Q&As

What is the status of a deposit paid under a contract upon termination for insolvency?

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Produced in partnership with XXIV Old Buildings
Published on LexisPSL on 13/08/2019

The following Commercial Q&A produced in partnership with XXIV Old Buildings provides comprehensive and up to date legal information covering:

  • What is the status of a deposit paid under a contract upon termination for insolvency?
  • Terms of the contract
  • Does the deposit have a special status under any insolvency rules?

This Q&A considers a scenario where:

  1. there is a business-to-business commercial contract which is not subject to specific industry or sector legislation, rules or practice

  2. the deposit is in relation to the sale of goods

  3. the reference to insolvency, means bankruptcy or liquidation

Terms of the contract

It will be necessary to check the contract for any express terms concerning the consequences of termination and treatment of the deposit in such circumstances.

In analysing a contract, the court will apply an objective test in considering the contract as a whole, not just the relevant clause, and considers the ‘documentary, factual and commercial context’ (Arnold v Britton (at para [15])). See: Contract interpretation—overview.

For detailed discussion around contract interpretation, see the following Practice Notes:

  1. Contract interpretation—the guiding principles

  2. Contract interpretation—rules of contract interpretation

Where the contract is silent on the treatment of the deposit in the relevant circumstances, the point to consider is whether a term needs to be implied as to how the deposit should be treated.

Terms are implied into contracts in the following circumstances:

  1. by law—terms implied in law are not terms that the parties to an agreement would have agreed to, but rather terms that arise as a legal incident of a particular legal relationship

  2. by custom—the custom applicable to the market in which the contracting parties are operating must be ‘certa

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