Pursuant to section 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43, a court may grant relief against penalties, and relief against forfeitures, on terms that are considered just.
The court in this instance had to deal with a mediated settlement between a contractor and an owner whereby the parties agreed that certain construction deficiencies would be remedied by a certain date, and if not, the contractor would forfeit the money paid into court. What seemed “unfair” to the contractor in this case is that despite working hard at trying to get all the deficiencies fixed, an appointed engineer concluded that some modest issues still had to be fixed (likely less than $10,000.00 worth of work), and because of this, the entire $30,000.00 on deposit was forfeited. The contractor appealed, arguing that the trial judge erred in not granting relief from forfeiture.
This case is handy because it summarizes a number of recent cases on the topic and outlines the following framework for requests for relief from forfeiture when parties enter into an agreement that contains a “stipulated remedy clause” (ie: if there is a future default, the following pre-determined remedy will result) – in this case, if every deficiency is not fixed by X date (the default), the money paid into court will be paid over in full to the owner (the pre-selected remedy):
1. A stipulated remedy clause (“SRC”) may be characterized as a penalty (the payment of a sum of money) or a forfeiture (the loss of a right, property or money, often being held as security or part payment):
FOR SRC’S CHARACTERIZED AS A PENALTY
2. At common law, the enforceability of a SRC penalty is to be determined at the time the contract was formulated (not at the time of default);
3. If at the time the contract was formulated the SRC penalty is considered “extravagant and unconscionable in amount” compared to the greatest conceivable loss upon breach, the SRC penalty will be treated as an unenforceable penalty;
4. If at the time the contract was formulated the SRC remedy is a genuine attempt to pre-estimate damages upon breach, the SRC penalty will be treated as an enforceable penalty;
FOR SRC’S CHARACTERIZED AS A FORFEITURE
5. For SRC’s that involve forfeitures of rights, property or money, it will be enforced in equity when it is not unconscionable to do so, determined at the time of breach.
HOW TO DECIDE WHETHER THE SRC IS A PENALTY OR FORFEITURE?
6. If a SRC remedy can fall into either category, the strong judicial preference is to classify the SRC as a forfeiture rather than as a penalty;
ASSESSING UNCONSCIONABILITY
7. When assessing unconscionability, the court can look at:
i) Just about anything, but making a finding of unconscionability is an exceptional finding that needs to be strongly compelled on the facts of the case;
ii) “the general organizing principle of good faith in contract law, and the duty of honest performance” as set out by the Supreme Court of Canada in Bhasin v. Hrynew,2014 SCC 71, [2014] 3 S.C.R. 494, at para. 93;
iii) Some factors include, but are not limited to: “inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties.”
In this case, the appellant contractor probably thought they would have a successful appeal based on the fact that forfeiting $30,000 held in deposit was arguably wholly unconscionable for a few residual repairs that were still needed, costing no more than $10,000.00 (as assessed by the owner’s own expert’s opinion), and even more so when the contractor was not allowed to be present during the final inspection by the engineer that rendered the opinion to the effect that certain repairs were still outstanding.
But the contractor lost the appeal. The appellate court concluded that the lower court judge correctly assessed this as a forfeiture SRC, (and not a penalty SRC), and applied the correct test of whether it was unconscionable. The appellate court was not prepared to interfere with the judge’s assessment of the conscionability of the SRC.
I do, however, have some misgivings over the analysis and the result. If an SRC is characterized as a forfeiture, the test of unconscionability is to be made at the time of the breach. So here, the breach at the end, when let’s say $7,500.00 in additional repairs was owing, there is a good argument to be made that the forfeiture of $30,000.00 is unconscionable. But the lower court, and appellate court, looked extensively on what occurred at the time the SRC was negotiated. Although this is undoubtedly a factor, I would submit that if the assessment has to be made at the time of the breach or default, much less weight should be given to the circumstances surrounding the negotiation of the SRC. Indeed, if the forfeiture assessment is heavily skewed at looking into how the SRC was negotiated, what is the purpose of straying away from defining a SRC as a penalty which requires the court to assess the parties’ situation at the time the SRC was negotiated?
Have a look at what the court considered, and assess for yourself whether you believe the court was looking at unconscionability at the time of the breach:
“In reaching …(her)… conclusion, …(the judge)… was aware that the Minutes of Settlement were negotiated following mediation, under which some but not all the alleged deficiencies that the engineer identified would be remediated by an agreed deadline, with the engineer being the sole arbiter of compliance: at paras. 12-13. She found that the Minutes of Settlement “reflect a considered and voluntary agreement by the parties to adopt a practical solution to resolving their dispute” and “was arrived at using mediated negotiation with the assistance of counsel”: at para. 21. She also noted that the agreed consequences of default “do not include any additional process for discussion, review, argument or arbitration” but rather designate the respondent’s engineer as “the professional arbiter of whether the work done by [the appellant] satisfactorily corrected each agreed-upon deficiency”: at para. 22. In addition, she notes that a finding of unconscionability “would require a party to establish an inequality of bargaining power and terms, in the context of a settlement, that are substantially unfair”: at para. 31.”
Again, in reading the above paragraph, it seems to me that all the focus was on factors that existed at the time the SRC was negotiated and this is how forfeitures of penalties are to be assessed: at the time the SRC was negotiated. It seems to me that the court codified this as a forfeiture of rights, but then proceeded to assess the case as a forfeiture of a penalty case. But clearly there is overlap when assessing “unconscionability,” and I guess at the end of the day, the judge, and the appellate judge, were satisfied that these sophisticated, well represented parties, and with no inequitable bargaining power, they made a deal that they need to stick with.
The cases making up the summary above included: Peachtree II Associates – Dallas L.P. v 857486 Ontario Ltd. (2005), 2005 CanLII 23216 (ON CA), 76 O.R. (3d) 362 (C.A.), leave to appeal denied, [2005] S.C.C.A. No. 420; Chilikoff v. West Capital Placer Inc., 2016 ONSC 6354; and Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, 413 D.L.R. (4th) 272
City Star Roofers Inc. v. 2169462 Ontario Limited, 2022 ONSC 1407
https://www.canlii.org/en/on/onscdc/doc/2022/2022onsc1407/2022onsc1407.html