Every word in a contract has meaning

The only thing worse than big words is big words thrown together in long sentences. What’s even worse is when big words and long sentences are in contracts. Even worse is when words are actually small and sentences are short, thereby lulling you into a false sense of security by making you think you know what’s going on in the contract.

Big mistake! Case in point: A recent decision of the British Columbia Court of Appeal held that a deposit paid by a buyer in a real estate transaction was forfeited to the seller when the buyer failed to complete the transaction, even though the seller couldn’t prove he had suffered any damages.

So does this case stand for the proposition that when a buyer fails to complete, the deposit automatically goes to the seller, even if there are no damages? That would be too easy. It stands for the proposition that words are devious and it helps to pay attention to them when you’re writing contracts.

In this case, the buyer signed an unconditional offer for $2,030,000.00. The property was in Vancouver, which means it was a fixer-upper. The deposit was $100,000.00.

The contract said that if the buyer failed to close, “…the amount paid by the Buyer will be absolutely forfeited to the Seller…on account of damages without prejudice to the Seller’s other remedies.”

The buyer never completed the transaction, and the seller eventually sold the property for a higher price, with the result that he did not suffer any losses. The buyer adopted what the uninitiated might conclude was a reasonable argument: the deposit was intended to be applied against actual damages incurred, and as there were no damages, give me my money back. The seller begged to differ, as did the court.

The court began by stating that whether a deposit was refundable or non-refundable depended on the wording of the contract. It went on to say that interpreting the wording of a contract was not simply a matter of looking at the words. Words do not exist in a vacuum (unless the cleaning lady didn’t notice the Scrabble game you left on the floor). You have to look at where the words reside in the contract, and then all of the circumstances surrounding its execution.

The court said the deposit serves two purposes: it is a part-payment of the purchase price, and it is also a motivation for the buyer to complete the contract. As a matter of common law, the deposit is forfeit in the event of non-completion unless the contract manifestly says otherwise. Based on this analysis, the court found the words “on account of” meant that, in any subsequent action by the seller against the buyer for failure to close, the deposit would be applied to any damages otherwise awarded by the court. The purpose of that clause then was to prevent double recovery in the case of actual damages. But it does not require the seller to prove damages in order to retain the deposit.

So the seller made a huge profit, and I’m guessing the agent for the buyer had some uncomfortable questions from his former client.

The moral of this story: All contracts are not created equal. Every word has a meaning, and that meaning may not be what you think it is. So pay attention to the words. Your client will thank you (by not suing you).

The article above is for information purposes and is not legal advice or a substitute for legal counsel.

Bill Harrington, former General Counsel, oversaw CREA’s legal department, which provides legal advice to boards and associations on a wide range of issues, including intellectual property, REALTOR® Code issues, interpretation of CREA’s Bylaws, Rules, and policies, and issues involving federal legislation. Our legal department also supports the Executive Office and the Board of Directors. Bill has seen it all and enjoyed the variety and unpredictability of legal issues that came up. Interesting fact: To call Bill a fan of “The Who” is a bit of an understatement – he has seen them in concert 28 times!

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