• DOWN PAYMENT AND ADVANCE PAYMENT. WHAT ARE THE DIFFERENCES?

    Deposit and advance payment – what's the difference?

    The deposit is a form of security for one of the parties to the contract against unjustified non-performance by the other party.Thisspecificandcompensationandjust in case. That's why it's enoughcommonly used when concluding civil law contracts, especially regarding the sale of real estate. Its meaning and legal effects are often confused with the institution of an advance payment. However, despite the apparent similarity, there are fundamental differences between a deposit and an advance paymentthey involve - I will explain to you in this very entry...

    What is a deposit?

    The answer to this question is not as simple as it seems at first glance...

    Well, in legal terms, a deposit has two meanings.

    The first of them comes down to the fact that it is an additional contractual stipulation, the purpose of which is to protect the parties against non-performance of an already concluded contract. It comes into effect when a specific sum of money is given to the other party. The deposit therefore constitutes a security for the proper performance of the concluded contract by appropriately disciplining the contractors.

    The reservation of a deposit may be included in virtually any contract, although as I indicatedbefore, it is particularly often used in relation to sales transactions, especially real estate. The sales contract itself will be discussed in more detail in the next article.

    The second meaning of the concept of "deposit" results directly from the provisions of the Civil Code, specifically its Art. 394. According to it - a deposit given at the conclusion of the contract means that in the event of failure to perform the contract by one of the parties, the other party may withdraw from the contract without setting an additional period and keep the deposit received, and if it was given by the party itself, it may demand a sum twice as high .

    The legislator himselfusesSothe concept of a deposit as a specific sum of money that is given by one party to the other upon concluding a contract in order to secure its proper performance. In this shotThe deposit has a strictly technical meaning, constituting to some extent a form of compensation intended to compensate for the damage suffered by one of the parties as a result of non-performance of the contract. Thus, it strengthens the legal position of the partner who is not responsible for this state of affairs and whose actions did not contribute to it in any way.

    As I mentionedabove, the institution of a deposit is very often used by the parties when concluding a preliminary contract for a movable item, for example a car, but especially for the sale of real estate. In such a case, it serves as a tool securing the conclusion of a future contract by both parties, on the basis of which the ownership of a given item will be transferred.

    The subject of the deposit may be money or fungible items of corresponding value, i.e. items that can be weighed, deducted or measured.

    I wrote about the preliminary agreement in detail in the article: :“Preliminary contract – in writing or at a notary? LINK So if you want to learn more, check out its content…

    How to give a deposit?

    The deposit is provided by payment. This may take the form of either handing over to the other party or its authorized representative cash, i.e. simply cash, or using non-cash money, i.e. making a transfer to its bank account.

    There are no legal obstacles for the parties to agree in the contract that the amount constituting the deposit will be transferred to the contractor within the agreed period after the conclusion of the contract.

    You must know that if the parties want to stipulate this effectively, they should include an appropriate provision in the contract specifying the date of its delivery. This means that a deposit that was not given at the conclusion of the contract and the parties did not indicate its subsequent provision in the contract should be considered as ineffectively reserved. The same effect will also occur if the party fails to provide the deposit within the specified period.

    How much can the deposit be?

    The amount of the deposit depends on the will of the parties, as it is subject to their mutual consentdetermination. In this respect, the principle of freedom of contract applicable in Polish law fully applies. According to it, the parties concluding a contract may arrange the legal relationship at their discretion, provided that its content or purpose does not contradict:

    • its properties (nature),
    • setting,neither
    • principles of social coexistence.

    In practice, the amount of the deposit usually ranges from ten to forty percent of the entire benefit specified in the concluded contract - for example, the sales price.

    However, you must know that this does not mean that the amount of the deposit can be completely arbitrary and is not subject to any rules. This is not the case - making an excessive reservation will be considered by the court as an abuse of rights or an act contrary to the nature of the obligation relationship and as such classified as invalid, and therefore notcausing no legal consequences. Judicial practice clearly shows thatThis will be the effect of the parties establishing a deposit, the amount of which exceeds the value of the performance that is the subject of a given contract.

    It is assumed that the deposit is a certain fraction of what can be expected in the performance of the contract. Therefore, it will be contrary to its essence if, when concluding a contract, money is given whose value is close to, equal to or exceeds the value of the agreed performance. Legally, this will simply be considered payment of the price before the due date, rather than a deposit.

    This effect will occur even if the parties, by mutual consent, provide for a deposit of such an "excessive" amount in the concluded contract. This is due to the fact that the principle of freedom of contract is not absolute,Becauseit has its limits, which I wrote about earlier. This means that the parties are obliged to comply with the essential elements of the obligation relationship, i.e. its components, which determine the essence of the legal bond being created, and violation of the above-mentioned criteria results in the invalidity of the contract or its part.

    How to set up a deposit?

    If you want to effectively reserve the establishment of a deposit, you must first of all remember one very important rule - it must be clearly defined by the parties in the content of the contract they conclude, preferably with a direct reference to Art. 394 of the Civil Code. Not only its expected legal consequences depend on this, but also its possible evidentiary value in court. This will certainly prove necessary if you come into conflict with your contractor over the performance of the contract between you...

    If the above condition is not met, it will be difficult for you to prove that the amount of money given was of this nature and was not an advance payment, the essence of which is completely different...

    In the context of the above, it should be noted that it is worth considering whether, when concluding a preliminary agreement with the intention of transferring a certain amount of money to the other party as security for the execution of the transaction envisaged therein, it is better to use the help of a real estate agency whose staff has appropriate skills and experience, enjoying at the same time, positive opinions from satisfied customers.

    If you decide to do so, he will certainly be able to ensure that this sum is properly included in its content, as an advance payment and not a deposit, so you will not have to worry that if things go wrong, you will suffer negative consequences of your ignorance and negligence in this matter, losing your money. You must be aware that a person who does not have appropriate practice and specialist knowledge, despite the best intentions, is not always able to adequately protect his or her interests in the complex legal act of selling an apartment or house.

    A professional real estate agency will ensure not only the selection of the best available offer - exactly what the client expects, but also efficient and comprehensive preparation of the transaction, especially in legal terms, and proper notary service, thus enabling a significant reduction in costs and, last but not least, - stress level.

    When should a deposit be given?

    As I wrote in the previous partarticle, "giving" a deposit means physically handing over a specified amount of money or a specific item to the other party to the contract. Therefore, it should be transferred at the moment of concluding the contract that provides for it.

    Giving a deposit only in the future may be ineffective from a legal point of view. This will also be the nature of only a general obligation of the contractor to perform such an activity at a different time.

    According to established case law, since the law stipulates that the deposit should be "given at the conclusion of the contract", there should be a close time coincidence between the moment of its giving and the conclusion of the contract. Otherwise, especially when a longer period of time has passed between these activities, the court may find that the deposit was not actually made, and the money given only covers part of the main monetary obligation, usually the purchase price - it is not even a depositand only an advance payment.

    Therefore, it must be stated that an effective reservation of a deposit requires the existence of a strict time relationship between the provision of money or goods and theconclusion of the contract.

    There is one exception to the above rule - the parties may include such a reservation - that the deposit will be given in the future - in the concluded contract. Such an effect may also result from custom established in given legal relations.

    Thanks to the above, giving a deposit at a time other than when concluding the contract produces the effects specified in the declarations of will of the parties, which may undoubtedly link the reservation of the deposit with a different, i.e. later, date of handing over its subject. Therefore, transferring money after concluding the contract does not deprive this activity of the nature of a deposit if they specified in the contract that it would be of this nature, but only set a later date for its submission. Consensus will is decisive hereparties who have contractually classified money transferred at another time - after the conclusion of the contract - as a down payment.

    Therefore, if the cash was handed over before or after the conclusion of the contract, in order to qualify it as a down payment, it is necessary that the parties expressly decided in the contract (if the handover took place before its conclusion) or in an annex (if the handover took place after the conclusion of the contract) that the cash given is a deposit to which Art. 394 1 of the Civil Code In such conditions, it is permissible to provide a deposit after the conclusion of the contract, but within the time agreed by the parties.

    What are the legal consequences of making a deposit?

    Establishing a deposit has far-reaching legal consequences.

    They are particularly severe for the party that failed to meet the terms of the concluded contract, leading to its non-performance, for example by terminating it for unjustified reasons or by failing to fulfill its mutual obligation.

    What are they?

    In such a situationthe injured party has the right to:

    • immediate withdrawal from the concluded contract - without setting an additional deadline for its implementation,
    • keep the deposit received.

    If she gave the deposit herself, she may demand twice as much.

    It should be noted that using the above-described rights is not obligatory. Therefore, if one of the parties fails to perform the contract, the other party does not have to withdraw from it, but may demand its performance on general terms. Also, despite the reservation of a deposit, the entitled party has the option of either usingvolandć from the resulting rights, or claim compensation on general terms.

    As a side note, it should be noted that "failure to perform the contract" should be understood as its complete failure to perform. Therefore, it does not only apply to improper performance, for example if the debtor only partially provides the performance. Therefore, failure to comply with the contract, even in part, is not its failure to be performed, which is the basis for the entitled person to draw consequences related to the establishment of a deposit. Also, "withdrawal from the contract" may only refer to the entire withdrawalj of the contract, and not from its part.

    Finally, it is worth mentioning that in the event of complete performance of the contract by the contractors, the deposit is counted towards the benefit of the party that gave it. However, if this is not possible for various reasons, it will be refunded in full.

    You must know that in the event of termination of the contract, the deposit is returned to the other party, and the returning party is not obliged to pay an amount twice as high. The same principle applies if the non-performance of the contract is the result of circumstances for which neither party is responsible, for example as a result of an unforeseeable so-called force majeure or for which both of them are responsible, so each of them contributed to a certain extent to their creation.

    It is not without significance that the legal situation of the party exercising the rights under the deposit is significantly strengthened thanks to it. This is due to the fact that in order to withdraw from the contract and obtain appropriate compensation, the contracting party is not obliged to:

    • demonstrating that it has suffered damage and its amount,
    • demonstrating that the other party's performance has lost its significance for it,
    • setting an additional, appropriate deadline for fulfilling the obligation, which is basically a mandatory solution in relation to mutual contracts.

    Is there a statute of limitations for claims for a down payment?

    Unfortunately, this question must be answered in the affirmative. But what are these claims?

    From a legal point of view, the parties to the contract who made a deposit are entitled to claims for:

    • refund of the deposit or
    • payment of a double deposit.

    The rule is that since the deposit does not constitute an independent contract, but is an inherent part of another legal relationship, claims regarding the deposit expire together with those relating to the contract with which it is related.

    In connection with the above, it should be noted that if the specific provisions relating to a given contract do not provide for other limitation periods, claims regarding the deposit become time-barred upon the expiry of:

    • three years in the case of contracts related to running a business,
    • six years in other cases.

    However, you must know that the limitation period is different if the deposit results from the preliminary agreement concluded by the parties.

    Since, as I mentioned, the deposit is not an independent contract and cannot exist independently of the preliminary contract, constituting only one of its provisions - claims arising from it are claims arising from this very preliminary contract. This means that they expire after one year from the date on which the final contract was to be concluded. If the court rejects the request to conclude a final contract, claims under the preliminary contract become statute-barred after one year from the date on which the judgment becomes law.powerful.

    What is an advance payment?

    Just the conceptthe advance payment is not of a normative nature, i.e. strictly established by the legislator as part of a legal provision. However, it is assumed that it means transferring to the contractor, upon concluding the contract, a certain sum of money as partial payment towards the benefit specified in the contract, usually the sales price.

    Deposit and advance payment – what's the difference?

    The differences between a deposit and an advance payment are absolutely fundamental. They concern not only the legal effects of both these institutions but also the purpose of their application. These are tools of a completely different legal nature.

    A thorough explanation of this issue is particularly important due to the fact that specifying the obligation to pay an advance payment or deposit is a common practice in legal transactions involving real estate. Such a provision is generally included in every preliminary sales contract. So what's the difference between them?

    First of all, you must know that while the deposit is intended to secure the performance of the contract by the other party, the advance payment is only a monetary amount paid towards future contractual receivables. It constitutes only a part of the price agreed by the contractors and is, in fact, its component, so it does not provide any protection for the execution of the concluded contract.

    Therefore, the purpose of establishing an advance payment and a deposit is completely different.

    The remaining differences between an advance payment and a deposit concern their legal effects and boil down to the following elements:

    • because the advance payment de facto means a partial payment towards the performance specified in the concluded contract, after its performance, the obligated party pays the other party only the difference between the final amount and the advance payment - it is therefore simply offset against the contractual performance due,
    • in the case of an advance payment, when the contractual performance of the other party is not fulfilled, unlike a deposit, it is refundable in full, unless the parties have agreed otherwise, expressly mentioning it in the concluded contract,
    • When returning an advance payment, you can deduct all costs incurred by a given party in connection with the implementation of the contract. In the case of a refund of the deposit - this is not possible.

    Deposit and advance payment – what if there are any doubts?

    In practice, there is often a situation in which, when concluding a specific contract, one party gave the other a sum of money or possibly movable property, and it is not possible to clearly determine, using general rules for the interpretation of declarations of will,significance attached by the parties to this fact. In such a case, as indicated by the Supreme Court, the relevant meaning should be that it is a deposit and not an advance payment.

    You must know that the amount paid is considered an advance payment only if it is clearly stated in the concluded contract. If there is no appropriate provision in the contract, any other prepayment will be treated as a deposit.