Key points
· Parties may agree that a deposit is non-refundable, even without a contract
· A stakeholder who interpleads is estopped from denying the correctness of the decision
When contracts are exchanged on a sale of land, it is customary for the purchaser to pay a deposit. This is usually paid to a third party, such as the vendor’s solicitor, to be held until it becomes clear who is entitled to the money. The normal position is that if the sale is completed, the deposit goes towards the price. If the purchaser fails to complete, the deposit is forfeited, but the money is returned to the purchaser should the vendor fail to complete.
It was once common for estate agents to seek a small “holding deposit” from potential purchasers while the parties remained in negotiations over a sale. These proved a tempting source of income to rogue agents, whose tactic of disappearing with the money left vendor and purchaser arguing over who should bear the loss. In Sorrell v Finch (1976) 238 EG 639, the House of Lords ruled that since the money had always belonged to the purchaser (who could demand its return at any time), the agent was holding it at the purchaser’s risk. Hence, if the agent absconded, the vendor was not liable for the loss.
However, agent default is not the only problem caused by precontract deposits. A recent Court of Appeal decision considered other pertinent issues, and is of considerable importance for future practice in this area.
Conflicting decisions
In Gribbon v Lutton [2001] EWCA Civ 1956; [2002] 2 WLR 842, the claimant was negotiating to sell some land. He took the view that the purchaser was prevaricating, and threatened to break off negotiations unless the purchaser paid a deposit of £21,600. This was to be held by the defendant (the claimant’s solicitor) as stakeholder, and to be forfeited if contracts were not exchanged within a specified time (unless this was the claimant’s fault). Contracts were not exchanged, and both parties claimed the deposit. The defendant then prudently issued interpleader proceedings, a procedure under which a stakeholder says: “I don’t know which of you is entitled to the money, so let the court decide. I’ll pay the money accordingly.”
In these proceedings, the claimant accepted that, unless he had given some consideration for the payment of a non-refundable deposit, the agreement under which it was paid would be unenforceable. He therefore argued that he had provided such consideration in the form of a lock-out agreement, under which he had promised not to negotiate with any other potential purchaser for a certain period. Unfortunately, the recorder held that no such agreement existed. The deposit agreement itself therefore fell, and the vendor had no right to the money.
The claimant then started an action for negligence against his solicitor, arguing that the latter should either have ensured that the deposit agreement was enforceable or advised him that it was not. When this action reached court, the claimant argued, first, that the recorder’s decision had been correct, that is he had not been entitled to the deposit, and, second, that the defendant could not in any event argue, as it had, that the recorder was wrong, since he (the defendant) had been party to the earlier proceedings. Jacob J found against the claimant on both points: the recorder had been wrong (ie the claimant had been entitled to the deposit all along), and the defendant was perfectly entitled to say so. The claimant appealed against these rulings.
Whose deposit was it?
Although they were unanimous in upholding the appeal on the first ground, the three members of the Court of Appeal differed widely in their reasoning. According to Laddie J, the recorder had been absolutely correct in holding that a vendor cannot treat a deposit as non-refundable unless the purchaser’s agreement to pay it on that basis is supported by consideration. Since the only possible consideration in this case was the alleged lock-out agreement, which the recorder held did not exist, it followed that the claimant had no right to the deposit. His solicitor was therefore liable in negligence.
The other two members agreed that the recorder’s decision, on the case as pleaded and argued before him, had been correct. But had the case been presented differently, both thought that the claimant should have been entitled to the deposit. According to Pill LJ, the lack of an express promise of a lock-out agreement was irrelevant; such a term ought to be implied, and the necessary consideration therefore found. Walker LJ went further. In his view, the reason why an agreement to pay a non-refundable deposit is legally enforceable has nothing to do with the law of contract. It is instead based upon restitutionary principles, and, thus, there is no need to find any consideration for the purchaser’s agreement.
Was the solicitor estopped?
The second issue (whether the defendant solicitor was estopped from arguing that the decision in the interpleader proceedings was wrong) produced a split decision. All agreed that the question was not one of “issue estoppel” in the narrow technical sense, but the wider question of whether it would be an abuse of process to permit the defendant to relitigate a point that had been decided in the earlier proceedings. Walker LJ and Laddie J both thought that this would be the case, on the ground that, having started the interpleader proceedings in order to obtain a ruling on who was entitled to the deposit, a stakeholder must be bound by that ruling. However, Pill LJ thought that it would be unfair to prevent a stakeholder from raising arguments that it could not introduce in the earlier proceedings and that the parties, for whatever reason, had chosen not to raise.
John Murdoch, professor of law, Reading University
