Deposit and advance payment – what is the difference between these two forms of prepayment;

Deposit and advance payment – what is the
difference between these two forms of
prepayment;

When concluding transactions, which are to take place after some time, prepayment in the
form of deposit or advance payment is often made. Deposit or advance payment is given for
the benefit of the person who gave it. However, if this is not possible, the deposit is
refundable. Although the effects of making a deposit and advance payment differ
significantly, in practice these institutions are often confused. Most of us think that these are
just different names (meaning that the deposit and advance payment are synonyms, in other
words). However, this misconception can be very costly.

If you need help, please contact us – lawyer in Katowice –
biuro@adwokatagk.pl tel. 322541818

What is a deposit?

According to the Civil Code, in the absence of a different contractual reservation or custom
of giving the deposit at the conclusion of the agreement, it means that if one of the parties
fails to perform the contract, the other party may, without setting an additional deadline,
withdraw from the contract and keep the received deposit, and if it was the one giving it, it
can request a sum that is twice as high.
Thus, in the event of non-performance of the contract by the party giving the deposit, the
party receiving the deposit may withdraw from the contract and keep the deposit. On the other
hand, in the opposite case, when the party receiving the deposit has not performed the
contract, the party giving the deposit may withdraw from the contract and demand twice the
amount of the deposit.
Therefore, the deposit fulfils the function of securing the performance of the contract. It is a
kind of compensation for a given party’s failure to perform the contract.
It should be kept in mind that in the event of termination of the contract, the deposit should be
returned, and the obligation to pay twice the sum will not be accepted. The same applies if
none of the parties is responsible for the failure to perform the contract, or both parties are
responsible.
However, the parties, exercising their freedom of contract, may modify the statutory
regulations indicated above in the contract.

When do we have an advance payment?

The situation is completely different in the case of an advance payment. First of all – the advance payment is always eligible for inclusion as the main benefit.
Secondly – and most importantly – in the event of non-performance of the contract, it shall be
returned in full amount to the party who gave it. The fault of the party in the non-performance
of the contract is not important. The fact that the contract did not take place is what matters.
As a consequence, the advance payment should be paid back.
Therefore…
As you can see, the difference between these two forms of prepayment is very important.
While the effects for both parties can be very far-reaching. Therefore, it is important that the
parties, when concluding the contract, specify exactly whether they want to use the deposit or
advance payment.

When making a decision to make a prepayment in the form of deposit or advance payment,
you must be aware of the effects indicated above. We must carefully analyse whether there is
a risk of non-performance of the contract on our side and whether it is real. If so, it will be
safer to decide on advance payment. However, if there is no risk or the risk is negligible, it
seems that it will be better to opt for a deposit.

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