All about deposits

All about deposits

05.03.2024.

In establishing a contractual relationship, both parties share the common objective of fulfilling their respective contractual obligations. To ensure the fulfillment of these obligations, legal provisions exist for securing contractual performance, which can take either personal or property-related forms. In this discourse, we shall elucidate one of the most prevalent methods for securing contracts – the deposit. 

In practice, there exists significant ambiguity surrounding the concept of a deposit, often leading to confusion with advance payments or misconceptions about rescission fees, as evidenced by numerous examples from legal proceedings. 

What Constitutes a Deposit? 

As stipulated in our Law on Obligations, if one party, at the time of contract conclusion, provides the other with a specific sum of money or a defined quantity of other exchangeable property items as an indication of contract finalization, the contract is deemed concluded upon the deposit, unless otherwise agreed. 

From this provision, the fundamental characteristic of a deposit is derived – it serves as a means of securing contractual obligations while also signifying the conclusion of the contract due to its exchange at contract finalization. A deposit is established through a deposit contract specifying that money or other exchangeable property items constitute the deposit. Therefore, a deposit cannot be presumed but must be explicitly agreed upon; otherwise, it would be considered an advance payment. 

Legal Nature of a Deposit 

A deposit is considered an ancillary legal transaction that mirrors the fate of the main contract. As an accessory and ancillary agreement, a deposit cannot exist independently of the main contract. Hence, the absence of a main contract precludes the existence of a deposit contract at the contract conclusion moment. The provisions governing deposits under our law pertain not to the return of received amounts but rather to unjust enrichment. 

For instance, in the case Gž. 1077/11, the Higher Court in Pančevo declared the ancillary deposit contract null due to the non-execution of the main contract, obligating the defendant to reimburse the received funds as part of the purchase price due to lacking legal grounds. 

Similarly, by the decision of the Supreme Court Rev. 108/2005, it was affirmed that a real estate sales contract lacking certification by the competent authority does not hold legal force, thereby invalidating the deposit made during the conclusion of the uncertified pre-contract as a means of securing contractual performance. 

Regarding the execution of the main contract, the deposit must either be returned or credited towards obligation fulfillment. In the absence of contrary agreements, the party making the deposit cannot unilaterally withdraw from the contract, leaving the deposit with the counterparty, nor can the counterparty do so by returning double the deposit amount. 

Basic Principles of the Deposit Concept in Case of Non-Performance 

Article 80 of the Law on Obligations addresses this issue. Should a breach occur due to the depositor’s fault, the aggrieved party may opt for either contract enforcement, if feasible, or seek damages, with the deposit being deducted from the compensation, refunded, or retained as already received. 

The Supreme Court, in the case Rev. No. 1086/02, clarified that a deposit signifies contract finalization, requiring written formality for construction contracts. Consequently, the deposit must be agreed upon in writing; thus, the lower courts rightly dismissed the plaintiff’s claim for deposit return, given their responsibility for contract non-performance. 

Conversely, if the party receiving the deposit is accountable for contract non-performance, the other party may also pursue contract enforcement, damages, deposit refund, or demand double the deposit amount. 

It is essential to note that opting for contract enforcement entitles the aggrieved party to compensation for damages due to the counterparty’s delay. 

Partial Fulfillment of Contractual Obligations 

In instances of partial fulfillment, the deposit must not be retained by the recipient but can be pursued for the remaining obligation fulfillment and compensation for any delay or damages resulting from incomplete performance. In either scenario, the deposit shall contribute to the overall damages. 

Should the creditor terminate the contract and return partial performance, they retain the rights accorded to them when a contract remains unfulfilled due to the counterparty’s fault, as previously discussed. 

Distinction Between Deposit and Advance Payment 

Differentiating between a deposit and an advance payment often poses challenges in practice. A common misconception associates deposits with contract finalization indicators. However, the deposit’s purpose lies in securing contract performance, signifying a concluded contract. Failure to conclude the contract renders such payments advances rather than deposits. 

Advance payments, like deposits, involve transferring a sum of money or property items before or at contract conclusion, serving as partial obligation fulfillment. Failure to categorize a payment as a deposit precludes the application of legally prescribed deposit rules regarding non-performance. 

For example, in the case Pž 163/19, the Commercial Court in Belgrade ruled on the plaintiff’s advance payment for an oral vehicle sale contract, ordering the defendant’s refund due to non-performance. The court rejected the appellant’s deposit claim, emphasizing the factual advance payment nature. 

Distinguishing Deposit from Rescission Fee 

As initially mentioned, the law stipulates that, absent contrary agreements, the depositing party cannot unilaterally withdraw from the contract, nor can the counterparty do so by returning double the deposit. 

Provisions concerning rescission fees accompany deposit regulations, allowing parties to repudiate the contract by serving a notice of rescission fee. Upon receipt of such notice, the counterparty forfeits the right to demand contract performance. The rescission fee is declared concurrently with the contract performance repudiation. This right ceases upon the commencement of contractual obligations fulfillment. 

Therefore, while a deposit and a rescission fee are distinct legal constructs, they may be contractually intertwined. If a deposit includes a withdrawal clause, the deposit effectively serves as a rescissionfee. Withdrawal by the depositing party results in deposit forfeiture, while withdrawal by the recipient necessitates double deposit repayment. 

The decision of the Supreme Court of Cassation in case Prev. 252/17 affirmed that when a withdrawal right is associated with a deposit, such right equitably belongs to both contracting parties, with withdrawal consequences equally distributed. Consequently, should the deposit-receiving party rescind the contract, merely returning the deposit does not impact their assets, as they are reimbursing what they received from the other party. Only double the deposit amount would reduce their assets by the agreed withdrawal deposit sum. 

Please note that this piece does not offer legal advice but rather represents the author’s standpoint.   

 

Scroll