In commercial transactions, it is very
common for one party to give the other party an amount of money before the
contract being performed. Should this amount be considered as deposit or
advance payment?
How to Distinguish
between Deposit and Advance Payment
Deposit is one of security measures for
the performance of contract obligations. According to regulation of Civil Code
2015, deposit is an act whereby one party (hereinafter referred to as the
depositor) gives to other party (hereinafter referred to as the depositary) a
sum of money or precious metals, gemstones or other valuable things
(hereinafter referred to as the deposited property) for a period of time as
security for the entering into or performance of a contract.
Upon a contract being entered into or
performed, any deposited property shall be returned to the depositor, or
deducted from the amount of payment obligation. If the depositor refuses to
enter into or perform the contract, the deposited property shall belong to the
depositary. In case the depositary refuses to enter into or perform the
contract, the depositary must return the deposited property and pay an amount
equivalent to the value of the deposited property to the depositor, unless
otherwise agreed.
It can be seen that the purpose of
deposit is to ensure the entering into or performance of a contract. Due to the
fact that its nature is a security measure for the performance of contract
obligations, sanction is set in regulation of deposit in case one party refuses
to perform the agreement.
In practice, the advance payment can be
understood that the obligor pays the obligee a sum of money in advance and this
amount is regarded as in-advance performance of a payment obligation. As the
nature of the advance is not a security measure for the performance of contract
obligations, there is no fine rising from the advance if one party refuses to
perform the agreement. Further, when a contracting party gives to the other
party a sum of money, which is not clearly identified by the parties as a
deposit or an advance, such amount shall be considered an advance payment.
It is important to distinguish the difference between deposit and advance
payment to avoid potential disputes in performance the contract
or consult with dispute resolution lawyers in Vietnam at
early stage of the dispute for proper actions.
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