Deposit versus advance payment

The deposit and advance payment are so-called additional contractual reservations. The parties may, but are not required to, include provisions in the contract to regulate the rules and time limits for the payment of the price of an item prior to its delivery or the value of a service prior to its performance. A deposit and an advance payment consist of the performance of a monetary consideration by one party prior to the performance of an obligation by the other party (i.e. prior to the performance of the contract). However, the two institutions have some significant differences.

Deposit

In accordance with Article 394 of the Civil Code:

• 1. In the absence of any other contractual stipulation or custom, a deposit given at the conclusion of the contract has the meaning that, in the event of non-performance of the contract by one of the parties, the other party may, without setting an additional date, withdraw from the contract and keep the deposit received, or, if it was given by the party itself, it may demand a sum twice as high.
• 2. If the contract is fulfilled, the deposit shall be counted towards the performance of the party who gave it; if the counting is not possible, the deposit shall be returned.
• 3. In the event of termination of the contract, the deposit shall be returned and the obligation to pay the double amount shall fall away. The same shall apply if the non-performance of the contract is due to circumstances for which neither party is responsible or for which both parties are responsible.

The regulation of a deposit is dispositive, i.e. it can be modified by the parties in the contract.
A deposit may be reserved for the benefit of only one or both parties.
The object of a deposit is most often money, although things of kind or identity are also not excluded as the object of a deposit.
The amount of the deposit is not regulated by law, but it is assumed that it should be a small part of the monetary consideration agreed in the contract.
A deposit is a real act, which means that its effectiveness depends on whether it was actually paid at the conclusion of the contract. In the absence of payment of the deposit, despite the parties’ agreement that it would be given, the sanctions that are provided for in Article 394 of the Civil Code in the event of non-performance of the contract cannot be invoked.
The effect of the payment of a deposit provided for in the law depends on which party gave the deposit.
If the debtor fails to perform an obligation for reasons for which he is at fault, the creditor has the right to rescind the contract. This right applies even if there was no additional provision in the contract allowing withdrawal in certain cases.
An additional entitlement in the event of the debtor’s non-performance of the contract is the right to:

• retention of the deposit if the creditor was the party accepting the deposit,
• to claim double the amount of the deposit if the creditor was the party who paid the deposit.

The creditor’s claims arising from the reservation of a down payment in the contract are time-barred under the general rules, i.e. within six years from the due date of the down payment, or within three years from the due date of the down payment if the claim is in connection with the conduct of a business activity.

Advance payment

The institution of an advance payment is not regulated in the law.
It is most often assumed that the object of the advance payment should be the same as the object of the main performance. Thus, if one of the parties is obliged to pay a certain amount of money to the other party, an advance payment consists in the payment of a certain part of this amount by the latter for the performance of its obligation in the future. The amount paid reduces the amount of the monetary consideration remaining to be paid under the contract.
An advance payment is always made by the party opposite to the entitled party. Thus, if the seller is entitled to demand payment of the price, the buyer may make an advance payment on the price due.
The parties’ agreement on an advance payment does not affect the principles of liability for non-performance of the contract.
The deposit paid by the party in default through its own fault shall be forfeited. The down payment made by the party in default through its own fault may be recovered (provided that it is not set off by the other party against its claims against the party in default).
Legal status as at 6.11.2024