposit was out of all proportion to the damages suffered, and … whether it would be unconscionable for the seller to retain the deposit”, tracing to Varajao v. Azish, 2015 ONCA 218, and to Stockloser v. Johnson, [1954] 1 Q.B. 476 (C.A.). Both branches have to be met. The Court of Appeal was explicit that disproportion alone will rarely be enough on its own: “the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case.” Redstone itself involved a $750,000 deposit — just over 7% of a $10.225 million price — and the Court of Appeal reversed a lower-court reduction and restored the full forfeiture, finding neither branch of the test made out on an arm’s-length, sophisticated commercial deal.
$150,000 against a $3,100,000 price is 4.84% — below the just-over-7% deposit the Court of Appeal upheld in full in Redstone, and inside the range Newbury J.A. described in Tang v. Zhang as customary (10% being the traditional figure). There was no evidence in the record of what the seller’s actual resale loss would have been — which under Redstone does not help the buyer. Silence on damages does not create disproportion; it removes the only evidence that could have shown it.
The court dismissed the buyer’s application. It held the deposit clause, on its wording and the trust mechanics behind it, was a true deposit rather than a part payment, and that neither branch of the relief-against-forfeiture test was satisfied: the sum was proportionate to a realistic range of resale exposure on a $3.1 million deal, and nothing about the parties’ dealings — both represented by counsel, no unequal bargaining power, no misconduct by the seller — supported unconscionability. The $150,000 stayed with the seller.
Had the payment been characterised as a part payment, the seller would have been put to proving actual damages from scratch: re-marketing costs, any price shortfall on resale, professional fees on both deals, and the carrying cost of a business already being wound down for a transition that did not happen. Several of those losses are genuinely hard to quantify inside a reasonable litigation timeline — goodwill drift and staff attrition during the gap may not be provable to a court’s satisfaction at all. The deposit converts that uncertain, expensive proof exercise into a fixed, immediate result; that conversion is the entire commercial point of calling it a deposit rather than an instalment.
The tell was in the drafting history, not the outcome. During negotiation, the buyer’s counsel had pushed to describe the $150,000 as “part of the Purchase Price paid on account and to be applied against the Purchase Price at Closing” rather than simply “a deposit,” trying to preserve a part-payment characterisation without saying so directly. It did not work — Tang v. Zhang is explicit that a label does not control. What mattered was the whole clause: the forfeiture-on-default language the seller’s counsel had insisted stay in, and escrow mechanics that treated the sum as security rather than a running credit against price. Engineering the legal character of a deposit through vocabulary alone, while leaving the operative forfeiture language untouched, fights the wrong part of the document.
A Quebec business sale does not run through equitable relief against forfeiture at all — there is no Quebec analogue to CJA s.98 in play here. A forfeitable deposit clause is a clause pénale under the Civil Code of Québec: “A penal clause is one by which the parties assess the damages in advance, stipulating that the debtor will suffer a penalty if he fails to perform his obligation.” (art. 1622). Article 1623 gives the same “no proof of loss” rule as the common law true-deposit doctrine — “A creditor who avails himself of a penal clause is entitled to the amount of the stipulated penalty without having to prove the injury he has suffered.” — but the next sentence is where Ontario and Quebec diverge: “the amount of the stipulated penalty may be reduced if the creditor has benefited from partial performance of the obligation or if the clause is abusive.” Ontario law is binary — forfeiture stands or it is relieved against in full. Quebec law lets a court simply reduce the amount. If the sale agreement is also a contract of adhesion — a real risk where a sophisticated buyer’s standard-form SPA was presented to an unrepresented or lightly-advised seller — art. 1437 supplies an independent ground: “An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may be reduced.” Two Ontario deals with an identical clause and an identical 4.8% deposit could see one held in full and the other quietly cut down to a fraction — that outcome is not available under Redstone; it is available under art. 1623.
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