Protecting Your Deposit

The Environment

With the economic downturn and many businesses still struggling to make ends meet, inevitably some businesses are still at risk of failing.  In this environment, it is important for farmers to understand the risks associated with paying large deposits for goods or services.
 

The Rationale

So what is a deposit?  Under contract law a deposit is a part payment of the purchase price for goods and services.  The deposit is designed to provide the vendor the comfort of knowing that the purchaser will perform his or her obligations under the agreement and has the financial means to do so.  It also serves to provide initial funding for the inevitable costs incurred by the vendor for those goods and services. Except with a conditional contract, a deposit is not refundable.
 

The Problem

If you pay a deposit to a business under a contract for services or goods and that business goes into liquidation, then your deposit will certainly be lost.  This seems unfair because you did not receive anything for the money paid. But the law provides that if you make a payment by way of deposit the money is owned by the business. If the business gets into trouble, the money is available to creditors.  It is not refundable in total to you. You will become a creditor but inevitably the secured creditors will come ahead of you as a non-secured creditor with the outcome that you will receive very little, if any, refund.
 

The Exception

There is an exception to this rule.  The exception arises when it can be established that the company or provider holds your deposit on trust.  The burden of proving (on the balance of probabilities) that the money was held on trust is on you, the payer.  The mere fact that a deposit was paid and you, out of a sense of fairness, assumed that the deposit would be refunded if the services or goods were not provided is not sufficient.
 

Proof

The best way to prove that the deposit paid was to be held on trust is to have a written contract.  If the deposit clause states that the vendor or provider holds the deposit on trust, then you have established a trust and can get a refund.

However, if the deposit is tens or hundreds of thousands, an alternative method is to have the deposit paid to your solicitor’s trust account with an undertaking from the solicitor to disburse the deposit funds to the business or provider upon the satisfaction of certain conditions, such as delivery of the goods or the completion to a certain stage of the building.
 

Conclusion

In these uncertain economic times, you can expect service providers and businesses selling goods to want to protect their business from risk.  There is very little leeway in many businesses and cash flow is often tight. In these circumstances, suppliers will want deposits to be paid.

You cannot assume that the business you are dealing with will not fail, with the result that the deposit you pay will be lost.  Except where the money is held on trust, you will not be entitled to a refund of the deposit.
 

Recommendation

When a farmer is paying a significant amount of money by way of deposit, it is important that:

1. You insist upon a written contract;
2. You ask your solicitor to review the contract;
3. The solicitor amends the contract to provide that the deposit is paid to the supplier and held on trust; or
4. The money is paid into your solicitor’s trust account on an undertaking that it would be paid on the settlement or completion of the agreement.

The supplier recognises that you are a well-established farmer operating an asset of significant value.  It is not the farmer who is in risk of failing, it is the supplier. Perhaps that farmer should be asking for a deposit!