Forfeiture Of Deposit UNL1622 – Contract IISummita Segaran

Tevaasiny A/P Vijayakumar

Simranjit Kaur

Nur Najehah

Introduction

• What is deposit?

▫ A sum to be paid as a first installment on the purchase of something or as a pledge of a contract, the balance being payable later.

Definition of “Deposit”

• In Howe v Smith’s case, Cotton LJ defined deposit as serving 2 purposes :

(1) Deposit is treated as a guarantee for performance

(2) If the buyer performs his part of the deal, the deposit goes towards part payment of the purchase price stated.

What is forfeiture of deposit?

• To lose to another individual some rights or property (money) due to breach of contract to become liable to the part payment made as an assurance in the contract and use to compensate (money) imposed by law for the loss or damages made.

General Rule : Forfeiture of Deposit

• When in the contract the buyer does not go through or complete the purchase, the deposit paid by the buyer will be forfeited to the seller “on account of damages, without prejudice to the seller’s other remedies.

What is Forfeiture?

• What is forfeiture▫ Giving up something such as money or assets as

consequences of breaching the law

• Example▫ Landlord forfeits deposit of the rental as the tenant

fails to fulfill his duty or breach the contract ( can only forfeits if the agreement contains a special clause )

• Exception▫ Universiti Teknikal Melaka (UTeM) v Mars

Telecommunication Sdn Bhd (2012) Court held that the respondent can claim for the rent by

virtue of Section 75 of Contracts Act

Section 75

• Section 75 of the Contracts Act 1950

▫ If a party breach a contract, the party must pay sum stated in the agreement or do something as a penalty, with a reasonable compensation not exceeding the amount to the adversely affected, and the adversely affected does not need to prove his damage

Continuation..

• Kim Guan Construction Sdn Bhd v A. AnandarajPillay & Anor (2012)

▫ Court of Appeal held that the judgment was in favor of the plaintiff. As by the virtue of section 75, the court must determine what is reasonable compensation “whether or not actual damage or loss is proved to have been caused thereby”. However in this case, the defendant fail to prove basis of rectification work let alone the quantum of damages

Continuation…

• Common law ▫ Agosti v Winter (2009)

Court held, seller is entitle to forfeit deposit if only he could prove that the actual damage, and can only claim the amount not exceeding the damages.

▫ Tang v Zhang (2013) However, court delivered new solution in this case.

It was held that seller need not to prove damages in order to forfeit the deposit even though the cases mentioned that forfeiture of deposit is “on account of damages”. This decision now is binding.

Quantum of Damage

• However party needs to prove to the court the actual extent of the damage in order for the claim to be successful.

• How to measure the damage?▫ Expectation measure

If the breach is made by the defendant, the court will award sum to the affected person that would put him back to his economic position if the promise was done

▫ Reliance promise If impossible to award in previous way, Court will grant

money compensation to restore his position in the economic is such promise was done

Cases

• Murphy v Stone Walwork

▫ Judge must do their best to reach the right figure on a reasonable balance of the probabilities avoiding undue optimism and undue pessimism

• Ratcliffe v Evans

▫ court suggest to use mathematical formulae to assess or measure the damage

Issues and Possible solutions

Whether a seller can “forfeit” an

unpaid deposit? • Case of Morello Sdn Bhd v Jaques (International) Sdn

Bhd• Answer was yes• Problem laid in the part where there were no provisions

that spoke about forfeiting initial payment in any event of breach from the appellants. The respondent then ended the agreement between them and proceeded to take action against the other. The held was the initial payment which was stated to be a deposit was indeed a true one.

• he respondent of the case was entitled to retrieve the unpaid deposit even though it was not stated in the contract any provision for forfeiture of deposit.

Whether a seller who terminates the

agreement due to the buyer’s fault of

breaching the contract is entitled to

recover the deposit that’s not paid?

• Answer to that was no, the unpaid deposit it not recoverable

Indeed allowed!

• Whether a vendor is allowed to get unpaid deposit even though no provisions are stated about it in the contract.

Whether the deposit is regarded as such even

when the words aren’t clearly stipulated?

• Words were used instead of “deposit” would it still be considered to be a deposit in its true meaning?

• Case of Constrajaya Sdn bhd v Johor Coastal Development Sdn Bhd was referred to

• Court held that in the absence of the word,” deposit” and by replacing it with “installments” it clearly states the fact that the payment was merely part payment towards the purchase price and as such can’t be forfeited.

Equitable relief of which whether

courts are allowed to grant them• Solution can be found by referring to case if

Stockloser v Johnson.

• Courts are said to have jurisdiction to grant relief against forfeiture of deposit however two conditions have to be fulfilled.

• Forfeiture clause is penal in nature, that is, the sum of money forfeited is disproportionate to loss suffered and also it is unconscionable for the vendor to retain the money.

OPINIONS ON FORFEITURE OF

DEPOSIT

• Forfeiture, under the terms of a contract, speaks of the condition by the defaulting party to surrender their possession of an asset, or their cash flows from that particular asset, as a reimbursement for the subsequent losses of the other party.

• In my opinion, the procedure of forfeiture every so often comprises of legal proceedings in a court of law

ISSUES OF FORFEITURE OF

DEPOSIT

1. During the act of forfeiting, is the seller allowed to forfeit and unpaid deposit?

▫ Morello Sdn Bhd v Jaques (International) SdnBhd

▫ Seller is allowed to forfeit and unpaid deposit

2. Who is entitled to the deposit in real estate contracts, where when it fails to complete, queries can rise in relation to whom has the entitlement towards the initial deposit?

▫ Tang v. Zang, 2013 BCCA 52

▫ A deposit is said to be forfeited by a buyer who refuses to accept the contract and who is not reliant on on proof of damages

3. Does the courts have the equitable jurisdiction to grant relief against forfeiture ?

▫ Stockloser v Johnson [1954] 1 All ER 630

▫ Courts do have an equitable jurisdiction to grant relief in contradiction of the forfeiture of money

Conclusion

• There is no specific provision provided in the act on the forfeiture of deposit.

• The court shall imply the said terms of it.

• Acts as a safeguard of seller in case the buyer forfeits the purchase or the contract.