Nature of a deposit

A “deposit” is usually paid at the time of making a contract and has been described as “an earnest to bind the bargain” the subject of the contract. It is a payment that is made before the delivery of the item or property the subject of the contract.

As Lord Justice Cotton says in Howe v. Smith[44], at page 95:—

The deposit, as I understand it, and using the words of Lord Justice James, is a guarantee that the contract shall be performed. If the sale goes on, of course, not only in accordance with the words of the contract, but in accordance with the intention of the parties in making the contract, it goes in part payment of the purchase-money for which it is deposited; but if on the default of the purchaser the contract goes off, that is to say, if he repudiates the contract, then according to Lord Justice James, he can have no right to recover the deposit.
I do not say that in all cases where this court would refuse specific performance, the vendor ought to be entitled to retain the deposit. It may well be that there may be circumstances which would justify this court in declining, and which would require the court, according to its ordinary rules, to refuse to order specific performance, in which it could not be said that the purchaser had repudiated the contract, or that he had entirely put an end to it so as to enable the vendor to retain the deposit. In order to enable the vendor so to act, in my opinion there must be acts on the part of the purchaser which not only amount to delay sufficient to deprive him of the equitable remedy of specific performance but which would make his conduct amount to a repudiation on his part of the contract.

In the same case, Fry L. J., said:—

Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed, and we must, therefore, inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.

In layman’s terms it can also be considered a bond for performance, indicating a sincere intention to be bound, which is forfeited if the party breaches the contract.

The common law relating to deposits in a contract for the sale of land is to the following effect.

First, a label or description in a contract of a payment as a ‘deposit’ is not determinative of its character as such: Coates v Sarich (1964) WAR 2, 15; Freedom v AHR Constructions Pty Ltd [1987] 1 Qd R 59, 66.

Second, a deposit fulfils two functions; first, its primary function is an earnest given by the purchaser to bind the bargain and to provide security for its performance; second, it is also a part payment of the purchase price: Howe v Smith (1884) 27 Ch D 89 ; Brien v Dwyer [1978] HCA 50; (1978) 141 CLR 378.

Third, on termination of a contract for breach, at common law the deposit paid by the purchaser is forfeited to the vendor: Brien v Dwyer; Romanos v Pentagold Investments Pty Ltd [2003] HCA 58; (2003) 217 CLR 367; Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22; (2008) 236 CLR 342. The vendor has an unconditional right to retain the deposit paid by the purchaser because the consideration has not failed. Wickham J in Farrant v Leburn (1970) WAR 179 explained:

The agreement to pay [the deposit] was not in consideration of conveyance but was in consideration of the contract. It was the price or part of the price of the vendor’s promise to sell and this promise, having been given by the vendor, the consideration for the purchaser’s promise was fully executed (184).

This explanation of a deposit at common law resonates with the words deleted from the definition of ‘terms contract’ in the Bill. In Farrant, the vendor had rescinded the contract for the purchaser’s ‘fundamental breach’ in failing to pay a deposit which was payable immediately on entry into the contract.

Further, the vendor can recover any unpaid deposit that has accrued due prior to contractual termination: Bot v Ristevski [1981] VicRp 13; [1981] VR 120. By contrast, on termination for breach, an instalment of the purchase price belongs to the purchaser at common law on the basis that the consideration for the payment, being the conveyance or transfer of the land, has failed and thus the instalment can be recovered, subject to the vendor’s right to counterclaim for damages: McDonald v Dennys Lascelles Ltd [1933] HCA 25; (1933) 48 CLR 457.

Fourth, the payment of a deposit within the contractual time stipulation is deemed, at law and in equity, to be an essential term of the contract (Brien v Dwyer) with the consequence that any breach of any nature or degree justifies termination without notice: Koompahtoo Local Aboriginal Land Council v Sampine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 [48]. Repudiation is a separate and independent ground for summary termination at common law: Koompahtoo [44].

Most of the cases on the subject of deposits to which I have referred concerned deposits which were payable on or around the time of entry into the contract. That accords with the common understanding of a deposit as an upfront payment as an earnest of the purchaser’s intention to perform and as security for the vendor. A bird in the hand, as they say. Gibbs J stated in Brien v Dwyer that the primary purpose of the deposit would not be served unless the deposit were paid at the very time when the purchaser assumed his obligations under the contract (392). This is reflected in the standard form offer and acceptance. The notion of a purchaser’s mere unperformed promise to pay a deposit being the earnest of performance and the security is inconsistent with long established principle. A promise to pay a deposit that survives termination is in substance a liquidated damages clause.

However, it must be accepted that in appropriate circumstances a deposit can be paid by instalments over an extended period: Romanos v Pentagold Investments Pty Ltd. In that case, the majority (Gleeson CJ, McHugh, Gummow, Hayne & Heydon JJ) stated:

In Brien, Jacobs J described a deposit as:

[A]n assurance to the vendor, a security to him pending completion. He can take his property off the market and not concern himself with other offers in case the sale should go off, with the comfort at least that the deposit is there for his security’.
This reasoning is no less applicable to contracts providing for the payment of a deposit in particular instalments at times each stated to be essential. That is the present case. Further, Brien is authority for the proposition that once there has arisen an entitlement to rescind for failure to pay the deposit, that entitlement may be exercised without the necessity that the purchaser first be given notice requiring payment to be made at a reasonable time [20].

How can a deposit be characterised from a something like a part payment?

In Howe v Smith (1884) 27 Ch D 89 Fry LJ said at 101:

Money paid as a deposit must, I conceive, be paid on some terms implied or expressed. In this case no terms are expressed, and we must therefore inquire what terms are to be implied. The terms most naturally to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is not performed by the payer it shall remain the property of the payee. It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture motive in the payer to perform the rest of the contract.

In Commissioner of Taxation (Cth) v Reliance Carpet Co Pty Ltd [2008] HCA 22; (2008) 236 CLR 342 the High Court said at 351-352 [27] (footnotes omitted):

The expression “an earnest to bind the bargain” reflects, as Fry LJ put it in Howe v Smith, the adaptation by the common law of “[t]he practice of giving something to signify the conclusion of the contract, sometimes a sum of money, sometimes a ring or other object, to be repaid or redelivered on the completion of the contract, [which] appears to be one of great antiquity and very general prevalence”. The practice was received from Roman law into the mediaeval common law by the time of Bracton, and thus preceded the development of the modern law of contract and of the equitable principles which it includes. The quotation by Fry LJ from Bracton indicates that where something was given by way of a deposit before delivery then if the buyer repented and wished to resile from the contract the buyer lost the deposit; if the seller was responsible for the non-performance then the seller was required to return double the amount of the deposit. Writing in the same period as Fry LJ, Benjamin said that in the modern law “the true legal effect of earnest is simply to afford conclusive evidence that a bargain was actually completed with mutual intention that it should be binding on both [parties]”.