FORFEITURE OF DEPOSITS
In Li Jialin & Anor v Wingcrown Investment Pte Ltd [2023] SGHC 256, the High Court addressed whether the respondent were entitled to withhold certain sums paid by the applicant following abortive attempts to purchase a property. This short blog will focus on the Court’s discussion relating to the forfeiture of deposits.
Salient facts. The respondent, Wingcrown Investment Pte Ltd (the “Respondent”), is a developer and vendor of a residential property that included a residential property (the “Property”) which the applicants, Ms. Li Jialin and Mr. Li Suinan (the “Applicants”), were interested to purchase.
The Applicants attempted to purchase the Property twice. As a result, the Respondent issued two Options to Purchase (“OTP1” and “OTP2”) and the Parties had entered into a Sale and Purchase Agreements (“SPA1”).
However, attempted purchases did not go through, and the Respondent retained the sum of $1,195,354.42, claiming that it was entitled to do so under the agreements between the Parties.
Close to four years later, the Applicants wrote to the Respondent demanding the return of the entire sum of $1,195,354.42, together with interest.
The Respondent returned $488,957.04 out of the sum of $1,195,354.42, claiming that it was entitled to retain the rest as the Respondent was entitled to forfeit $380,000 as being a deposit and $326,397.38 as reasonable fees and expenses incurred due to the termination of SPA1 and OTP2.
The Applicants then applied to Court seeking a declaration that the sum of $1,195,354.42 is not a true deposit, a declaration that the forfeiture of the said sum was an unenforceable penalty, and an order that the Respondent return the sum of $1,195,354.42 (less $488,957.04) with interest.
The law on forfeitable true deposits. As the Court noted at [30], the law allows for the forfeiture of true deposits, and both Parties agreed that the case of Hon Chin Kong v Yip Fook Mun and another [2018] 3 SLR 534 sets out the proper approach towards the forfeiture of a contractual deposit.
In this regard, the Court noted at [32] that a deposit is forfeitable even if the deposit exceeds the amount of loss actually arising or anticipated to arise from the breach. This is because, unlike liquidated damages, a deposit serves “the dual purpose of signalling the good faith commitment of a purchaser and of securing the due performance of the contract” (emphasis in original; [33]).
The Court also emphasized that the touchstone of a forfeitable true deposit is “reasonableness”, though this is not the same as asking whether the sum is a genuine pre-estimate of loss (see [34]). Relevant facts would include, e.g., “the history of dealing between the parties, their financial means, the degree of commitment required on the part of the vendor to keep the property “off the market” for the duration of the sale in light of the prevailing market conditions… the circumstances in which the figure was derived [and] the parties’ relative bargaining power” ([34]).
Application. Applying the law, the Court noted that the question was not whether the Respondent was entitled to forfeit $1,195,354.42, as that was not a position taken by the Respondent (see [37]). The question was whether the Respondent was entitled to forfeit $380,000.00, being 20% of the purchase price under OTP 2 (see [37]).
The Court held that the Respondent was entitled to forfeit this sum per Condition 15.9.(c)(i). For ease of reference, we set out Condition 15.9 of OTP2 below (see [10]):
“If the Purchaser does not comply with the terms of any effective Notice to Complete served by the Vendor under this Condition, then the following terms apply:
(a) on the expiry of the Notice to Complete or within such further period as the Vendor may allow, the Purchaser must immediately return all title deeds and documents in his possession that belong to the Vendor;
(b) the Purchaser must at his own expense procure the cancellation of any entry relating to the Contract in any register; and
(c) without prejudice to any other rights or remedies available to him at law or in equity, the Vendor may:
i. forfeit and keep any deposit paid by the Purchaser; and
ii. resell the Property whether by auction or by private agreement without previously tendering a Conveyance to the Purchaser.
[emphasis added]”
The Court found that on the facts of the case, as OTP2 was terminated following an effective notice to complete, the Respondent had the contractual power to “forfeit and keep” any deposit paid ([38]). Further, while the Conditions do not define “deposit” ([37]), the Court held that the phrase “any deposit” meant that the Respondent had a discretion to forfeit a lesser part of the sum that was designated as a deposit in OTP 2 ([40]).
The Court then found that the sum of $380,000.00 had been validly forfeited as a true deposit ([44]). Both Parties had agreed that “in the context of a sale and purchase of real property, 20% of the purchase price was the “magic number” and that a deposit of such amount would be customary and moderate, and thus be forfeitable as a true deposit” ([21]); in addition, on the facts of the case, the sum of $380,000.00 met the touchstone of reasonableness as it was not so large that it could not be objectively justified ([46]).
The Court also emphasized that the forfeiture of the deposit was consistent with the Parties’ course of dealing under SPA1, where the Respondent was entitled to forfeit the sum of $357,000.00 under SPA 1 ([49]), and that both Parties were legally represented and had engaged in “fairly extensive negotiations” leading up to the conclusion of OTP 2 ([50]).
Conclusion. The Court was at pains to make clear that there is a difference between a true deposit and liquidated damages. Hence, if certain sums are forfeited because they are true deposits, then not only would the penalty rule not apply, but the test for reasonableness is different from the test for “reasonableness” for liquidated damages.
This is a crucial distinction to bear in mind, as true deposits need not be genuine pre-estimates of loss and may be forfeited regardless of the actual loss caused by the breach (or the anticipated loss caused by the breach). And the rationale is because, as set out at [33] of the case, true deposits serve the dual purpose of signaling the good faith commitment of a purchaser, and to secure due performance of the contract. This is why the sum of the true deposit must not be so large that it cannot be objectively justified as being what is reasonably necessary to serve as earnest moneys.
For interested readers, we note that the Court also agreed that the Respondent was entitled in principle to equitable set-off, and allowed the Respondent to retain the sum of $326,243.07 pending assessment of damages. The Court also found that the Applicants ought to be compensated via interest for the repaid sum of $488,957.04, as well as any sum determined to be payable to the Applicants after assessment of damages for the equitable set-off.
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