Deposit forfeiture clause: Overview, definition and example
What is a deposit forfeiture clause?
A deposit forfeiture clause is a provision in a contract that specifies that a deposit paid by one party may be forfeited if the party fails to meet certain conditions or obligations outlined in the agreement. It is commonly used to protect the party receiving the deposit, typically a seller or service provider, in case the other party backs out or fails to perform as required. This clause ensures that the party receiving the deposit is compensated for the time and effort invested, even if the deal falls through.
Why is a deposit forfeiture clause important?
A deposit forfeiture clause is important because it provides financial protection for the party receiving the deposit. It discourages the other party from backing out of the agreement without facing consequences, helping ensure that both parties remain committed to fulfilling their obligations. For businesses, it offers a layer of security in case of non-performance and helps mitigate losses due to cancellations or breaches.
Understanding a deposit forfeiture clause through an example
Imagine a business enters into a contract to purchase a piece of equipment from a supplier. The buyer pays a deposit of $5,000 to secure the purchase. The contract includes a deposit forfeiture clause, stating that if the buyer cancels the order after a certain point in the process, the deposit will be forfeited.
If the buyer decides to cancel the order just before the equipment is delivered, they would lose the $5,000 deposit. The supplier keeps the deposit as compensation for the time and resources invested in fulfilling the order, such as preparing the equipment and scheduling delivery.
Example of a deposit forfeiture clause
Here’s how a deposit forfeiture clause might look in a contract:
“In the event of cancellation by the Buyer after the execution of this Agreement, the deposit paid shall be forfeited as liquidated damages and shall not be refunded.”
Conclusion
A deposit forfeiture clause is a crucial component in contracts where deposits are required. It ensures that the party receiving the deposit is protected from potential losses caused by cancellations or breaches. By including such a clause, both parties are clear on the consequences of non-performance, helping maintain commitment and accountability throughout the agreement.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.