Contract security

Contracts are concluded with the aim of fully fulfilling contractual obligations. It is precisely for the full performance of the contract that appropriate security measures are provided, which can be divided into real (deposit, bail, pledge and mortgage) and personal (contractual penalty, surety, waiver and debtor’s solidarity) security measures.

In the case of real assets, the essence is that the creditor acquires a real right to the debtor’s property, and if the debtor does not settle his obligation on maturity, the creditor can be satisfied from that property.

Deposit as a security measure

A deposit as a real security measure involves the transfer of a certain amount of money or other interchangeable items from one party in a legal transaction to the other, in order to secure and fulfill contractual obligations, but also represents a sign that the contract has been concluded. The basic feature of a deposit is that it is transferred at the moment of concluding the contract. When the conclusion of a contract requires the payment of a deposit, the contract is considered concluded only when the deposit is handed over. The deposit itself is given on the basis of a deposit agreement and it is necessary for the parties to expressly agree that the amount handed over will constitute a deposit. Therefore, a deposit is not assumed, but quite the opposite, if it is not expressly agreed, what one party gave to the other before the conclusion of the contract is to be considered an advance payment.

Functions of a deposit

The functions of a deposit are multiple: it is a sign that the contract has been concluded, it is a means of securing the fulfillment of the contract, it exerts a kind of psychological pressure on the person giving the deposit to fulfill his obligation so that the deposit does not go to waste, but also on the recipient so that he does not return the double amount of the deposit, and it can also have the meaning of partial fulfillment of the contractual obligation. Also, if the right to withdraw from the contract is agreed with the deposit, each party to the contract will have that right, applying the rule: if the person giving the deposit cancels, he loses it, and if the recipient of the deposit cancels, he is obliged to return it in double amount. In this way, the deposit also has the function of a waiver, and can, to some extent, be considered a personal security.

Advance

An advance is a sum of money or a certain quantity of interchangeable items that one contracting party hands over to the other in advance or upon conclusion of the contract. An advance, therefore, represents a kind of advance payment that can be considered both premature and partial fulfillment of an obligation. Its function is to encourage the giver to fulfill his obligation.

A significant difference compared to a deposit is that an advance does not represent a means of securing the fulfillment of a contractual obligation. It also does not have such a rigorous effect as a deposit, because if the party that gave the advance gives up fulfilling its obligation, it will be included in the fulfillment of the obligation of the giver or in compensation for damages. On the other hand, if the recipient of the advance does not fulfill his obligation, the giver will have the right to return the advance in a single amount on the basis of unjust enrichment.

Deposit and advance payment in practice

When we consider the essence of these two payments, we come to problems that often arise in practice.

A deposit is a sign that the contract will be performed, not that it will just be concluded. The problem that a deposit most often poses in practice is that the parties to a legal transaction perceive the deposit not as a sign that the contract will be performed but, incorrectly, as a sign that the contract will be concluded. In this way, the payment that the parties name as a deposit can only represent an advance payment, or an unnamed payment, but not a deposit. The purpose of a deposit is to secure execution, which implies that the contract has already been concluded in order for it to be performed. Conversely, a contract that has not even been concluded cannot be secured, and for this reason, any prior payment cannot constitute a deposit. From this follows a simple and logical principle: conclusion of the contract – payment of a deposit – execution of the contract.

The relationship between a deposit and the main contract. A deposit agreement (regardless of whether it is provided for in the main contract as a deposit clause or exists as a separate contract) is a secondary, accessory contract in relation to the independent, main contract that it serves to secure. It follows that the effect of the deposit agreement occurs only if the main contract is valid and enforceable. Therefore, if the main contract does not meet all the requirements prescribed by law, the deposit agreement will not be valid either, or the deposit itself will be without legal effect. A typical example of a contract and therefore a deposit without effect is a real estate purchase and sale agreement that does not meet the form prescribed by law (the signatures of the contracting parties have not been certified by the court):

“A preliminary contract that is concluded in writing and that has not been certified by the court is considered not to have been concluded. This is expressly provided for in the provisions of Article 4, paragraphs 2 and 3 of the Real Estate Transactions Act. According to the aforementioned legal provision, a real estate transaction agreement is concluded in writing, and the signatures of the contracting parties are certified by the court. According to the provisions of Article 45 of the ZOO, a preliminary contract is a contract that assumes the obligation to later conclude a second, main contract. The regulations on the form of the main contract also apply toand a preliminary contract, if the prescribed form is a condition for the validity of the contract. Since the preliminary contract has not been certified by the court, it has not been created, so the payment made cannot be considered a down payment. A down payment is an accessory, secondary contract, and cannot exist without the existence of the main contract, i.e. the main obligation. Therefore, the payment made can only be interpreted as the payment of part of the purchase price. Since the main contract was not concluded, the basis for payment was not met, and the defendants, in terms of Article 210 of the Law on Obligations, are obliged to return the amount received to the plaintiff in the amount prescribed by Article 214 of the Law on Obligations.” (Judgment of the Supreme Court of Serbia, Rev. 3104/2004 of 7.4.2005); “The nullity of the contract for the sale of real estate is also transferred to the accessory contract, i.e. the contract for the down payment. The right to return or retain the down payment is related to the legal validity of the basic legal transaction, i.e. the contract for the sale of real estate. Since the contract for the sale of real estate does not produce legal effect, the defendant is obliged to return the down payment given to the plaintiff” (Judgment of the Supreme Court of Serbia, Rev. 802/2005 of 31.3.2005).

The moment of giving the down payment. The Law on Obligations (hereinafter: the Law on Obligations) provides that the down payment is given at the moment of concluding the contract. For example, in a real estate purchase and sale contract that requires a stricter form (written form and certification of the contracting party’s signature before the court), the deposit is paid at the time of the contract’s certification. Therefore, any payment made before the conditions for concluding the contract are met cannot in any case be considered a deposit, even if the parties themselves have designated the payment as a deposit. Of course, negative consequences are inevitable. If a certain amount of money is paid before the contract is concluded, and the contract is not concluded, the party whose right has been violated will not be able to demand in court proceedings that double the amount of the deposit be returned, or will not be able to keep the amount received, because the amount of money given in advance cannot be considered a deposit and everyone has to return what they gave according to the rules of unjustified acquisition:

“Since the preliminary contracts for the purchase and sale of an apartment have not been certified by the competent authority, they cannot produce the legal effect of a contract for the transfer of real estate, so the review unfoundedly states that the defendants are not obliged to return the amount received. It is true that Article 454 of the Law on Obligations stipulates that a purchase and sale contract must be concluded in writing. However, this is a general regulation, and it has weaker legal force than the special regulation in Article 4 of the Law on Real Estate Transactions, according to which a real estate transaction contract must be certified by a competent authority. Without certification, there is no contract, and when there is no contract, there is no down payment that arises at the moment of concluding the contract. As soon as there is no down payment, there is an obligation to return the amounts received.” (Decision of the Supreme Court of Serbia, Rev. 3990/01 ​​of 27.9.2001)

Legal effects of a down payment

The legal effects of a down payment depend on whether the obligations stipulated in the contract and whose fulfillment is ensured by the down payment have already been fulfilled or not, as well as on whose side is at fault for the partial fulfillment or non-fulfillment of the contractual obligations, but the effects are reduced to cases of non-fulfillment of the contract and partial fulfillment:

The down payment is returned or credited if possible, if both parties fulfill their obligations;

If the main contract is terminated, the down payment contract also terminates;

If the main contract is terminated by mutual agreement, whereby both parties do not fulfill their obligations, the down payment is returned;

If the obligation is partially fulfilled, the provisions of Article 81 of the ZOO provide the following:
“(1) In the event of partial fulfillment of the obligation, the creditor may not retain the down payment, but may to demand the fulfillment of the remainder of the obligation and compensation for damages due to delay, or to demand compensation for damages due to incomplete performance, but in both cases the deposit is included in the compensation.
(2) If the creditor terminates the contract and returns what he received as partial performance, he may choose between other claims that belong to one party when the contract remained unfulfilled due to the fault of the other.”

for cases of non-performance of the contract, the provisions of Article 81 of the ZOO stipulate:
“(1) If the party that gave the deposit is responsible for the non-performance of the contract, the other party may, at its option, demand the performance of the contract, if still possible, or demand compensation for damages, and the deposit be included in the compensation or returned, or be satisfied with the deposit received.
(2) If the party that received the deposit is responsible for the non-performance of the contract, the other party may, at its option, demand the performance of the contract, if still possible, or demand compensation for damages and the return of the deposit, or demand the return of the doubled deposit.
(3) In any case, when the other party requests the performance of the contract, it shall also be entitled to compensation for damages suffered due to the delay.
(4) The court may, at the request of the interested party, reduce an excessively large deposit.”

Problems in practice

The above problems and concerns most often arise when buying, selling or renting real estate through agencies. Agencies most often provide the parties with receipts for the deposit, which stipulate that the contract will be concluded within a few days. On In this way, agencies prevent the contracting parties from adequately sanctioning potential violations of their rights by an unscrupulous contractor in court. Therefore, in such situations, in order to avoid negative consequences, agencies should draw attention to the above, and require that payments made before the conclusion of the contract be marked as an advance payment, and payments made after the conclusion of the contract be marked as a deposit.