Case Update: Court of Appeal clarifies framework on forfeiture of deposits

In Li Jialin and another v Wingcrown Investment Pte Ltd [2024] SGCA 48, the vendor contracted for an extravagant deposit of $1,195,354.42, which represented some 63% of the purchase price of the property. When the purchasers failed to complete their purchase of the property, the vendor forfeited the entire deposit of $1,195,354.42. Four years later, when faced with a legal challenge on the forfeiture of the deposit, the vendor did an about-turn, purporting to forfeit only $380,000 out of the deposit, which represented 20% of the purchase price.

The Court of Appeal was faced with a novel question: Where the terms of sale and purchase agreement provide that a vendor may “forfeit and keep any deposit” paid by the purchaser and the vendor contracts for an exorbitant and unreasonable deposit, is the vendor entitled to forfeit a lesser part of the deposit? The High Court judge had answered the question in the affirmative.

The Court of Appeal overturned the High Court judge’s decision on appeal, answering the question in the negative. The apex Court held that if a vendor contracts for an unreasonable deposit, the vendor is not entitled to forfeit the deposit, whether in whole or in part.

Our Lee Ee Yang, Charis Wong and Sarah Teo successfully acted for the purchasers in challenging the vendor’s forfeiture of the deposit.

Significance

The landmark Court of Appeal decision is significant for several reasons:

1. Deposits and penalties have an important place in society and extend far beyond the conveyancing context. The apex Court clarified that penalties are distinct from deposits, departing from previous decisions which appeared to meld the two, and modified the analytical framework in Hon Chin Kong v Yip Fook Mun [2018] 3 SLR 534, to be applied where a plaintiff sues for the return of a deposit.
2. The decision concerns the interpretation of the phrase “may forfeit and keep any deposit” in the Law Society Conditions of Sale 2012, which are widely used standard terms in the conveyancing of residential properties in Singapore.
3. The Court of Appeal’s decision addresses the moral hazard created by the lower Court’s decision that the Courts have the power to award partial refund of an unreasonable deposit. Following the lower Court’s decision, vendors may stipulate excessive sums as deposits with confidence that they will not be left empty-handed by the Court. The apex Court made it clear that vendors cannot retrospectively save what would be an unreasonable deposit by purporting to forfeit a reduced sum.

Background

Our clients were interested purchasers of a condominium unit in a development known as The Crest (the “Property”). Wingcrown Investment Pte Ltd, was the vendor and the developer of The Crest. The case concerned the purchasers’ abortive attempts to purchase the Property.

In March 2018, the developer terminated the first sale and purchase agreement (“SPA 1”) after the purchasers, who had their purchase monies misappropriated by a rogue property agent, started to fall behind on the instalment payments.

As the purchasers remained interested in the purchase of the Property, they negotiated with the developer for another opportunity to purchase the Property. The developer proposed the following terms for a fresh sale of the property, which were subsequently recorded in the second Option to Purchase (“OTP 2”). The salient terms of OTP 2 were as follows:

1. The purchase price of the property would increase from $1,750,000 under SPA 1 to $1,900,000;
2. Of the amount which the purchasers had paid under the first SPA, $357,000 would be treated as the option fee payable for the fresh option, and another $838,354.42 would be credited towards the deposit payable by the purchasers in the event that they exercised the fresh option.
3. Upon the exercise of the option, there would be a contract for the sale and purchase of the property under the “Terms of Sale” set out therein. The Terms of Sale defined “Deposit” to mean the sum of $1,195,354.42. The agreement also incorporated the widely-used Law Society of Singapore’s Conditions of Sale 2012 (“Conditions of Sale”) which provided as follows:
   1. a party may serve a “Notice to Complete” where the other party fails to complete the sale on the scheduled completion date, and the parties must complete the sale within 21 days after the day of service; and
   2. if the purchaser does not comply with the terms of any effective Notice to Complete, the vendor may “forfeit and keep any deposit paid by the purchaser”.

On 20 November 2018, when the purchaser again failed to complete OTP 2, the developer terminated the sale and forfeited the entire deposit of $1,195.354.42.

More than 4 years later, the purchasers engaged us to issue a letter of demand to the developer. The demand letter stated that the deposit was not a true deposit and demanded a full refund of the deposit. The developer then did an about-turn and purported to exercise its right to forfeit only $380,000, representing 20% of the purchase price. The purchasers sued for the return of the full deposit.

High Court Decision

The High Court judge agreed with the developer that Condition 15.9(c)(i) of the Conditions of Sale, which allowed a vendor to “forfeit and keep any deposit” paid by the purchaser, gave the developer the discretion to forfeit a lesser part of the contractually stipulated deposit.

Both parties agreed, and the judge accepted that the analytical framework in Hon Chin Kong v Yip Fook Mun [2018] 3 SLR 534 (“True Deposit Test”) was applicable to determine whether the deposit could be forfeited. At the heart of this framework is the principle that, for a sum to be a true deposit, it must be reasonable as an earnest.

The lower Court accepted the developer’s argument that the relevant question before the Court is whether the sum that was actually forfeited, i.e. $380,000, was reasonable as an earnest. The lower Court took the view that it was irrelevant whether the deposit of $1,195,354.42 that the developer contracted for was reasonable, so long as the sum that was forfeited was reasonable.  

On that basis, the High Court judge found that the sum of $380,000 was reasonable as an earnest and therefore a true deposit, thereby upholding the developer’s forfeiture of the $380,000 sum. The purchasers appealed against the High Court judge’s decision.

Court of Appeal Decision

Allowing the appeal, the Court of Appeal agreed with us that Condition 15.9(c)(i) did not confer upon the developer a discretion to forfeit a lesser part of the contractually stipulated deposit. The reference to “any amount paid as a deposit” in Condition 15.9(c)(i) could not be interpreted as “any part of the amount paid as a deposit”, as the developer had argued.

The Court of Appeal further agreed with us that the True Deposit Test was to be applied at the time of contracting, and not the time of forfeiture. In other words, the question before the Court was whether the vendor had contracted for a reasonable deposit, and not whether the vendor had forfeited a sum that was reasonable as a deposit.

The Court of Appeal took the opportunity to refine and restate the analytical framework in Hon Chin Kong v Yip Fook Mun [2018] 3 SLR 534, to be applied where a plaintiff sues for the return of a deposit:

1. First, the court determines whether there is a contractual right to forfeit the sum alleged to be a deposit upon the payer’s breach. This will involve consideration of the parties’ intentions and the terms of the contract, and may be express or implied. If there is no contractual right to forfeit, there is no need to further inquire as to the reasonableness of the sum, and its recoverability, will be determined under the general law notwithstanding the payer’s breach.
2. Second, where there is contractual right to forfeit, the court determines whether the sum is “reasonable as an earnest” and a true deposit. If the sum is higher than customary, the payee must show special circumstances to justify the deposit.
3. Third, if the sum is reasonable as an earnest, it is a true deposit and can be forfeited. If the sum is not reasonable as an earnest, any express or implied right to forfeit is thus unenforceable.

Applying the revised framework to the facts of the case, the Court of Appeal found that the contractually stipulated deposit of $1,195,354.42 which amounted to 63% of the purchase price, was not reasonable as an earnest, and therefore could not be forfeited by the developer, whether in whole or in part.

The purchasers were therefore entitled to recover the full deposit save for the $357,000 option fee that the developer was entitled to retain, as the developer had earned the fee by granting the purchasers the second OTP.

The Court of Appeal also undertook a study of the underlying principles and the development of the law of deposits and penalties, and clarified that the law of deposits should be kept separate and distinct from the penalty rule, which applies to liquidated damages clauses.

• The penalty rule imposes limits on the parties’ freedom to agree on the remedy for a breach of a primary obligation under the contract. To ensure that the remedy is compensatory in nature, the rule is that any agreed remedy must be a genuine pre-estimate of the innocent party’s loss.
• Deposits, on the other hand, serve a different purpose of being an “earnest” to secure the purchaser’s performance of a sale and purchase contract at the time of the making of the contract. Deposits are not meant to substitute for damages.

The Court of Appeal thus departed from previous authorities which appeared to have melded the two areas of law, and which framed deposits as an exception to the rule on penalties.

Concluding Remarks

Given the importance of deposits in society, the Court of Appeal’s clarification on the law of deposits is timely and welcome.

The apex Court’s decision also addresses the moral hazard created by the lower Court’s decision that the Courts have the power to award partial refund of an unreasonable deposit. It is clear from the Court of Appeal’s decision that vendors cannot retrospectively save what would be an unreasonable deposit by purporting to forfeit a reduced sum.

Following the Court of Appeal’s decision, vendors should take care to contract for reasonable deposits. If a vendor contracts for an exorbitant sum as a deposit, which is higher than is customary or conventional for a particular type of contract, the vendor must show special circumstances to justify the deposit. If the deposit is adjudged to be unreasonable as an earnest and therefore not a true deposit, the purchaser would be entitled to a full refund of the deposit. The vendor would not be able to forfeit a lesser sum in order to retrospectively justify the deposit as reasonable.

Lee Ee Yang, Charis Wong and Sarah Teo from Covenant Chambers LLC successfully acted for the appellants in this case. For questions on this article or on property-related disputes, please feel free to contact them by email.