Contracts: enforcing payment of a deposit

A High Court case has provided another reminder that the purpose of a deposit is to secure the buyer’s performance. The court ordered the buyer of a ship to pay to the seller the full amount of an unpaid deposit (either as a debt or as damages), and not a lesser sum in damages for actual loss caused by the buyer’s breach. The buyer’s failure to pay the deposit by the time specified in the contract was a repudiatory breach, leading to termination of the contract by the seller. On a proper interpretation of the contract, the deposit was a deposit and not merely an advance payment. The full amount of the deposit was payable because the right to the deposit had accrued before termination, and had not been lost because of the termination.

The decision also highlights where the parties’ risks lie in the initial stages of contracts where deposits are a feature. A seller should ensure that the obligation on the buyer to pay the deposit should arise as soon as possible after the contract is concluded and to have a deadline by which the deposit is to be paid. This should reduce the seller’s risk of having a sale fall through leaving only a right to damages for loss of bargain and some expenses. If the parties do not intend the deposit to be forfeit if the buyer defaults, then the contract needs to be very clear that the parties intend that to happen.

This checklist highlights some of the other major pitfalls that a business needs to avoid during contract negotiations.