Commercial Litigation Law Firm

Creating Pragmatic Outcomes for Business Disputes

Is the Payment a Deposit or Part-Payment?

Parties negotiate a contract, agree to terms, and one party (the buyer) pays an amount of money to the other (the seller).  I did not define the nature of the money paid because the definition given to that payment impacts what happens following a breach[1] of contract.

The Difference between a Deposit and Part-Payment.

Generally,[2] an initial payment in advance of services or products being provided may be classified as either a deposit or a part-payment.

A deposit is an advance payment made by a buyer intended to secure performance through fear of the buyer forfeiting the amount.  The buyer is essentially saying:  I can perform under this agreement and I give you a sum of money that I will forfeit if I breach the contract.  Therefore, the seller can rely on my performance under the contract.  The deposit will be credited towards the contract amount upon successful completion of the contract.

A part-payment is an amount paid by a buyer to a seller in furtherance of the contract price.  It is not intended to be forfeited in the event of the buyer breaching the contract, but rather is a payment under the contract.

A deposit has a dual role.  A deposit: 

Not only operates as a part-payment of the obligation under the contract, it also functions as an earnest to bind the bargain entered into which, through the fear of forfeiture, creates a motive to perform the rest of the contract.[3] 

Effect of Deposit vs. Part Payment.

Because a buyer intends to secure performance by providing a deposit, the buyer loses their deposit if it breaches the contract.  The seller does not have to prove a loss (or damages) in order to retain the deposit amount. 

However, where the amount paid by the buyer is a part-payment, and the seller has suffered no damages[4], the buyer is entitled to a refund of the part payments even if it caused the breach[5].  Therefore, if a seller suffers no damages from the buyer’s breach, the buyer who breached the contract is entitled to receive back the entirety of the part-payments.    

What you should do.

Be clear in defining whether the payment is either a deposit or a part-performance.  The court will always look to the words used in the contract and ascertain their meaning by looking at their context, and the surrounding circumstances.  These factors include the relationship created by the agreement, the purpose of the contract, and factors known by the parties at the time of the contract’s formation.[6]  Make sure that the language and context support the intended meaning for the advanced payment as either a deposit or part-payment.

[1] There are several cases that I have relied on for this blog.:   Aylward v. Rebuild Response Group Inc., 2018 ONSC 4800 CanLII. ;

Aylward v. Rebuild Response Group Inc. 2020 ONCA 62 (CanLII) ;

Symonds v. All Canadian Hockey School Inc. 2009 CanLII (ON SC) ; and

De Palma v. The Runnymede Iron & Steele Company, 1949 CanLII 73 (ON CA);

[2] Generally, because in some situations, a payment of money in advance may be treated as both a deposit and a part-payment. 

[3] Symonds at para. 26

[4] If the seller suffers damages, the damages amount is deducted from the part-payment amounts.

[5] Aylward at para. 67 and Symonds at para 25. 

[6] See Aylward at para 68 citing Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at paras. 47-48.