This is a series of blog posts that we are doing in conjunction with our upcoming Music Contract Drafting Seminar. In this series, we will be exploring some of the basics of contracts and how to use them.
One of the most basic, yet oftentimes most important aspects of a contract is the deposit. The premise of a deposit is that it is a portion of the purchase price paid before a service or good is provided as a “good faith”. The deposit is often a condition of holding a reservation or commencing work on a project. For a vendor, the deposit is a guarantee that at least some of the contract price has been paid and can be used to cover expenses. When contracting, consider the following questions to ensure you structure your deposit appropriately:
How is the deposit calculated?
The deposit can be a set value, a percentage of the purchase price or based on anticipated expenses. The higher the deposit, the more security there is for the vendor. However, purchasers may be opposed to the risk of a large deposit.
Is the deposit refundable? If so, under what circumstances can part or all of the deposit be refunded?
Deposits can be forfeit for a number of reasons: purchaser cancellation, last minute changes or even circumstances beyond the control of the purchaser and vendor. Alternatively, some deposits are not refundable under any circumstances. In any case, the conditions in which the deposit is returned or forfeited should be clearly stated in the contract.
How may the deposit be used?
Many vendors treat deposits as guaranteed money. However, there may be conditions on how the money is used. Purchasers may demand that the deposit money only be used on expenses required to provide the product or service. Alternatively, there may be rules in place saying the deposit cannot be spent or must be held in trust until the deal is completed. Clearly stating the conditions in which the deposit may or may not be used helps grant clarity to all parties.
Consider the above questions when contracting to help ensure clarity in your contract. When properly considered, the deposit can act as a sign of good faith and provide security when contracting. When not adequately thought out, the deposit can be a source of conflict and potential litigation. The above points are just some of the considerations when contemplating a deposit. Therefore it is important to have your contract reviewed by a lawyer prior to signing.
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