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The court provides clarification on the status of a contractual deposit

It has long been the case in a domestic property transaction that the buyer pays a deposit ahead of the purchase of the property, on the understanding that the deposit will be forfeited if the purchase of the property does not proceed. This process is aimed at ensuring that the contract is eventually completed.

Background

The payment of deposits in commercial contracts has recently been clarified in the judgment of Popplewell LJ sitting in the Court of Appeal in a case of King Crude Carriers SA and Others -v- Ridgebury November LLC and Others [2024] EWCA Civ 719.

The case concerned an order for three ocean going tankers. The total contract price was approximately $50million, and the contract documentation stipulated that the buyer would pay a 10% deposit within three days of them signing the deal, but only if the seller’s agent confirmed they were in a position to receive the monies that were due. It was a condition of the contract that the buyer provide necessary documentation to the seller’s agent, such as evidence required to satisfy the agent’s anti-money laundering obligations.

The buyer did not pay the contractual deposit because the seller’s agent never confirmed they were in a position to receive the monies. The reason they did not do so was because the buyer had failed to provide the necessary documentation required under the contract. The seller elected to cancel the contract. There was a provision in the contract allowing the seller to sue for liquidated damages, but instead they elected to sue for the payment of the deposit, recoverable as a debt.

The buyer argued that they were not required to pay the deposit, on the basis that the seller had breached the contract by their agent not confirming they were in a position to receive the monies.  Therefore, the deposit was not due. The seller stated that if the buyer’s argument were correct, they would in effect be taking advantage of their own breach. It was an express obligation in the contract that the buyer provide the documents that were required to enable the agent to confirm they were in a position to receive the monies. In failing to do so, the buyer was in breach.

The outcome

The matter was initially dealt with in an arbitration, which was then ultimately referred to the High Court. In the High Court, the buyer’s argument was successful. The seller appealed, and the case came before a panel consisting of three senior Court of Appeal judges, including Popplewell LJ who gave the lead judgment.

The seller was successful in their appeal. The Court of Appeal held that the requirement to provide documentation to enable the agent to confirm they are in a position to receive the money was a condition of the contract. In failing to provide that information, the buyer was in breach of contract, and the seller was therefore entitled to sue the buyer in respect of their breach.

The Court of Appeal held that it was quite proper for the seller to seek the payment of their deposit as a debt, rather than seeking damages for the breach. This is good news to sellers in circumstances where the deposit is likely to be more than any damage that has been suffered as a result of the breach of contract, as they can elect to pursue the remedy that returns the most value to them.

It also reinforces the point that a party to a contract cannot take advantage of their own breach in order to attempt to resile from the contractual obligations imposed upon them.

The mechanisms required to ensure that the measure of damages is accurate, or that deposits are payable in a particular fashion, need to be set out in a carefully drafted contract.

Contact one of our solicitors today

If you need assistance in relation to the drafting of such documents, please contact the Clarke Willmott commercial team.  Alternatively, if you are facing or bringing litigation on the provisions of a contract, the litigation team at Clarke Willmott would be happy to help.

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