(PARTIAL) FORFEITURE OF DEPOSITS
In Li Jialin and another v Wingcrown Investment Pte Ltd [2024] SGCA 48 (“Judgment”), the Court of Appeal addressed whether a respondent property developer was entitled to forfeit a part of the deposit that was paid by the appellants upon the non-completion of a contract for the sale and purchase of an apartment.
Brief facts. In brief, the appellants wanted to purchase an apartment unit in a housing project that was then under development by the respondent (Judgment [6]). There were two options to purchase issued, with the key dispute relating to the Second Option to Purchase (Judgment [7] – [9]).
The second option to purchase was exercised on 30 April 2018 (Judgment [12]). As such, the sale and purchase property was to be governed by the “Terms of Sale” as set out in the Second Option to Purchase (Judgment [9] – [10]). Relevantly, as set out in Judgment [11] – [12], there were two aspects of the Terms of Sale which were relevant:
“11 … First, the terms expressly defined “Deposit” to mean the sum of $1,195,354.42, which would form part of the purchase price. This sum essentially comprised the Refund Amount and the Option Fee, and amounted to almost 63% of the purchase price of $1,900,000. The respondents did not dispute that this substantially exceeded the usual deposit for a conveyancing transaction. …
12 Second, the [Law Society of Singapore’s Conditions of Sale 2012 (the “Conditions of Sale 2012”)] were incorporated into the agreement. These are widely used standard terms in the conveyancing of residential properties in Singapore. Condition 15 of the Conditions of Sale 2012 provides generally that a party may serve a “Notice to Complete” where the other party fails to complete the sale on the scheduled completion date. Upon such service, the parties must complete the sale within 21 days after the day of service. Materially, Condition 15.9(c)(i) provides that if the purchaser does not comply with the terms of any effective Notice to Complete, the vendor may “forfeit and keep any deposit paid by the [p]urchaser”.”
The appellants failed to complete the sale, which led to the respondent giving notice that the sale had been terminated and asserting its entitlement to forfeit the stipulated deposit of $1,195,354.42 (Judgment [13]).
The respondent eventually resold the property, and on 21 March 2023, the appellants’ solicitors issued a letter of demand to claim for repayment of the entire deposit with interest. The respondent replied through its solicitors on 10 April 2023 to purport to forfeit $380,000.00, representing 20% of the purchase price of $1,900,000.00 (Judgment [17]).
The appellants then commenced an originating application to seek declarations that the deposit of $1,195,354.42 was not a true deposit and amounted to an unenforceable penalty, and sought a refund of the entire sum with interest (Judgment [18]).
Law of deposits and Law of penalties. Tracing the history, the Court of Appeal summarised at Judgment [42] that the law of deposits and the law of penalties have different lineages.
The Court of Appeal held at Judgment [44] that the law of deposits should be retained, as society has a use for deposits, being a “part of commerce since ancient times and continue to be widely used today”. In particular, the Court of Appeal stated at Judgment [45] that the “function of deposit as an earnest remains relevant in modern society” (emphasis in original).
Nonetheless, the Court of Appeal held that deposits serve a different purpose from damages (Judgment [52]), and therefore, “[t]o that extent, the deposit is sui generis. Seen in this light, there is little reason in principle or pragmatism for the law of deposits to be subsumed within the law of penalties. The two should continue to be kept distinct.”
Condition 15.9(c)(i). The Court of Appeal held at Judgment [57] that Condition 15.9(c)(i) was not a discretionary forfeiture clause: the “provision in Condition 15.9(c)(i) that the vendor may forfeit and keep “any deposit paid by the Purchaser” was clearly a reference to “any amount paid as a deposit” and not “any part of the amount paid as a deposit”.”
The Court of Appeal at Judgment [58] stated that “[i]t was also difficult to see how a discretionary forfeiture clause would serve the earnest function of a deposit, or indeed any other legitimate commercial purpose.” And at Judgment [59], the Court of Appeal stated that “we doubted the workability of such a discretionary forfeiture clause to the extent that it purportedly gave the respondent a discretion to decide whether and when to forfeit.”
Thus, the Court of Appeal rejected the submission that Condition 15.9(c)(i) was a discretionary forfeiture clause.
Partial forfeiture? Could the respondent forfeit a lesser sum? The answer is given in Judgment [60]. The Court of Appeal stated that the respondent was not contractually prohibited from forfeiting a lesser sum. However, such an act would be “a matter of goodwill as opposed to contractual right” (emphasis in original). But this right would be premised on there being a right to forfeit the entire deposit contractually.
Reasonableness of deposit. The Court of Appeal also set out a revised framework for determining when a deposit out to be recovered. As the framework contains an explanatory pre-amble and a three-step test, we set out the entire framework below for our readers’ ease of reference:
“Preamble
1 The penalty rule operates in the sphere of secondary obligations, and in particular, the obligation on the part of the defendant to pay damages to the claimant (Denka at [92]). It is focused on compensation, which constitutes the broad policy underlying the award of contractual remedies (Denka at [93]). Thus, where an agreed remedies clause (most commonly, a liquidated damages clause) purports to operate as a substitute for the court’s determination of the appropriate extent of compensation, such a clause is subject to judicial scrutiny (Denka at [93]). Consistent with the underlying rationale of compensation, the question asked is whether such a clause is a genuine pre-estimate of loss. If it is not, then it is not truly compensatory and is unenforceable as a penalty.
2 Deposits, however, are not intended to be compensatory. As the court in Hon Chin Kong observed, a deposit serves an important signalling function. It shows the vendor that the purchaser is serious about the purchase and will not leave him high and dry. It is a sign of good faith and sieves out frivolous or fickle purchasers. At the same time, it motivates the purchaser to follow through with the contract (Hon Chin Kong at [124]). This motivation is inherent in the key feature of a deposit – that the vendor may forfeit it if the purchaser does not perform. In this light, it is clear that the policy considerations of compensation do not apply to deposits. Deposits do not operate in the sphere of secondary obligations and are not intended to be a substitute for damages. They are sui generis and operate outside the scope of the penalty rule.
3 This does not mean that parties are free to agree to excessive and extravagant deposits. The law places a limit on this freedom with the principle that the deposit must be reasonable as an earnest. Where a deposit is not reasonable as an earnest, the right to forfeiture is unenforceable, regardless of whether it is express or implied. It is not open to the court to recharacterise the right of forfeiture into a right to liquidated damages which remains enforceable subject to the penalty rule – to do so would be to impute an element of compensation which did not otherwise exist. As Prof Yeo has put it, if a deposit is not compensatory when reasonable, it is also not compensatory when unreasonable. The purchaser may therefore seek a recovery of the sum paid under the general law.
Revised framework
Thus, where the claimant sues for the return of a sum alleged to be a deposit, the proper framework to apply is as follows:
(a) First, the court determines whether there is a contractual right to forfeit the sum alleged to be a deposit upon the payer’s breach. This will involve consideration of the parties’ intentions and the terms of the contract, and may be express or implied. Where there is an express forfeiture clause to this effect, this will be sufficiently clear. Where there is no such clause, the right of forfeiture may nonetheless be implied from the use of words such as “deposit”. A reference to a sum described as a deposit being compensatory as liquidated damages could displace the inference that it is intended to be a deposit which is forfeitable upon breach. If there is no contractual right to forfeit, then there is no need to make any further inquiry as to the reasonableness of the sum. Its recoverability will be determined under the general law notwithstanding the payer’s breach.
(b) Second, where there is a contractual right to forfeit, the court determines whether the sum is a true deposit. The test is whether the sum is reasonable as an earnest. The sum will be reasonable if it is customary or conventional. If it is higher than customary, it may nevertheless be reasonable if the vendor can show special circumstances to justify the deposit.
(c) Third, if the sum is reasonable as an earnest, it is a true deposit and can be forfeited. However, if the sum is not reasonable as an earnest, it is not a true deposit and cannot be forfeited. The right to forfeit, whether express or implied, is thus unenforceable and the claimant’s right to recovery of the deposit will be left to be decided under the general law.” (emphasis in original)
Applying the above to the facts of the case, the Court of Appeal held that the deposit of $1,195,354.42, which amounted to 63% of the purchase price, was not reasonable as an earnest and hence was not a true deposit and could not be forfeited (Judgment [74] – [75]).
Hence, the appellants were entitled to claim for a recovery of the deposit under general law in unjust enrichment on the ground of a failure of basis (Judgment [80]).
And in context of the present case, there were two contracts: an option to purchase, and the sale and purchase contract which came into effect upon exercise of the option. The respondent was entitled to retain the option fee of $357,000.00 even though the parties agreed for it to be credited to the deposit under the sale and purchase contract because the respondent had “earned” the option fee as the option contract had been duly performed (Judgment [83] – [85]).
Conclusion. The immediate relevance of the Judgment is, of course, to conveyancing transactions as the Law Society of Singapore’s Conditions of Sale 2012 are commonly incorporated in property transactions. This judgment therefore clarifies how Condition 15.9(c)(i) operates, and makes clear that if a party asks for an extravagantly high deposit (which is beyond the norm), it may be challenged as not being a “true deposit” and hence cannot be forfeited.
However, the Court of Appeal’s comments on deposits as an earnest should be carefully read. Property transactions are not the only transactions where deposits may be asked for. In such situations, parties should consider what function does the deposit play, and whether it is clear that the deposit may be forfeited or not. And even if the deposit may be forfeited, parties should consider if the amount of deposit is such that it may be susceptible to being challenged such that even though there is a contractual right of forfeiture, the right may not be enforceable.
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