What is a Non Refundable Deposit?
A non refundable deposit is a payment made by one party, normally in the form of cash to another as part of an agreement made between the parties. The general purpose of a non refundable deposit is to ensure that the potential purchaser is committed to proceeding with the transaction and does not change their mind. As a general rule, in the event the purchaser does not complete the transaction they forfeit their deposit which compensates the vendor for their loss in having conducted business with the vendor and having potentially missed out on conducting business with other parties. Common examples of transactions in which non refundable deposits are used include: essentially any transaction in which the party required to pay the deposit has the potential to benefit financially through the sale of the goods or services. A non refundable deposit may only be retained in a limited set of circumstances. For example , it may be retained where: it is not commercial practice to charge or receive a deposit in the relevant industry the purchaser breached the agreement for which the deposit was required the deposit is a part payment of the total purchase price (although in some circumstances payments of the deposit plus any additional moneys which are considered to be an integral part of the payment may not be retained where there are no issues with the performance of the contract) the supplier/vendor has incurred additional costs arising from the forced cancellation of the agreement and those costs exceed the amount of the deposit the terms of the agreement clearly provide that the deposit is not refundable.
Legal Basis for Non Refundable Deposits
The general legal principle is that a deposit is to be restored on request unless there is an express contractual stipulation to the contrary. For the deposit to be non refundable it needs to be clearly stated in the contract. Registrars will usually view forfeiture with caution and will require substantial evidence that the purchaser has been flagged (due to missing timeframes) in order to turn down a request for return of a deposit.
The test to determine whether a deposit is recoverable will differ from one jurisdiction to another and how the contract is applied in each jurisdiction can vary. Some jurisdictions may state that it’s not lawful to withhold a deposit where a purchaser submits a valid request in circumstances where there has been a substantial failure by the seller to fulfill his or her obligations under the contract. In some instances a lapsing time frame can give reason for a deposit to be forfeited but this isn’t always the case.
The risks associated with taking a deposit from a prospective purchaser are clear and obvious, however, the opportunities really do allow a seller to provide a greater offering to a purchaser in the hope that their interest will continue after a contract has been signed.
When are Non Refundable Deposits Legal?
The law has recently grappled with this issue in depth so that a clearer picture has now emerged. From the 2002 Ontario Superior Court decision in April & Mix Barber, Shantios and Shuba Mills v. Mott’s Supermarkets, Inc. to the Ontario Superior Court of Justice decision in Piggly Wiggly-London, Ontario v. C.Beckman Holdings, Inc., the question of when a non refundable deposit is enforceable has moved steadily towards a more balanced test of enforceability.
It is clear that parties are free to make business arrangements and they are free to order their affairs as they choose. It is also clear that such arrangements may be placed in writing. What is not clear is when is that clear. More importantly, when is that enforceable?
As the Ontario Superior Court of Justice stated in Piggly Wiggly-London, Ontario v. C.Beckman Holdings, Inc., it is very clear that "A buyer may agree to forfeit its deposit if it does not close, so long as the forfeiture is truly a deposit and not a penalty." In order for a forfeited deposit to be a legally binding, the following four conditions must be satisfied: (1) Forfeitures for deposits are sometimes considered penalties, and therefore voidable by courts. Deterrence from default is a desirable goal in a commercial contract, but the law does not permit the imposition of penalties. (2) In order to avoid a finding that a forfeiture is a penalty, the parties must intend for the deposit to be truly a deposit. The focus is on the language of the contract; the intent of the parties for the forfeiture clause is relevant. (3) In order to be a true deposit, the forfeiture must bear a reasonable relationship to the anticipated harm caused by the defaulting party’s breach. In other words, the forfeiture cannot be out of all proportion to the anticipated harm caused by the defaulting party’s breach. (4) In the situation where the actual expenses incurred as a result of the breach are below the amount of the deposit, the forfeiture clause will not be a legitimate deposit intended to reimburse for anticipated harm, but rather a clause designed to act as a penalty. This is called the penalty rule.
Piggly Wiggly-London, Ontario v. C.Beckman Holdings, Inc. is a case in which the words "upon closing" were added to the clause "The deposit shall be forfeited and retained by the Vendor in the event of a breech of this Agreement by the Purchaser," distinguishing this case from Mott’s Supermarkets.
The most important point here is to note the difference between Mott’s Supermarkets and Piggly Wiggly-London, Ontario in applying the penalty rule. In Mott’s Supermarkets it was held: "as of the closing date, Mott’s was going to suffer $100,000 as a result of these costs. $100,000 was not an unreasonably inappropriate prediction of loss resulting from the breach." Whereas in Piggly Wiggly-London, Ontario, "It is possible that the vendors would have incurred carrying costs, but not in the amounts referred to in the letter of March 10, 1999. The Vendor was, and is, seeking to collect a penalty for breach and not the injury caused by the breach. It is clear that the consideration of the anticipated harm caused by a default must be given due weight in deciding whether a party’s intention was to impose a penalty or to ensure that compensation would encompass actual losses."
The test for a legitimate forfeiture clause which has been borne out by Piggly Wiggly-London, Ontario v. C.Beckman Holdings, Inc. considers primarily "the nature of the deposit as a means to compensate for the anticipated harm caused by a default" and secondly "reasonableness of the forfeiture in relation to the aforementioned purpose."
Consumer Protections
When purchasing a goods or services, many consumers are often met with a demand for a deposit to be paid up front by the supplier of that goods or services. In some cases, the deposit is refundable and in other cases the deposit is for a booking fee. We have all encountered a situation where we have paid a deposit for a good or service and in the event of withdrawal, change of mind or turnaround, have gone back to the supplier to request a refund of the deposit. However, the company/ supplier (also known as the ‘merchant’) has told us that they will not give us a refund of the deposit, and in some cases they have refused us any refund at all for a deposit. The question arises; Can a company/ merchant refuse a consumer any refund for a deposit? Put simply, under the Consumer Rights Act 2015, it would be extremely rare for a company/ merchant to retain a deposit and not provide a refund to the consumer for that deposit.
In certain cases the customer pays a deposit that is held as a retainer, whereby the business is required to give a refund upon request. Under Section 17 of the Consumer Rights Act 2015 the consumer is entitled to a refund for the deposit where a service has not been performed, and the wording of the consumer contract does not state otherwise. There are various ways in which you the consumer can use the Consumer Rights Act to conclude a contract and get a refund for pre-paid deposits.
Section 62 of the Consumer Rights Act 2015 provides for unfair terms in consumer contracts and states that a ‘consumer cannot be required to pay more than the market cost of whatever is being provided.’ Provided that the deposit you have paid does not exceed the market cost of the goods or services (if that is the outcome), then you shall be entitled to a deposit refund.
In most cases the pre-paid deposit supplied by a customer is not actually a charge for the service being rendered, so the merchant is not entitled to the deposit and should refund you your money without quibble. This would usually be considered as not charging a fair price, especially in instances where a service is delayed, whereby it is not possible to refund your deposit and the contract is not completed.
The caveat in all of this is that there are specific circumstances under which a company/ merchant may be lawfully entitled to charge a non-refundable deposit. For example, should you exercise your right to cancel a trip (as under the Package Travel Regulation of 1992 and the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013) within 14 days prior to the journey due date, the company is within their rights to keep any non refundable deposit.
Business Approach to Non Refundable Deposits
Non refundable deposits are one strategy that can be implemented by businesses in order to assist in resolving the fears related to nonpaying customers. While it may seem like a knee jerk response to the fear of not being paid, if properly assessed, a non refundable deposit can be a great way to get paid (to your credit) and to reserve time in your schedule for only those clients who are willing and able to pay for your services.
Non refundable deposits require that a client pays you a portion of the fee up front. Although how much of a fee is appropriate will vary, a non refundable amount should be something that is enough to both offset your costs in providing the services later should the client fail to show and also enough to get the attention of the client should they fail to show after paying . A deposit that is too high will scare off potential clients, while a deposit that is too low won’t be enough to provide adequate motivation for clients to show or pay.
A non refundable deposit must be used in a way that does not cause the transaction to be viewed as a loan from a legal perspective.
A business can avoid the pitfalls of being viewed as a loan by making sure that a non refundable deposit meets the three factors in Louisiana that govern whether or not a transaction is a loan. The transaction must:
Disputes and Legal Enforcement of Non Refundable Deposits
Given their contentious nature, it is no surprise that deposits and deposit clauses in agreements have become the subject of attention at both the provincial and federal level with respect to consumer protection legislation. Consumers have brought claims for breach of contract and other alleged unlawful treatment against businesses that have charged them non refundable deposits. Recipients of deposits have also had recourse to the courts to protect their own interests in the event that a party retains the deposit rather than returning it. Businesses have engaged in alternative dispute resolution techniques, such as mediation and arbitration, in order to amend or enforce the terms of a contract involving a non refundable deposit. The Canadian Motor Dealers Association ("CMDA") has also established a form Non Refundable Deposit Agreement which provides a guide for drafting the terms of a non refundable deposit agreement and describes the appropriate way to handle the associated dispute.
Common Claims by Consumers Against Recipients of Non Refundable Deposits: The consumer, as payor of the deposit, usually brings claims against the business that has retained the deposit: Inconsistency with "Average Consumer Expectation" Several of Canada’s provincial consumer protection statutes employ "average consumer expectation" tests when determining whether there has been misrepresentation or improper practice in the sale of consumer goods and services. In Great Washed Inc v TA Appliance & Mattress Centres (2007), 83 CCC (3d) 185, the Court of Appeal for Ontario, citing the Supreme Court of Canada’s decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), stated that "[w]hen interpreting [consumer protection legislation], courts must pay special heed to the fact that consumers typically lack the knowledge and experience to negotiate confidently with merchants". Consumers have attempted to apply this reasoning to warranty agreements that characterize as non refundable what amounts to an ordinary deposit. The CMDA has accepted that a consumer "is not expected to have the extensive knowledge and experience that a merchant has", and the CMDA has amended its form Non Refundable Deposit Agreement to include more specific language regarding the nature of the deposit.
Inconsistent with GLA In Canada (Director of Investigation and Research) v. Southam Inc., 2001 FCT 28, the Federal Court of Canada held that the deposit clause in a consumer agreement was "inconsistent with the express wording of the [GLA]." The deposit clause, including its associated provision governing the treatment of the deposit, breached the GLA by failing to remain strictly within the bounds of the deposit, as defined in the GLA. The GLA is a consumer protection legislation administered by the Competition Bureau, an entity of the Canadian federal government. As such, the GLA governs all provinces in Canada, including Alberta, despite there being provincial consumer protection legislation. The actions of the Competition Bureau, including its approach towards deposits and other advance payments, have undoubtedly shaped the evolution of deposits in consumer agreements in Canada. In light of the Competition Bureau’s decision in Southam, consumers have pursued deposit claims against recipients of deposits with more vigour.
Arbitration Awards: Consumers have also brought forward claims to arbitration regarding the application of non refundable deposits. In 2015, the Alberta Motor Vehicle Industry Council’s ("AMVIC") arbitration panel held that MMSoft Technologies Inc. must refund most of a non refundable deposit that it had retained because its contract with the consumer fulfilled none of the criteria constituting a non refundable deposit as defined under the GLA. The AMVIC was particularly influenced by the fact that the payment was described as a "down payment" (rather than a "deposit") and that the seller had justified the payment as a "down payment" in the contract. The contract referred to the payment in several different ways that were inconsistent with the definition of a non refundable deposit in the GLA. The AMVIC, however, did not provide evidence on an appropriate refund amount consistent with the spirit of the law. B&B Walker Holdings Ltd., doing business as Perth Motors, was also required to refund a consumer’s deposit in 2017. The AMVIC panel found that Curtis Harshman misled another consumer in a similar situation; the panel held that the consumer’s expectations were governed by the law in effect at the time the deposit was made; interpretations that had developed after the deposit was made were not relevant to the deposit’s enforceability. The AMVIC panel ordered Curtis Harshman to refund the consumer’s deposit.
Tips for Consumers: Avoiding Unlawful Non Refundable Deposits
Here are some tips to avoid non refundable deposits that violate the EPA law:
- Be careful agreeing to a non refundable deposit that isn’t clearly tied to a specific expense actually incurred by the business.
- If you need to cancel, consider drafting something in writing with the contractor: after all, things come up and "its just good business" to be able to cancel with that person quickly as a courtesy – without being charged for it .
- Do not agree to a non refundable deposit without being given an effective right to cancel if the job costs are significantly higher than the estimate.
- Do not agree to a non refundable deposit without being given an effective right to cancel if the work product is significantly different than what had been agreed upon.
- Consult with an attorney if you have concerns about a deposit as it is offered to you.
