When entering into legal transactions, the parties often confirm their agreement by paying a specific sum of money. In practice, such a payment is most often referred to as a deposit. However, not every sum of money handed over is actually a deposit within the meaning of the provisions of the Obligations Code (hereinafter: OZ). Indeed, the correct definition determines what legal consequences arise if the contract is not fulfilled. It should be emphasized that the law defines a deposit as both the payment of a sum of money and the provision of other substitute items—the rules are the same in both cases. The penalty clause will come into play primarily when one of the contracting parties fails to fulfill its obligations. Thus, when the contract is not performed, it is necessary to determine which party is responsible for this.

An “ara,” or an agreement regarding an “ara”, is contingent upon the existence of a validly concluded contract or preliminary agreement and cannot exist on its own if there is no valid agreement between the parties regarding the essential elements of the transaction.1 In theory, this is referred to as the accessory nature of the “ara.” Pursuant to Article 15 of the Civil Code, a contract is concluded when the contracting parties agree on its essential elements. In the case of a sales contract, pursuant to Article 435 of the Civil Code, the contract is concluded when the parties agree on the subject matter of the sale and the purchase price. In this regard, it is necessary to note the explicit legal provision of Article 52 of the Civil Code, pursuant to which a contract of sale for real estate must be concluded in writing. This means, therefore, that the payment of a sum of money upon the oral conclusion of a real estate sales contract will not be considered a down payment, but rather an advance payment for the purchase of the real estate, even if the buyer and seller may also document the handover and receipt of the amount upon the transfer of the cash, and even if such a document is titled as an agreement on a deposit, payment of a deposit, or something similar. If the document in question does not specify that the sum of money is being given for a specific piece of real estate (i.e., the subject matter of the contract) and the final price (and possibly the method of payment), the sum of money handed over will not constitute an “are,” since the contract has not actually been concluded. Here, then, lies an additional significance of the deposit, namely its evidentiary function. In the case of oral contracts, it is precisely the oral agreement regarding the deposit and its delivery that serves as proof that the contract was indeed concluded. Conversely, the deposit will not carry significant evidentiary weight if the contract is required to be in writing. In any case, in a properly concluded contract, the agreement regarding the deposit must be clear and unambiguous, since the mere fact that one party paid a certain amount of money to the other upon the conclusion of the legal transaction does not in itself allow one to conclude that the parties agreed on a deposit. In case of doubt, the transfer of the monetary amount is therefore considered partial performance¹ and thus constitutes a prepayment or advance, not a down payment. Nevertheless, a deposit may also serve the function of partial performance of an obligation—pursuant to the second paragraph of Article 64 of the Civil Code, upon performance of the contract, the deposit must be returned or credited toward the performance of the obligation. In practice, the deposit is most often considered part of the performance. This is a logical consequence of the normal course of a legal transaction, namely that the agreed deposit was paid and the contract was performed (whereby the subject matter of the deposit must be the same as the subject matter of the performance). In this case, the deposit paid is also an advance payment.

In practice, situations often arise where the contracting parties believe they can withdraw from the contract or change their minds by paying a deposit, such that the buyer forfeits the deposit already paid, while the seller returns double the deposit. A party cannot simply change its mind and assume that by paying or returning double the deposit, it has already acquired the right to withdraw from the contract. A party that has changed its mind cannot therefore discharge its performance obligation by leaving the deposit with the other party or returning double the deposit. Such a situation can only arise if, at the time of concluding the contract or upon payment of the deposit, it is agreed that either party may withdraw from the contract and either forfeit the deposit paid or return double the amount of the deposit. In such cases, the deposit is referred to as a withdrawal fee, which is a separate legal concept from the deposit. If the deposit is designated as a penalty, the party therefore has the right to withdraw from the contract, regardless of whether they are at fault for the withdrawal or not, but must pay the penalty at the same time as submitting the notice of withdrawal. Once a party submits a notice stating that they will pay the penalty, they can no longer demand performance of the contract.

The concept of “aro” is most significant in cases where there is a breach of contract for which one of the parties is liable. When this occurs, it is important to determine which party is liable for the breach. The party that received the deposit has the option, in the event of the other party’s liability, to demand either performance of the contract and damages, termination of the contract and damages, or to terminate the contract and retain the deposit. The party who paid the deposit, where the other party is liable for non-performance, may demand performance of the contract and damages, termination and damages, or terminate the contract and demand double the deposit. As a rule, a party will opt for the deposit (either to retain it or to receive double the amount) when the deposit exceeds any potential damages. In this regard, it should also be noted that the court may reduce an excessive deposit. However, a reduction may only occur if the interested party requests a reduction of the deposit and if the deposit paid was disproportionately high. Whether the deposit is disproportionately high depends primarily on the ratio between the deposit paid and the value of the entire subject matter of the contract.

In practice, the distinction between a deposit and an advance payment is not merely a matter of terminology, but has significant legal and financial implications. Therefore, it is essential that both the contract and the agreement on the aro be drafted clearly, unambiguously, and in accordance with legal requirements, as this is the only way to prevent future disputes between the contracting parties.

Many disputes regarding deposits and advance payments stem primarily from unclear agreements or improperly drafted contracts. Timely legal advice can significantly reduce the risk of future complications and unnecessary costs. Our law firm provides legal assistance in drafting and reviewing contracts, as well as in resolving disputes related to deposits, advance payments, and other contractual relationships.