Payors Beware: How Express Terms Can Help Save Your Deposit

Background: Pre-contractual negotiations and payment

The Benzline-Lorinser Agreement: Benzline Auto Pte Ltd ("Benzline") was offered the master dealership rights in Singapore for Lorinser cars, a range of modified Mercedes-Benz cars customised by Sportservice Lorinser Sportliche Autoausrustung GmbH ("Lorinser"). Daimler AG was the manufacturer of the Mercedes-Benz cars supplied to Lorinser.

The Exclusive Sub-Dealership Agreement: As Benzline was not inclined to be the direct retailer of the Lorinser cars, Supercars Lorinser Pte Ltd ("Supercars") was offered the opportunity to enter into an agreement with Benzline, on a "back to back" basis with the Benzline-Lorinser Agreement. Under this arrangement, Benzline would import the Lorinser cars into Singapore, for retail by Supercars.

As the Exclusive Sub-Dealership Agreement was intended to mirror the Benzline-Lorinser Agreement, drafts of the Benzline-Lorinser Agreement were circulated to Supercars for their review. In the midst of negotiations for the Exclusive Sub-Dealership Agreement, Lorinser reminded the parties to place a deposit on Supercars' first Purchase Order soon, to avoid a lengthy delay in the eventual delivery of the Lorinser cars. Supercars proceeded to pay a deposit of S$300,000 to Benzline (which was paid on to Lorinser, and subsequently to Daimler). 

Thereafter, Supercars and Benzline failed to reach an agreement as Supercars had refused to agree to a provision to provide a standby letter of credit, which mirrored a provision in the Benzline-Lorinser Agreement. Benzline proceeded to grant the exclusive sub-dealership rights to another party. Supercars commenced proceedings against Benzline to recover the deposit pursuant to, inter alia, a claim for unjust enrichment on grounds of a total failure of consideration.

What Was The Basis Of The Payment?

The High Court, at first instance, allowed Supercars' claim for unjust enrichment on the grounds of a total failure of consideration, as parties had failed to conclude and enter into the Exclusive Sub-Dealership Agreement. The High Court also found that the deposit was payment to demonstrate Supercars' good faith and seriousness to complete the negotiations and enter into a binding agreement.

The Court of Appeal overturned the High Court's decision and held that the implied basis for the deposit was not that the parties would enter into the Exclusive Sub-Dealership Agreement, but that Benzline would offer Supercars the exclusive sub-dealership on terms which would correspond in material ways to the draft Benzline-Lorinser Agreement, which Supercars had reviewed prior to making the payment. The deposit was payment to set in motion the production process, to avoid future delay in the delivery of the cars. In other words, contrary to the High Court's finding, it was not the parties' understanding that the deposit would be refunded if the Exclusive Sub-Dealership Agreement was not concluded. Even if the parties had each assumed or expected that they would enter into the Exclusive Sub-Dealership Agreement, there was no evidence that they had communicated this assumption or expectation to each other. Without such communications, this assumption remained nothing more than an assumption and could not form the legal basis for the deposit.

Did That Basis Fail?

As Benzline was in fact prepared to move forward with the Exclusive Sub-Dealership Agreement, the Court of Appeal found that the basis for the payment did not fail. By refusing to agree to the provision to provide a standby letter of credit, Supercars chose to reject Benzline's offer to enter the Exclusive Sub-Dealership Agreement on terms which would correspond in material ways to the draft Benzline-Lorinser Agreement. Therefore, Supercars' claim for unjust enrichment was denied. To allow restitution would be to allow Supercars to profit from its own actions; the payor cannot insist on abandoning the contract and yet expect to recover the deposit as this would allow him to take advantage of his own wrong. After all, as aptly observed by the Court of Appeal, "the basis for the payment of a deposit is to serve as an earnest for the payor's performance, i.e., as a disincentive... to the payor's breach. Naturally, the ability of the payee to forfeit or retain the deposit also helps to protect the payor from the losses which would be caused by the breach". It also did not make any commercial sense that Benzline would be willing to offer Supercars the opportunity to recover the deposit, thereby personally assuming the risk to be liable for the Lorinser cars, which was the exact reason why Benzline had involved Supercars in the first place. 

The Importance Of Express Terms

The appeal pivoted upon one question: What was the deposit for? Supercars ought to have communicated, and obtained Benzline's agreement on, its understanding that the basis of the deposit was that the Exclusive Sub-Dealership Agreement would be entered into and that the deposit was to be refunded if the said basis did not materialise. This case serves as a caution for the party paying the deposit to make clear the purpose of the payment, and to ensure that express terms are set out to govern the consequences in the event that purpose is not achieved.