Deposit paid under void contract: whether recoverable depends on the parties’ intention and the law of restitution

In Sharma v Simposh Ltd ([2012] 1 EGLR 113, CA (Eng)) Simposh granted Sharma an option to acquire property to be developed by Simposh. Sharma paid a deposit of GBP55,000. The agreement required Simposh to carry out the development works within an agreed timescale and not to market the property elsewhere. The agreement was oral and so invalid because of its failure to comply with section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989.  Simposh nevertheless honoured the agreement, carrying out the work and not marketing the development. Sharma then decided not to proceed and sought the return of its deposit.

The English Court of Appeal saw the outcome as depending on the correct interpretation of Chillingworth v Esche.  The deposit had passed to Simposh and it was a question of the intention of the parties concerning the terms on which property had passed. This understanding, while clearly related to the void contract, was separate from it. Here the parties’ intention was that Simposh was to keep the deposit if Sharma did not proceed with the purchase:

‘In the present case the agreement was not illegal in the same sense as in Singh, but it was void for failure to comply with the formal requirements of section 2. As in the case of a contract void for illegality, so in the case of a contract void for lack of formal validity, it did not follow that property in the deposit could not pass to the defendant. That depended on the intention with which the payment was made. Was the payment intended to be conditional on the claimants completing the transaction or was it intended to be unconditional? If the former, the defendant would have obtained only a conditional title to the money and would have been bound to return it on the transaction falling through. If the property passed unconditionally, the defendant was prima facie entitled to retain it.’ (Toulson LJ, [44])

Sharma also sought to rely on restitution. This failed too:

‘The fact that property was intended to pass and did pass does not, of course, exclude the possibility of a claim for restitution, but such a claim depends on the claimant being able to establish a recognised ground of restitution. In this case the only suggested ground is failure of consideration. Since the claimants obtained the benefit for which the payment was made, there is no merit in their claim and no injustice in the defendant retaining the money. The justice of the matter is entirely on the defendant’s side.’ (Toulson LJ, [55])

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