How to Get Contract Deposit Refund? Legal Guide | Atlas Legal

1. What is a Contract Deposit and What Types Exist?

Basic Concept of Contract Deposit

A contract deposit refers to money or other valuables delivered from one party to another when entering into a contract. In actual transactions, various terms are used including security deposit, cancellation deposit, earnest money, penalty deposit, booking deposit, retainer, advance payment, and down payment.

Although the Civil Act regulates contract deposits in the sales contract section (Article 565), this applies not only to sales contracts but also to other onerous contracts such as lease agreements, construction contracts, and employment contracts (Article 567).

Subject Matter of Contract Deposits

While contract deposits are primarily money, they are not limited to money or tangible objects. Intangible values such as claims or intellectual property rights can also serve as contract deposits. This reflects the diversity of modern transactions, where various forms of value are delivered as contract deposits in practice.

Four Types of Contract Deposits

Contract deposits are classified into four types based on the content of the deposit agreement.

First, Evidence Deposit is delivered as proof of contract formation. The nature of evidence deposit is the minimum characteristic of a contract deposit, so it always functions as evidence even when it has other characteristics.

Second, Cancellation Deposit is delivered as consideration for reserving the right to cancel the contract. Article 565 of the Civil Act presumes that a contract deposit has the nature of a cancellation deposit. This is the most common nature of contract deposits, and unless there is a special agreement, a deposit is considered a cancellation deposit.

Third, Penalty Deposit is delivered under an agreement that the deposit will be forfeited or double the amount must be refunded in case of breach. A penalty agreement is presumed to be liquidated damages under Article 398(4) of the Civil Act.

Fourth, Advance Payment is paid under an agreement to prepay part of the payment obligation borne by the payor.

Possibility of Multiple Characteristics

The important point is that the characteristics of evidence deposit, cancellation deposit, penalty deposit, and advance payment are not mutually exclusive. Therefore, depending on the content of the deposit agreement, a deposit can have both cancellation and penalty characteristics.

Relationship with Advance Payment

Generally, advance payment is merely partial payment of the price or remuneration and is distinguished from a contract deposit that reserves the right to cancel. However, actual practice considers the deposit as partial payment, and advance payment also has at least the nature of an evidence deposit.

Whether a deposit has the meaning of advance payment should be clarified through interpretation of the parties’ intent. Particularly, if the deposit is excessively large to be recognized as a cancellation or penalty deposit, it may be presumed to have only the meaning of advance payment.

2. Atlas Legal’s Successful Contract Deposit Case

Case Overview

Atlas Legal recently achieved a successful outcome representing the defendant (seller) in a penalty deposit refund lawsuit. This case was an important example where the legal nature of the deposit and whether the sales contract was established were the core issues.

The plaintiff (buyer) paid a deposit to the defendant claiming to purchase a property in Incheon owned by the defendant. The defendant immediately returned the deposit and stated that “no sales contract was established.”

Plaintiff’s Claims

The plaintiff filed a lawsuit making the following claims:

First, the sales contract was legally established. Second, the defendant as seller unilaterally cancelled the sales contract. Third, therefore, the defendant must pay double the deposit to the plaintiff under Article 565 of the Civil Act.

The plaintiff argued that based on the facts of paying the deposit and the defendant returning it, they had the right to receive double the deposit due to the defendant’s cancellation.

Core Issues

The legal issues in this case were twofold:

First, was a sales contract conclusively established between the plaintiff and defendant?

Formation of a contract requires matching intent through offer and acceptance. Merely exchanging a deposit does not establish a sales contract; there must be agreement on essential terms such as the subject matter, purchase price, and payment timing.

Second, was there an agreement to make the deposit a penalty deposit?

While Article 565 of the Civil Act presumes deposits to be cancellation deposits, the issue was whether there was a separate agreement to make it a penalty deposit. If there is a penalty agreement, it also has cancellation characteristics, but it was necessary to clarify the legal basis for the plaintiff’s claim for double refund.

Atlas Legal’s Defense Strategy

Atlas Legal developed the following defense strategy representing the defendant:

1. Proving Non-establishment of Sales Contract

• Proving there was no agreement on essential contract terms (purchase price, balance payment timing, ownership transfer timing, etc.)
• Arguing that money was merely delivered in the process of exploring purchase intent, without definitive contract formation intent
• Emphasizing that the defendant’s immediate return of the deposit was an expression of intent to deny contract formation

2. Proving Absence of Penalty Agreement

• Proving there was no explicit agreement to make the deposit a penalty deposit
• Arguing that even if a deposit was delivered, it cannot be considered that there was also a penalty agreement
• Clearly distinguishing that the presumption of cancellation deposit under Article 565 and penalty agreement are separate matters

Court’s Judgment

The court accepted Atlas Legal’s arguments and ruled as follows:

“It is insufficient to recognize that a sales contract was concluded between the plaintiff and defendant, or that an agreement to make the deposit a penalty deposit was conclusively established”

For these reasons, the court dismissed the plaintiff’s claim.

Significance of the Judgment

This judgment has the following important legal significance:

First, merely exchanging a deposit does not establish a sales contract. If there is no agreement on essential sales terms, a contract cannot be deemed established merely from the fact of exchanging money.

Second, the legal nature of the deposit must be clearly agreed upon. The party asserting a penalty agreement must prove it, and a penalty agreement is not presumed merely from exchanging a deposit.

Third, immediately returning the deposit is important evidence of non-establishment. The defendant’s act of immediately returning the deposit served as objective evidence showing there was no intent to conclude the contract.

Practical Implications

This case provides the following practical lessons for contract deposit disputes:

1. Essential terms must be clearly agreed upon and documented when forming contracts. Oral agreements alone make it difficult to prove contract formation when disputes arise.

2. The nature of the deposit (cancellation, penalty, advance payment, etc.) must be specified in the contract. Failure to clarify this becomes a source of future disputes.

3. If there is no intent to contract, immediately return the deposit and clearly communicate that intent. Retaining the deposit risks being interpreted as acknowledging contract formation.

Based on this practical experience, Atlas Legal effectively protects clients’ rights in contract deposit disputes.

3. Can You Cancel a Contract Using the Deposit?

Meaning of Cancellation Deposit Presumption

Article 565(1) of the Civil Act provides that “until either party commences performance, the payor may forfeit it and the payee may refund double the amount to cancel the sales contract,” thereby legally presuming the deposit to be a cancellation deposit.

This means that unless there is a special agreement, the person who paid the deposit can cancel by forfeiting it, and the person who received the deposit can cancel by returning double the amount received.

Effect of Legal Presumption

Since Article 565 is a legal presumption provision, to overturn this presumption, the party denying it must provide convincing proof to the court that the deposit is not a cancellation deposit. Simply claiming “the deposit is not a cancellation deposit” is insufficient; clear evidence must be presented.

Positive Effects of Cancellation Deposit

A cancellation deposit requires the cancelling party to forfeit the deposit or refund double the amount, so when the benefit from cancellation is less than the deposit, it deters parties from arbitrarily breaking the contract. This can ultimately strengthen the binding force of contracts.

For example, in a real estate sales contract with a 50 million won deposit, if the buyer wants to cancel, they must forfeit 50 million won, making it difficult to easily break the contract. Conversely, if the seller wants to cancel, they must return 100 million won, making them equally cautious.

4. What Happens When Cancellation and Penalty Deposits Are Combined?

Coexistence of Cancellation and Penalty Deposits

Even when there is an agreement to make the deposit a penalty deposit, the presumption as a cancellation deposit is maintained. That is, when there is a penalty agreement, the deposit has not only the nature of liquidated damages under Article 398(1) of the Civil Act, but also the nature of a cancellation deposit under Article 565.

Practical Significance

This has important practical significance. Whether the cancelling party bears a loss equivalent to the deposit or liability for breach makes no substantial difference and does not contradict the essence of a penalty deposit agreement.

Article 565’s presumption of cancellation deposit “unless otherwise agreed” means cases where there is no agreement excluding the cancellation deposit, so the existence of a penalty agreement alone does not negate the nature of a cancellation deposit.

Choice Upon Contract Cancellation

Therefore, even with a penalty agreement, a party can choose to:

1. Cancel the contract by forfeiting the deposit or refunding double the amount, or
2. Claim damages based on the other party’s breach

5. Can You Cancel Without Paying the Full Deposit?

Legal Nature of Cancellation Deposit Agreement

Under the principle of freedom of contract, a cancellation deposit agreement should be considered a consensual contract possible through mere matching of intent, regardless of whether the deposit has been paid. The cancellation deposit agreement presumed under Article 565 should also be considered a consensual contract.

Exercise of Right to Cancel Without Full Payment

The cancellation deposit contract regarding the agreed total deposit amount should be deemed established and effective. Therefore, even before the full agreed deposit is paid:

The payor can cancel the contract by paying the remaining deposit, and the other party can cancel by refunding double the agreed deposit amount.

This is a reasonable interpretation that does not discriminate between the party who agreed to pay and the party who agreed to receive the deposit, and respects the agreement to reserve cancellation rights.

Practical Example

For example, in a 100 million won real estate sales contract where a 10 million won deposit was agreed but only 5 million won has been paid:

• The buyer can cancel by additionally paying the remaining 5 million won
• The seller can cancel by refunding 20 million won (double the agreed deposit)

6. How to Cancel When Only Partial Deposit Is Paid?

Legal Effect of Partial Payment

Even when only part of the deposit has been paid, the cancellation deposit agreement remains valid. The right to cancel can be exercised based on the agreed total deposit amount.

Method of Exercising Right to Cancel

The party who agreed to pay can cancel by paying the remaining deposit, and the other party can cancel by refunding the deposit received plus the agreed deposit amount.

Specific Calculation Example

Case: 20 million won deposit agreed but only 5 million won paid

For buyer (deposit payor) to cancel:

• Pay additional 15 million won
• Forfeit total 20 million won

For seller (deposit recipient) to cancel:

• Refund 5 million won received + 20 million won agreed deposit = 25 million won
• Or refund double the agreed deposit, 40 million won

Principle of Equity

This interpretation is reasonable in that it does not discriminate based on whether or to what extent the deposit was paid, and respects the originally agreed cancellation right.

7. How Is the Deposit Refunded When Contract Is Void?

Application of Unjust Enrichment Principle

When the main contract is void or rescinded, the subordinate cancellation deposit agreement also loses effect. In this case, the refund relationship of the deposit should follow the unjust enrichment principle (Article 748 of the Civil Act).

Case of Good Faith Recipient

If the deposit recipient was in good faith, meaning they did not know the contract was void, they only need to refund to the extent of existing benefit. Existing benefit means the benefit that currently remains from what was received.

For example, if they received a 10 million won deposit but spent 5 million won on living expenses, a good faith recipient only needs to return the remaining 5 million won.

Case of Bad Faith Recipient

If the deposit recipient was in bad faith, meaning they knew or should have known the contract was void:

• They must return the full amount received
• They must pay interest
• If there are damages, they must compensate for them

For example, if they received a 10 million won deposit knowing the contract was void, they must compensate for the full 10 million won plus interest and any damages incurred by the other party.

Examples of Void Causes

Causes making a contract void include:

• Violation of mandatory provisions
• Acts contrary to social order
• Legal acts by persons without capacity
• False conspiracy

8. What Is the Refund Scope Upon Contract Cancellation?

Application of Restitution Principle

When the main contract is cancelled due to breach or mutual agreement, if cancelled and losing effect, the subordinate cancellation deposit agreement also loses effect. At this time, the refund relationship of the deposit should be governed by the restitution principle unique to cancellation (Article 548 of the Civil Act).

Refund Scope and Interest

The recipient must always return the benefit received, and if the deposit is money, interest must be added. This is because the deposit payment substantially has the character of partial payment of the main contract obligation.

Possibility of Set-off

When the deposit recipient cancels the contract due to the payor’s breach, the restitution obligation (deposit refund) and the payor’s damage compensation obligation are in a simultaneous performance relationship. Therefore, either party can set off the two obligations.

Practical Example

Case: In a real estate sales contract, the buyer paid a 10 million won deposit, but the contract was cancelled due to the seller’s breach

Refund scope:

• 10 million won deposit
• Interest from payment date to refund date
• Damages if any occurred to the buyer

Set-off possible: If the seller has a damage claim against the buyer, it can be set off against the deposit refund obligation.

9. How Is the Deposit Handled After Performance Commences?

Extinguishment of Right to Cancel

Under the wording of Article 565, cancellation under the cancellation deposit agreement is impossible after performance commences. This is because there is a time limitation of “until either party commences performance.”

Principle of Appropriation to Payment

When the deposit is of the same kind as the object of the payor’s obligation, it is generally appropriated to payment of that obligation.

For example, in a sales contract, a deposit paid by the buyer is appropriated to part of the purchase price. If a 10 million won deposit was paid and the purchase price is 100 million won, the balance becomes 90 million won.

Handling When Different Kind

When the deposit is of a different kind from the object of the payor’s obligation, it cannot be appropriated to payment of the obligation. In this case, the recipient must return the deposit under the unjust enrichment principle.

For example, in a service provision contract, if money was received as a deposit but the service provider’s obligation is delivery of a specific object, the money cannot be appropriated to payment and must be returned.

Meaning of Commencement of Performance

Commencement of performance means performing part of the performance act or making preparatory acts for performance in a form objectively recognizable from outside. Mere expression of intent to perform is insufficient; there must be concrete action.

10. Practical Considerations

Clarifying Contract Formation Requirements

As seen in Atlas Legal’s successful case, a contract cannot be deemed established merely from exchanging a deposit. There must be clear agreement on essential terms such as the subject matter, purchase price, payment timing, and ownership transfer timing.

Essential items in contracts:

• Specific identification of contract subject matter
• Contract amount and payment terms
• Balance payment timing and method
• Ownership transfer timing
• Special provisions

Clarifying Nature of Deposit

It is important to clearly agree on the nature of the deposit when forming a contract. The contract should clearly state whether it is a cancellation deposit, penalty deposit, advance payment, or a combination thereof.

Contract drafting example: “This deposit has both cancellation and penalty characteristics and will be appropriated to part of the purchase price upon contract performance.”

Determining Appropriate Amount

If the deposit is excessively large, its effectiveness as a cancellation or penalty deposit may be denied. Generally, 10-20% of the contract amount is appropriate.

Excessive deposits may be reduced by the court (Article 398(2) of the Civil Act), and in some cases may only be recognized as advance payment.

Recording Time of Performance Commencement

Since whether performance has commenced can be the core of disputes, evidence that can objectively prove the fact of performance commencement should be secured.

Evidence securing methods:

• Sending certified mail
• Email or text messages
• Photos or video recording
• Third-party witness confirmation

Selecting Legal Basis When Claiming Deposit Refund

When claiming deposit refund, appropriate legal basis should be selected according to the situation:

• Contract void/rescission: Unjust enrichment claim
• Contract cancellation: Restitution claim
• Cancellation deposit: Cancellation under Article 565

Importance of Immediate Return

If there is no intent to contract, like in Atlas Legal’s case, immediately return the deposit and clearly communicate that intent. Retaining the deposit risks being interpreted as acknowledging contract formation.

Precautions when immediately returning:

• Clearly express intent of non-establishment in writing
• Prepare receipt when returning deposit
• Notify non-establishment by certified mail

Importance of Expert Consultation

Contract deposit disputes involve complex legal relationships depending on the case, with different applicable principles. It is important to consult with an attorney early in the dispute to establish an optimal response strategy.

Atlas Legal has successfully protected clients’ rights in various contract deposit disputes, including the recent successful case in an Incheon property contract deposit dispute, and provides systematic legal services from analyzing the legal nature of deposits to filing refund claims and litigation.

11. FAQ

Atlas Legal, located in Songdo, Incheon, provides various corporate legal services including corporate contracts, corporate disputes, and unjust enrichment returns. We recently successfully represented a defendant (seller) in an Incheon property contract deposit dispute, dismissing the plaintiff’s claim by proving non-establishment of the sales contract and absence of penalty agreement. We have successfully protected clients’ rights in numerous contract deposit disputes and provide systematic legal services from analyzing the legal nature of deposits to establishing refund claim strategies and litigation representation. Please feel free to consult us if you need legal advice regarding contract deposits.