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Recovery of Advance Payments

Client Question

Am I able to recover some advance payments I have made under a recent contract I have signed? It seemed to be based on standard terms and I do remember there being a lot a of small print. (Ali Memon, Karachi)

Answer

If the party accused of being in breach has already made advance payments under the terms of the contract his ability to then recover those payments is dependent upon whether those payments constitute a deposit paid as a guarantee of due performance or whether it was just a payment in advance covering either part or all of the price.If this money is a deposit, depending on the parties intentions, it typically means that it cannot and will not be recovered and will be offset against any damages that are awarded to the innocent party. Due care should always be taken where deposits are concerned in order that they do not amount to those penalties described below in ‘penalty clauses’. It may, however, be possible to recover the deposit if the party has a lien on it.

If this advance payment is definitely not a deposit the party who is in breach could recover it, subject to any claims which the innocent party has made for damages in respect of that breach.

Innocent parties can only recover advance payments when a complete failure of consideration has occurred. This is a remedy known as ‘quasi-contractual’. When only the failure of consideration is only partial, this remedy is not an option.

It is also important that you observe all the relevant requirements for procedures as stated in the contract. These include notice periods and any provisions which require the assessment of liquidated damages in lieu of deducting them within a certain period of time, if this is not carried out the defendant will not have to pay any of the damages.

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