Deposit on the purchase agreement. Where is the catch?
Theory and practice

Deposit on the purchase agreement. Where is the catch?

Addressing the litigation surrounding the payment of the deposit for the yacht
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We continue our series of articles dealing with interesting cases of yacht sales transactions subject to English law. This time we will look at cases involving contentious situations in the payment of a deposit under sale and purchase agreements.

Yacht settlements are almost always the cornerstone of yacht transactions and contracts entered into.

In the yachting industry there is an established practice of paying for yachts by dividing the sum of the yacht cost into two payments - an advance payment (deposit) and the main payment (balance).

Balance payment is usually made on the day of actual delivery of the yacht and documents upon completion of the transaction. The deposit is paid by the buyer either immediately upon signing the sales contract or shortly afterwards.

Given that in the yachting field the rules and customs established in the shipping industry are applied, precedents from this area are applicable to yacht situations and will also be of interest to yachtsmen.

PORTARIA SHIPPING CO. v. GULF PACIFIC NAVIGATION CO. LTD. (THE "SELENE G") [1981].

The contract of sale of the vessel SELENE G was concluded between the seller and the buyer whereby the buyer was required to pay a deposit of 10 per cent of the purchase price within 48 hours of the signing. The contract contained a provision to the effect that the non-payment of the purchase price gave the seller the right to withdraw from the contract and retain the deposit. Which it did. The case was referred to arbitration, which held that the seller was entitled to avoid the contract and to retain the deposit. However, the Tribunal noted that the deposit was an advance on the purchase price of the vessel and the mentioned possibility for the seller to terminate the contract upon non-payment of the purchase price implied that the deposit should be paid by the buyer in due time.

Disagreeing with the tribunal's decision, the buyer brought an appeal which upheld the tribunal's award but did not agree with its reasoning. In particular, the appeal distinguished between the terms «purchase price» and «deposit», i.e. the deposit was not considered to be part of the purchase price within the meaning of the contract. The appellate judges focused on whether failure to pay the deposit was a material term of the contract ( «condition»), the breach of which gave rise to a right to rescind the contract, or an unnamed term ( «innominate term») that did not give rise to such a right.

The English Sale of Goods Act 1979 states that the time of payment is not a material term of the contract. However, the judges held that that clause was inapplicable to the circumstances of the case and concluded that the timing of payment was a material term under the terms of the contract. This was justified by the fact that upon payment of the deposit the seller was given security ( «security») whereby in the event of the buyer's default, the seller would receive 10% of the purchase price.

Payment of the deposit upon signing the contract is in fact a security for the obligations of the buyer to fulfil the contract.

For example, the Mediterranean Buyers Federation's Yacht Sales Agreement form devised by the Association of Mediterranean Brokers ( «MYBA») states that the deadline for payment of the deposit is four bank days from the signing date of the contract. Interestingly, on the day of completion of the deal not only the balance of the value of the yacht is transferred but also the deposit that is held by the deposit holder until that day. That is, the deposit becomes part of the purchase price when paid into the buyer's account on the completion date. Until then it is a security, as we discussed above. Under the provisions of the proforma, if the buyer fails to fulfil the contract, the seller has the right to retain the deposit (less certain costs) as compensation for the losses incurred ( «liquidated damages»).

GRIFFON SHIPPING LLC v FIRODI SHIPPING LTD (THE "GRIFFON") [2013]

In this case, the seller entered into a contract for the sale and purchase of the vessel «Griffon» valued at $22,000,000. The contract called for a 10% deposit to be paid by the buyer within three days of signing the contract. When this did not happen, the seller exercised its right to terminate the contract. The buyer did not deny that the non-payment of the deposit constituted a breach which justified the seller's unilateral termination of the contract ( «repudiatory breach»).

The seller sought arbitration to recover a deposit of $2,156,000 as payable by the buyer and damages for breach of contract. The defendant argued that the plaintiff was only entitled to damages for breach of contract, not the full amount of the deposit. As a result, the Tribunal sided with the buyer and awarded a payment limited to the damages sustained by the seller, which was substantially less than the amount of the deposit.

Thereafter, the seller brought an appeal, which was decided in its favour, for the following reasons:

  1. The payment of the deposit was a security for the proper performance of the contract of sale and its faithful execution (English - «an earnest of performance»).
  2. The seller's entitlement to the deposit could not be lost due to the termination of the contract, hence the deposit had to be paid.
  3. By analogy with the common law position, the amount of the compensation for the buyer's failure to pay the deposit should not be less than the amount of the deposit itself.

The court's position was that if the provisions of the contract of sale contain a provision for refund of the deposit upon the buyer's default, the fact that the deposit itself is not paid cannot deprive the seller of its right to reimburse it. The extent of his rights in such a case should not differ from that of the seller in whose contracts the deposit was paid.

However, the entire amount of the deposit should be compensated, because if the buyer were to pay less than the deposit itself in case of non-payment of the deposit and the breach of contractual obligations, the buyer would be in a better position than when the deposit was paid. That is, the non-payment of the deposit would be more advantageous to the buyer in the event that he failed to comply with the terms of the contract, which in the opinion of the court is entirely illogical.

So, if the buyer did not pay the deposit on time and thereby breached the terms of the contract for the purchase of the yacht, the seller can get the full amount of the deposit reimbursed by the court.

SIMPSON MARINE (SEA) PTE LTD v JIACIPTO JIARAVANON [2019]

In this case, a buyer decided to purchase a yacht from a yacht dealer at Azimut Benetti, an Italian shipyard. The buyer was choosing between two yachts and paid an amount of €1 million as a deposit to hold the two yachts until a certain date (so to speak «booking»), which would be the first payment for one of the yachts he would eventually choose. However, a few days before the payment, one of the desired yachts was sold to another seller. The dealer then offered another yacht of similar characteristics to replace the one sold. The buyer never made a final choice between the yachts, and part of the deposit paid, as agreed with the dealer, was used to pay for the cost of a yacht that had previously been purchased by the buyer (the third yacht).

The sum of €500,000 was still outstanding, however, and that was the subject of the dispute, for which the buyer appealed to the courts. The Court of First Instance thus held that there had been no agreement between the parties as to the non-return of the deposit. Consequently, the balance of the deposit should be refunded to the buyer. The seller disagreed and appealed, on the grounds that the buyer was not entitled to the refund of the balance, since this sum was considered to be a security in the event of its refusal to purchase the boat.

The appeal noted that the main condition that served to pay the deposit was the retention (reservation) of the two yachts for the buyer and not a condition for the conclusion of the sale contract in the future. The buyer's decision not to purchase the boats was not caused by a default on the part of the dealer. Accordingly, the buyer was not entitled to receive the balance of the deposit. That said, since part of the deposit had gone to pay for another boat as agreed by the parties, the appellant's decision concerned the remainder of the deposit.

Not every payment is a deposit in the context of the transaction of the sale of a yacht.

Thus, in this case the payment was for retention (reservation) and not a contractual deposit. Therefore, it is particularly important to correctly record the legal status of the paid funds and to make payment only within the framework of the agreements, recorded in a separate agreement between the parties.

DAMON COMPANIA NAVIERA S.A. v. HAPAG-LLOYD INTERNATIONAL S.A. (THE "BLANKENSTEIN", "BARTENSTEIN" AND "BIRKENSTEIN" CASES) [1984]

In this case, the seller instructed brokers to arrange the sale of three vessels, the "BLANKENSTEIN", the "BARTENSTEIN", and the "BIRKENSTEIN". The seller's brokers negotiated with the buyer's broker, coordinated the essential conditions and prepared the sale-purchase contract in the name of the buyer, acting on behalf of the company which will be appointed (nominated) later. Its provisions provided for payment of 10% deposit by the buyer immediately after signing the contract. At the same time, the seller had the right to terminate the contract and withhold the deposit paid in the event of non-payment of the purchase money under the contract. This contract was not signed by the buyer. After the buyer had nominated the company as a party to the contract and had sent an updated contract of sale, it had also not been signed and the deposit had not been paid and the seller had rescinded the contract. Thereafter, deeming the buyer in breach of its obligations under the contract, the seller commenced arbitration claiming damages and the remaining unpaid deposit of $236,500. The Tribunal accepted the claimant's claims, however the buyer disagreed and appealed, arguing that no obligation to pay the deposit had arisen, since no contract had been signed.

As a result of the proceeding the buyer's appeal was rejected and the earlier judgment was upheld. It was argued on appeal that it had not been proved that the parties had not entered into contractual negotiations until after the formal contract had been signed. According to the appeal, it was the usual market practice to accept the original version of the contract as a basis for a binding agreement of sale that did not require a signed contract to be validated. The appeal thus held that the sales agreement had been concluded. That being the case, the condition of payment of the deposit was a fundamental clause in the agreement and the deposit was therefore due.

The absence of the seller's signature on the sale agreement did not relieve him from paying the deposit in the event of a breach of obligation under the agreement.

In yachting practice there are often cases of substitution of a party (novation) in the contract of sale of a yacht. This is caused by the fact that as a rule the seller prepares a separate yacht ownership structure by registering a new yacht company. In order not to incur the costs of its registration before the agreements with the seller are secured in writing, the contract is entered into by the actual buyer or his authorized representative. At the same time, the future nomination of the new company is usually made public and agreed upon with the seller in order to avoid misunderstandings. Thus, the MYBA form contains a provision that the transfer of the rights and obligations of a party to the contract to a third party must be approved by the other party, which must be made known in advance.

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