Contract Determines Deposit Status

When a contract is terminated and a deposit has been paid, what is the status of the deposit? A recent case has clarified the law in this area.

In a dispute between two shipping companies, the High Court ruled that if a contract is terminated because of a breach by the buyer, before it has been completed, the buyer’s deposit on the contract may be forfeited.

However, if the deposit is a down payment on the whole – i.e. payment of a proportion of the whole contract price – then it may be recoverable, at least in part, depending on the extent to which the other party has fulfilled their side of the contract.

If the deposit is an ‘earnest of his performance’ – i.e. a payment made in advance to secure the benefit of the contract, but not part of the contract price per se – then the other party will be entitled to retain it.

It is the wording of the contract that will decide the issue.