A Penalty is a Penalty is a Penalty . . . .

Calling something a “deposit” instead of a “penalty” doesn’t make it so, according to a recent decision of the New South Wales Court of Appeal.

In Iannello & Anor v. Sharpe, the purchaser had agreed to buy a parcel of land for $4.5 million. He put down $225,000 in cash, which was 5 percent of the purchase price. The custom in New South Wales, apparently, is that buyers put down 10 percent.  So under the contract, the buyer was also obliged to ante up an additional 5 percent “deposit” in the event he backed out of the deal — and the entire deposit would be forfeited.

If the whole 10 percent had been paid up front, it would all have been a “deposit” and the forfeiture would presumably have been valid. Did the fact that the additional 5 percent was not paid paid up front change the equation?  Yes, said the court. Only the money paid down on the barrelhead counts as a “true” deposit.  By making the second payment contingent on a breach by the buyer, the seller had simply imposed an improper penalty.

David Meagher of Sydney’s Cutler Hughes & Harris has some thoughts about the case in When a ‘Deposit’ Payable Under A Contract May Not Be A Deposit.  (Free registration required.)

[Frank Snyder]