And what about the deposit?

The Supreme Court, in its judgement of 7 October 1999 (I CKN 262/98) examined the problem of settling a reciprocal contract and also dealt with the issue of deposits in this context. The thesis presented by the Court was very categorical: the amount handed to the contracting party after the conclusion of an agreement cannot be deemed to be the amount paid on account of a deposit.

A number of serious legal and actual consequences arises from this lapidary statement and not all of them have been thoroughly analysed by the Supreme Court. The method chosen of treating the deposit and its legal character considerably affects the content of concluded agreements, particularly those concerning the transfer of either property titles or perpetual usufruct to real estate.

A strong guarantee
In order to understand it fully, we have to look closely at the institution of the deposit as such, as well as the economic functions served by it.
Article 394 of the Civil Code contains the provisions on the advance. The function of the deposit is to strengthen a given obligation. A party, by paying an advance, strengthens its obligation and receives an additional guarantee to receive a mutual performance. The effects provided for in Article 394 of the Civil Code are very severe, for the party responsible for failing to execute an agreement. The party that paid the deposit either loses it, or the accepting party is obliged to return the deposit at twice its value. The deposit therefore increases the security of the transaction and the trust of the parties in such a transaction.

A suitcase full of deposit money
In order to fully understand one inadequacy of the decision of the Supreme Court in the light of existing economic conditions, we can take the following example. The dematerialisation of money is becoming more and more visible. Transferring money from one account to another has become a normal way of making payments, required by the provisions of law. It is a more convenient and safer method than the traditional handling of cash. These are evident truths, but the decision of the Supreme Court seems not to have taken them into account. The decision in question stipulates that the deposit has to be handed in at the moment of concluding the agreement. Such a condition will clearly not be fulfilled by a subsequent transfer to the bank account of the other party to the agreement. This is not significant in the case of small transactions: handing in small amounts of cash at the moment of signing a contract is not at all problematic. If the transaction is large, then the deposit will consequently be higher. In such cases we are faced with absurd solutions: should we demand cash from our contracting parties at the moment of concluding contracts (for which an deposit has been stipulated)? What about such situations when the deposit is as high as, for instance, PLN 1 mln or more?

Friendly turnover
The absurdity of such a solution is even more apparent when we realise that even an irrevocable order to transfer money and block monetary means, (depending of course on submitting a signed agreement, to which the deposit relates), does not fulfil the requirements specified by the Supreme Court. Another method could be handing in a cheque or a bill of exchange, which does not change the fact that the solution adopted by the Supreme Court faces a great deal of criticism. The conclusions of the agreements and cash turnover should be ,user-friendly". Limiting the possibilities of paying the deposit to the moment of concluding the agreement does not help at all.

Freedom of contracts
What is more, some justifiable doubts can arise, regarding the principle of shaping contractual relationships. As Agnieszka Pyrzynska(1) rightly noticed in her partly critical gloss to the aforementioned judgement, the decision of the Court is in conflict with the principle of the freedom of contracts. It deprives the party of the possibility of shaping a legal relationship between them in the manner that suits them best, if all the negotiated circumstances are taken into account. If the parties decide - quite reasonably, for that matter - that the deposit should be paid in future, the law should not obstruct this. Consequently, we should rather adopt the standpoint expressed in the Code of Obligations(2)namely, that the parties may agree that the deposit will be paid in the future - as long as it is done before the performance of the agreement. Such a solution is not contrary to the actual nature of the deposit. This reservation would have legal effects only at the moment of paying the deposit.

Courts can change things
I hope that court practice will not share the Supreme Court's opinion expressed in the quoted decision and regard it only as incidental.
I am not going to question the importance and the value of the decisions of the Supreme Court. We have to remember, however, that those decisions do not constitute the source of law, and common courts are not bound by them. Moreover, we have to bear in mind the fact the Supreme Court has changed its opinions on many occasions, sometimes quite drastically. We do hope that the Court will change its opinion in this case as well. z

Jolanta Nowakowska-Zimoch, partner of international law firm Lovells

(1) A. Pyrzynska: "Gloss to the judgement of the Supreme Court dated 7 October 1999". I CKN 262/98 PiP 2001/10/106.
(2) L. Domanski: "Institutions of the Code of Obligations. General Part". Warsaw, 1936.