Payment Under Protest #239

Jul 01, 1995

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By Gerry Neely
B.A., LL.B.

What do you as a buyer do when your understanding of the contract is that the seller is required to pay GST, but the seller refuses to do so. When that occurred in a recent transaction, the buyer paid the GST to avoid losing the property. The buyer's lawyer did not state that the payment was made under protest.

Instead, in wording perhaps carefully chosen to avoid alerting the seller to the possibility that an action would be commenced after the transaction closed, the buyer's lawyer said that the payment was made solely for the purpose of completing the purchase.

This statement was sufficient evidence that the payment was not made voluntarily. The law concerning the need to state that a payment is made under protest, if the payment is to be recovered, is contained in the following statement:

"If a person with knowledge of the facts pays money, which he is not in law bound to pay, and in circumstances implying that he is paying it voluntarily to close the transaction, he cannot recover it. Such payment is in law like a gift and the transaction can not be reopened."1

***

A mortgage was drawn for $190,000, which included a $10,000 bonus, the full amount to be repaid in 30 days without interest. This resulted in an effective annual interest rate of 89%. The lawyer who drew this mortgage was held to be negligent because he failed to consider the effect of Section 347 of the Criminal Code, which makes a rate in excess of 60% per annum legal.

The case does not establish new law, but serves as a reminder to all professionals considering a short term loan that a relatively small bonus can lead to a criminal rate of interest.2

***

A defaulting buyer trying to recover its deposit will look to any technicality that might result in the Court agreeing that the Contract of Purchase and Sale was void for uncertainty. In one case, the deposit was $100,000 and the technicality was that the terms of a seller take-back mortgage to secure repayment of $2,400,000 in two years' time did not state whether the mortgage was open or closed. The judge decided it was not an essential term of the mortgage and ordered the deposit to be paid to the seller.3

***

Another case in which the terms of paragraph one of the Contract of Purchase and Sale resulted in a court ordering the return of a $75,000 deposit to a buyer who refused to complete. The buyer's reason - the seller was unable to clear the title of a private restrictive covenant. Paragraph one, which has been discussed in Columns #160, #188 and #198, allows a seller to deliver a title which is subject to restrictive covenants and rights-of-way in favour of utilities and public authorities, and any other encumbrances set out in the contract.

The restrictive covenant limited the size and location of buildings on the property to protect the views of the adjoining owner. The argument of the sellers, who had sued for specific performance or damages, was that even if they were in breach of paragraph one, the buyers would have received substantially what they contracted to buy.

The judge agreed that a restrictive covenant that is of a minor nature and which would not interfere with the buyer's enjoyment of the property, is insufficient to justify the buyer's repudiation. If, however, the restrictive covenant affects the buyer's use or enjoyment of the property in a sufficient way, then that would be a serious defect of title.

Applying this test, the judge looked for guidance to cases where rights-of-way that ran along the boundary of the property within the building setbacks were minor encumbrances that did not allow a buyer to repudiate. At the other end was a case where a right-of-way prevented construction of a building within ten feed on either side of the pipeline. That represented a serious defect and entitled the buyer to repudiate.

The judge concluded that the limitation on the size and location of buildings would seriously affect the use and enjoyment and value of the property, and ordered the return of the deposit.4

  1. United Properties Ltd. v. Kuwica, S.C.B.C., New Westminster Registry S017368, Reasons for Judgment, October 17, 1994.
  2. Barrie v. 687844 Ontario Ltd., 43 R.P.R. (2) 267.
  3. Innovest Development Corp. v. Chow, 43 R.P.R. 237.
  4. Ferreira v. Chen, S.C.B.C., New Westminster Registry 015182, March 15, 1994.

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