What Exactly Is A Non Refundable Deposit Agreement?
In most businesses, especially service industries, deposits are commonly collected to lessen the possibility of client no-shows or other similar infrequent events that make it difficult to keep the business running and profitable. However, if a client pays a deposit, and then does not show for an appointment or tries to cancel within an unreasonable amount of time before the appointment, what recourse do you have if you have not explicitly set out in writing the conditions under which you will not return the deposit to the client? You can use non refundable deposit agreements to address this potential problem.
This is where a non refundable deposit agreement comes into play. A non refundable deposit agreement is just like any other business contract. It spells out exactly what will occur if the customer breaks the terms of the agreement such as by canceling the appointment and losing the deposit. It also makes explicit the terms under which the deposit can be lost by the client. For example, if a hairdresser agrees to do someone’s hair for a wedding, they may collect a non refundable deposit of a certain amount which will be lost by the client if the wedding cancellation occurs before a certain time period prior to the wedding . The purpose of such agreements is to force the client to follow through on their scheduled appointment, or face a financial penalty in the form of a lost deposit. However, such agreements are not limited to beauty services, but can be used in practically any service industry. For instance, sales people, landscapers, and janitorial services may use these agreements as well.
Non refundable deposit agreements are very important for service industries, as they force a client to follow through with a service or to be penalized for not using the service. They are increasingly more common as both the customer and the service provider must "win" in order for there to be a successful exchange of goods and services. Such agreements, like any other contract, are enforceable under contract law against the party breaking the agreement or not following through on the appointment without the agreement. Thus, even if such events occur, the agreement should still be valid, unless the court deems it to be patently unfair to the party who breaks it.
Components of a Non Refundable Deposit Agreement
A non refundable deposit agreement must contain some necessary requirements for some degree of certainty and protection. The key elements that any well-drafted non refundable deposit agreement will have are: (a) the amount of the deposit; (b) conditions of forfeiture; and (c) conditions for returning the deposit.
Pursuant to California Civil Code ยง 1671, the key element of the non refundable deposit is that the forfeiture shall be valid and enforceable if it is "reasonable under the circumstances that existed at the time the contract was made," and if the contract clause is "not deemed to be a penalty." Unfortunately, the California Supreme Court has not provided clear guidance in the area of what is considered reasonable and whether a forfeiture provision is a penalty. A review of case law shows that the analysis involves both procedural and substantive unconscionability. Procedurally, the analysis looks at when the contract was formed (modifying vs. initial contract). Substantively, the analysis looks at the relative bargaining power of the parties, the clarity of the clause itself, and how the clause is drafted. A non refundable deposit agreement can survive this analysis if the clause is a reasonable estimate of future damages.
California law does not require the non refundable deposit agreement to use the words "non refundable deposit" or "forfeiture clause" for the deposit to be subject to forfeiture. Instead, the non refundable deposit agreement simply needs to accomplish the goal of conveying to the parties that the amount of the deposit is not something that can be accounted for against the purchase price. Instead, the deposit will be forfeited in the event the transaction does not close.
Legal Implications
When drafting any contract lawyers have a duty and responsibility to draft contracts in way to enhance the ability to enforce those agreements if there’s a dispute. However with non refundable deposit agreements this is especially important because if the agreement is not drafted and understood properly the consumer will not be able to use the absence of a signed agreement in their favor if there’s a dispute.
Recently in cases where companies are relying on these types of agreements they can be met with arguments from the other side that while one party may have initialed or signed the contract and fully understood it, their representatives told them that parts of the agreement would not be enforced. Or that one of the parties did not understand a particular term used and without interpretation they may have rejected signing the contract.
With many non refundable deposit agreements sales representatives use oral representations to discuss the agreement prior to anyone ever even looking at the agreement. With many agreements the sales person will provide the consumer the information but not the actual agreement itself. In many cases the contents of these discussions will be contested by the consumer. In those cases the enforceability of the agreement itself is up for grabs.
The biggest obstacle is companies relying on one key provision in their contract relating to how the non refundable deposit becomes available to the company if the consumer backs out. In those cases it’s essential that the company have the consumer agree on all of the same terms orally as found in the agreement.
Another major issue is in many of these cases the consumer clearly does not intend to move forward with the contract after the agreement is signed. The consumer will never visit the property to which the contract relates. They will never pick out the options available and they certainly will not move into the new home. In those cases the lack of intent to go forward with the purchase and the lack of good faith can be used as a defense to the enforcement of the agreement. As such it’s essential that the words of the contract are given effect before the consumers sign the agreement or the consumer will have nothing to lose in challenging its enforceability in court.
Pros and Cons
Benefits of NRD: There are a number of advantages that non refundable deposit agreements provide for you, the vendor. Some of these include:
As the vendor, besides the obvious benefit of the non refundable deposit, there are two other major advantages to using a non refundable deposit agreement which are:
1. Because the customer must pay if they cancel or move, they will be less likely to do so. If they are unhappy with the service you are providing at any time they can move to cancel your services, however since the agreement requires them to pay there is a financial disincentive for them to do so. As a result they will go out of their way to try and make things work with you.
2. The non refundable agreement will help minimize buyer’s remorse. Buyers sometimes cancel or move after having received services from a vendor simply because they have changed their mind or feel like they could just as easily do the job themselves. Rather than see money spent as wasted, the non refundable deposit agreement will encourage buyers to continue on with the services purchased instead. Ultimately the fact that they are paid should make them more willing to please you the customer.
Disadvantages of NRD: Now there are some disadvantages to the non refundable deposit agreements but all of these work in the favor of the vendor. In essence the disadvantages are:
- If a customer moves , they will still be out whatever services you’ve already provided them.
- The customer may feel cheated if not given a refund.
- You (the vendor) can’t file a claim for lost wages with the state department of labor and industries.
- The customer may be unhappy and leave a negative review online.
- The customer may request a refund when unhappy at any time during the engagement, which could become burdensome, even a distraction to the point of it threatening your business.
- Some customers may wonder why you’re requiring an NRD and may choose to not work with you because many other wedding vendors don’t require non refundable deposits of their clients.
Though the latter concern is real it is only a minor one. Most customers will simply shrug it off and move on. The reality is that a vendor has the much greater financial and personal obligation to satisfy their client, however, once they have paid. Any time spent considering a vendor’s non refundable deposit is a waste of time as the savvy client knows that they should carry on with their planning and find another vendor to fulfill their dream.
Sample Non Refundable Deposit Agreement Template
NON REFUNDABLE DEPOSIT AGREEMENT
This Agreement (the "Agreement") is made and entered into as of the ____ day of ______, 20__, (the "Effective Date") by and between ________ ("Company") with an address of _______________ and ________________ ("Customer") with an address of ________________________ (hereinafter collectively known as the "Parties")
Customer is engaged in ______________________________
Company and Customer mutually agree and warrant as follows:
If for any reason the Customer cancels the service on a short notice, meaning less than ___ days in advance of scheduled engagement, the non refundable deposit will be forfeited and the balance will be refunded to the Customer.
In the event that the Customer cancels the service less than ___ days but more than __ day of the scheduled service, the Company will refund ___% of the deposit, ___% will be deducted for administrative costs.
If the Company cancels the service for any reason, the deposit will be return to the Customer upon written request made within 3 days of cancellation.
The Customer will forfeit the entire deposit payment to the Company if, for any reason, the date and or time of the service must be changed upon less than ___ days notice to the Company and the Company is unable to accommodate the new date and or time requested by the Customer.
The Parties agree to indemnify and hold harmless for any damages as a result of any action brought for breach of fiduciary duty or otherwise arising out of this Agreement.
The Parties agree that disputes as to the interpretation of any provision of this Agreement will be settled exclusively under the Rules of the American Arbitration Association then existing, and that any judgment upon the award rendered by the arbitrators may be entered in any Court of competent jurisdiction in the state where the Company’s principal place of business is located. The Parties covenant and agree that in any such arbitration, the arbitration will be conducted in person and in Florida, and that they may be represented by counsel of their own choosing. Each Party will pay for the cost of its attorney, and share equally the fees and expenses of said arbitration.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the Effective Date set forth above.
CUSTOMER
______________________
COMPANY
______________________
This is merely a sample template and does not by itself cover specific state requirements in the United States or other countries. Either party employing this template would likely need to modify the template to meet their requirements and such modifications may require the assistance of a qualified attorney familiar with local laws. Uniform customs in different jurisdictions as well as changes in the industries parties belong to may require the use of additional clauses.
Drafting Tips For A Non Refundable Deposit Agreement
When drafting a non refundable deposit agreement, it’s vital to use clear and precise language that sets forth the specific events that will cause the forfeiture of the deposit. This clarity helps to ensure that both parties understand their rights and obligations under the agreement, reducing the potential for disputes.
First, be explicit about the conditions that will lead to the forfeiture of the deposit, as well as any exceptions that may apply. For example, the agreement could specify that deposits are refundable if the purchaser terminates the agreement within a certain period or if specific contingencies are not met, such as financing falling through or the inability to obtain necessary approvals. By clearly identifying these terms, you help ensure that the purchaser knows exactly when the deposit is non refundable and when it may be returned.
Second , ensure that both parties sign and date the agreement and retain a copy for their records. It’s also a good practice to send the purchaser a reminder about the terms of the agreement shortly before they become non refundable. Some purchasers may have a change of heart prior to the non refundable period and will expect the ability to obtain a refund of their deposit.
Third, confirm the methods of contact and payment that will be used as the agreement progresses to avoid future misunderstandings. For instance, you may want to confirm how communications about the lifting of any contingencies or moving forward with the process will occur (in person, by telephone, by email), as well as the payment options that will be used when the deposit becomes payable.
Following these best practices in drafting a non refundable deposit agreement will help ensure that both you and the purchaser understand your respective rights and responsibilities under the agreement. This, in turn, can reduce the potential for misunderstandings or disputes over the terms of the agreement.