IS A PENAL CLAUSE IN A PRELIMINARY SALES CONTRACT FOR A NEW CONDOMINIUM ENFORCEABLE? IT DEPENDS…

The plaintiff sued the condo developer to recover the sum of $63,926.10 that he paid as a deposit pursuant to a preliminary sales contract for the purchase of a new condo to be built for a total sales price of $639,261. (Zerdazi -vs- Développement Roccabella Inc. 2017 QCCQ 3025).

The plaintiff alleged that due to the termination of his employment, he was unable to obtain approval for the financing that he expected and required so he could not complete the transaction.

The developer, relying on a clear and express clause of the preliminary sales contract that plaintiff was fully aware of and accepted, agreed to the cancellation of the contract but insisted on retaining the deposit. 

The developer claimed that as a result of plaintiff’s default, it had to invest time, energy and incurred costs to find a new buyer, which it succeeded in doing approximately 5 months after the property was ready for occupation. In fact, the developer sold the property for $715,000 i.e. $75,000 more than the price of the aborted sale.

The developer submitted evidence detailing the additional costs that it occurred to find a new buyer in the aggregate amount of $51,570 so that it made a profit on the re-sale in the amount of $9,304. The court had to decide whether the developer could keep the deposit in addition to the profit on the re-sale.

A penal clause, sometimes referred to as liquidated damages, allows the parties to a contract to determine in advance the quantum of damages that an aggrieved party would be entitled to receive in the event of a breach, without having to prove the quantum of damages. Such clauses are legally enforceable but not absolute. As with the law in general, there are rules, exceptions to rules, exceptions to the exceptions and so on. 

Certain clauses may be declared unenforceable or reduced if they meet two conditions. The first condition is that the contract must be an “adhesion contract”, which is a standard form contract the terms and conditions of which are imposed by one of the parties on the other without the possibility of negotiation.

The second condition is that the impeached clause must be considered to be abusive, which is defined as being “…excessively and unreasonably detrimental to the adhering party and is therefore contrary to the requirements of good faith;” (Article 1437 Civil Code of Quebec).

Here are some of the characteristics of abusive clauses that have been picked up by the doctrine and caselaw:

·      The creditor has suffered no loss whatsoever as a result of the breach of contract

·      There is a substantial disproportion between the loss incurred and the amount of the penalty

·      The breach of contract is associated with an element of bad faith or negligence on the part of the defaulting party

In the case at bar, the court concluded that the developer had incurred no loss and in fact, had incurred a profit on the re-sale. The default of the plaintiff could not be attributed to any fault, negligence or bad faith on his part but rather was solely due to the loss of his employment, which was not within his control. Finally, the court also considered the particular circumstances of the case namely, the harsh financial impact of the penalty upon the plaintiff, who had retired and was in his late sixties.

For all of these reasons, the court assessed the penalty in the amount of only $2000 and ordered the developer to reimburse the plaintiff the amount of $61,926.10, with interest.