Commercial Deposits in the UK
It is common for there to be an obligation to make initial payment under a contract for sale. The payment is frequently expressed as a proportion of the purchase price. In law, the payment can be construed either as a commercial deposit, or as part-payment of the price.
The distinction between the two interpretations is important, in the event that the buyer commits a repudiatory breach of contract, and seeks the return of the initial payment.
The differences between a commercial deposit and a part-payment are:
1. A commercial deposit is "a guarantee that the purchaser means business”. In the event that the buyer repudiates the contract the seller can retain the deposit and the buyer loses all rights to it. 2. A part payment of the price is construed as that. Therefore in the event that the buyer repudiates the contract it can claim the refund of its advance payment. However the buyer will be liable to the seller in damages for the breach of contract. The determination of whether a payment is a deposit or a part payment of the price, is based on the proper interpretation of the contract. Express wording included in the contract as to the nature of the payment, will assist in this interpretation. In addition, it would be prudent for the contract to clearly state whether the payment is refundable, or non-refundable, and the circumstances in which the payment will be refunded. The circumstances should include whether the payment will be payable upon demand by the buyer, and if so, the timescale within which the seller must make re-payment. If such provisions are included in the contract, and the seller does not comply with the repayment provisions, then it may be in breach of the terms of the contract. A commercial deposit has long been established as a guarantee for the buyer's performance of the contract. If a buyer does not comply with the terms of the contract, and the seller terminates the contract for the buyer's repudiatory breach, the buyer is not entitled to a return of the deposit. However, this only arises where there is a contractual obligation to pay the deposit. If there is no obligation, then the seller will only be entitled to damages.
The obligation to pay a deposit is regarded as a fundamental term of the contract, and breach of that term, permits the seller to terminate the contract and claim the deposit. This is so even if the deposit is unpaid, so long as the obligation to pay it has accrued.
In Damon Compania Naviera v Hapag-Lloyd International, the Blankenstein [1985], the buyer was held to have entered into a contract for the sale of a ship but then repudiated it, by failing to sign a memorandum of sale in time. By majority decision of the Court of Appeal, the seller had not acquired the right to the deposit set out in the memorandum at the time it accepted the repudiation, and accordingly it was only entitled to damages.
About the Author
The author, Christian Browne is a corporate solicitor and the Managing Director of Summerfield Browne Solicitors (http://www.summerfieldbrowne.com). Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough, Leicester. Christian Browne is also a legal advisor with the Institute of Directors in London.
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