Parol evidence rule precluded admission of evidence of spoken contract allowing return of deposit
The Ontario Divisional Court has upheld an application judge’s decision to disallow a buyer from recovering his deposit after failing to complete a property purchase through his default.
In Brampton Worship Centre v. Montgomery, 2022 ONSC 6164, Reverend Vincent Sterling, on behalf of the appellant, agreed in July 2018 to purchase a property in Shelbourne from the respondent, Bruce Donald Montgomery. The purchase price was $1,150,000, and the appellant paid a deposit of $40,000 to the respondent.
Pending completion of the agreement, the appellant leased the premises at a rent of $4,000 per month. The agreement was not completed on the scheduled closing date due to the appellant’s inability to finance the purchase. In February 2019, the parties entered a second purchase and sale agreement. The purchase price was $1,300,000, with a deposit of $40,000 to be paid again to the respondent.
After the parties signed the second agreement, Sterling and the respondent’s real estate agent had discussions by email and text. The issues discussed included the possibility of the respondent providing a take-back mortgage and whether he would release the original $40,000 deposit to cover the appellant’s ongoing lease payments or to be used as the deposit required under the second agreement.
However, no agreement was reached, the required deposit was not paid, and the second agreement was abandoned. The respondent later sold the property to a third party for $960,000.
The appellant then applied with the Divisional Court for a declaration that it was entitled to a return of the deposit paid under the first agreement. The application judge dismissed the application. On his appeal, the appellant asked that the decision be reversed and sought a court order to release the deposit in its favour.
The Divisional Court upheld the decision and dismissed the appeal.
According to the court, the agreement provided for the disposition of the deposit upon completion of the agreement, such that if it were completed, the deposit would be credited to the purchase price. However, it did not provide for the disposition of the deposit if the appellant repudiated it.
The court noted that the application judge cited Azzarello v. Shawqi to the effect that in the absence of an agreement to the contrary, where a purchaser repudiates the agreement by failing to complete the transaction, the deposit is forfeited without proof of any damage suffered by the vendor, subject to relief from forfeiture. Thus, based on the Shawqi doctrine, the court found that the application judge correctly concluded that the respondent was entitled to keep the deposit.
The appellant argued that the application judge erred when she dismissed its claim that there was an agreement to the contrary – that the respondent had promised Sterling that he would return the deposit if the sale failed to close. The court disagreed.
The court found the application judge correctly rejected the appellant’s argument based on the parol evidence rule. The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing. Its purpose is primarily to achieve finality and certainty in contractual obligations and secondarily to hamper a party’s ability to use fabricated or unreliable evidence to attack a written contract.
Accordingly, the court agreed with the application judge’s finding that the parol evidence rule precluded the admission of Sterling’s evidence of an oral contract that the deposit would be returned if the sale failed to close.
On the issue of relief from forfeiture of deposit, the court ruled that the application judge correctly relied on Shawqi and Signal Chemicals Ltd. v. Dew Man Marine Trade Inc.
In Shawqi, the Ontario Court of Appeal approved a two-pronged test for relief from forfeiture of deposit: (1) whether the deposit is all out of proportion to the damages suffered, and (2) whether it would be unconscionable for the vendor to retain the deposit.
In Signal Chemicals Ltd., the Ontario Court of Appeal held that in determining whether it would be unconscionable for the vendor to retain the deposit, two factors must be examined: (1) whether there was an inequality of bargaining power between the parties; and (2) whether the impugned term or condition has a high degree of unfairness.
“The application judge found that the amount of the deposit was not disproportionate, that there was no evidence of inequality of bargaining power, and that it would not be unfair for Montgomery to retain the deposit,” Justice Stephen Bale wrote. “On the evidence before the court, it was open to her to do so.”
