Deposit or penalty? The court can order repayment of a penalty that has already been paid.

Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd ([1993] AC 573, PC) was an appeal to the Privy Council from the Court of Appeal of Jamaica. A purchaser had paid a 25% deposit and this had been forfeited by the vendor when the purchaser failed to complete on time (time being of the essence for completion). The purchaser successfully sought relief from forfeiture of the deposit.

Lord Browne-Wilkinson explained that in general a provision that a party in default is to pay or forfeit a sum of money is an unlawful penalty unless the sum in question can be shown to be a genuine pre-estimate of damages. There is an exception to this general rule in the case of deposits; these can be forfeited even where they bear no relation to the anticipated loss of the innocent party (p. 578).

For a sum to be treated as a deposit it must be a sum that can reasonably be described as a deposit. Since it is difficult to say what sum would be a reasonable deposit, the approach is to accept (without searching for any further explanation) that it is long established custom and usage in the United Kingdom and Jamaica to accept a 10% deposit as being reasonable in those jurisdictions. It is for a seller wishing to rely on any larger sum to show what special circumstances would justify the larger deposit (p. 580). A reference to market practice at the time of the contract does not amount to such a justification (pp. 579 – 580).

Here the vendor had not been able to show why a larger (25%) deposit was justified. As a result, the entire sum (not merely the excess over 10%) was treated as a penalty. The court had jurisdiction to order the vendor to repay the entire sum less the amount of any damage actually suffered by the vendor as a result of the purchaser’s breach (p. 582).

Michael Lower

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