Does the payment of a deposit create a binding Contract?

The purchase of property operates substantially different to any regular purchase. In the latter circumstance, a purchaser provides monetary compensation for the item sought, the vendor then accepts this compensation immediately after the offer, in exchange for the item being purchased. This quid pro quo, known legally as an “offer to treat”, is simple and encompasses nearly all transactions that people enter into on a daily basis. Property purchases operate quite differently. It is not always the exchange of consideration that binds the parties to the Contract, rather it is the exchange of the Contracts themselves that confirms a binding agreement between the parties.

This issue was entertained in the recent case of Bull v Cooldawinda Pty Ltd [2024] NSWSC 1011. A summary of the facts are as follows:

1. The purchaser sought to enter into a contract for the sale of a farm (the Property).

2. The purchaser paid a 10% deposit on the purchase price and proceeded to execute the Contract.

3. The contracts were signed by both parties, however they did not exchange – the main hurdle was that the purchaser refused to provide a personal guarantee under the Contract for its performance.

4. As a result, the vendor pursued offers from other buyers – one of which offered a higher price.

5. The purchaser declined to match the higher offer on the basis that the existing contract was already in force.

The purchaser’s primary argument was that the payment of the deposit and the fact that the Contracts were signed by both the purchaser and the vendor was sufficient to conclude that a binding agreement was in place. The Court, however, held otherwise.

To determine whether a Contract is binding depends upon the facts of the case. This is what is referred to as a “question of fact”. In NSW generally speaking Contracts are formed and become binding once they are signed by both parties and are exchanged. This implies that prior to exchange the Contract is simply a document and not binding on each of the parties.

Although, in cases where the parties agree, the Contract can come into existence and be binding on the parties without the need for a formal exchange. However, in this case the Court held that the repeated disclosure of the vendor in confirming that no binding Contract had come into existence at multiple stages of the negotiation and execution process dispelled this possibility. Therefore, the Court held that since the Contract was not in effect and binding on the parties the vendor was free to proceed with entertaining offers from other prospective buyers.

The purchaser also attempted to argue that their actions of setting up the company, paying the deposit and signing and delivering the Contract was an act of “part-performance” of the Contract and this therefore made the Contract binding. The judge did not accept this argument. Again the judge cited that the payment of a deposit in itself is a factor in determining the “part-performance”, but it cannot be the sole overriding factor.

This case highlights the responsibility of the parties to ensure that Contracts have been exchanged. If you are purchasing or selling property, please do not hesitate to reach out to our Property Department here at Marsdens Law Group.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.