What is a Car Deposit Contract?
A car deposit contract, or what is more commonly referred to as a ‘holding deposit’, is a document that a buyer must sign when they want to purchase a vehicle. The buyer will pay a deposit to the seller to secure their interest in the vehicle. The deposit ensures the vehicle is set aside for the buyer and that it will not be sold to another person without the buyer’s consent. Whether the vehicle is new or second-hand, a holding deposit is required if the vehicle has not yet been delivered into the physical possession of the buyer.
Many businesses such as dealerships and brokers, will ask a buyer to sign a holding deposit prior to them taking receipt of the vehicle. For a dealership , this will mean signing a holding deposit contract while the paperwork is being finalised and the new vehicle is prepared for delivery. A holding deposit contract is an essential document in any car sale as this is a legally binding agreement between the two parties. It could be a good idea to obtain a legally recognised written registration of the transfer of ownership of a car. A car is only considered to be legally sold and resold once the transfer of ownership is completely registered with the relevant registration service.
A holding deposit contract has a few relevant functions why it is a critical document in a car sale. To begin with, it serves as recognition of the buyer’s serious interest in the vehicle and demonstrates their intention to purchase the vehicle. Similarly, it provides the seller with peace of mind, as they will be confident that the vehicle cannot be sold to another party without the buyer’s consent.
Essential Components of a Car Deposit Contract
In order to form a binding legally enforceable contract, the following terms must be included:
Deposit Amount: As a first step in deciding on the terms under which you will be purchasing your new vehicle, the deposit amount is particularly important for two reasons. Firstly, the deposit amount is the consideration for the seller and is what binds them to the contract. Secondly, it also forms the basis of the agreed purchase price. In light of this, one must be cautious not to pay more than intended to bind the contract.
Payment Terms: The next aspect that requires careful consideration. Consider the following:
Vehicle details:
o Details of the vehicle that is the subject of the sale must be provided including but not limited to:
o Whether the motor vehicle is a new or used vehicle.
o The condition of the motor vehicle and state of roadworthiness.
Conditions for refund: It is recommended that the following conditions are put in place:
o Any conditions governing the payment of a refund of the deposit are essential.
o The parties must be clear as to when a refund may be demanded. If no such condition is set out the seller is entitled to refuse a refund.
o It is generally accepted that where a buyer has been fraudulently misled, or there was a material error even though there was no fraud, then a refund of the deposit is due. A material error refers to a mistake about the subject-matter of the contract which is so serious that but for the error, the purchaser would not have entered into the contract.
o It is important that, where the payment of a refund is subject to the seller being allowed to sell the motor vehicle in the interim, the seller be clear on what the limits of the seller are (i.e. seller must not exceed this price eg R50,000). If in exceeding the limits set by the seller, cannot be reimbursed to the buyer, the seller should exercise extreme care.
o The condition here is clearly in favour of the buyer. All deposits are negotiable but this system is not without benefits for both buyers and sellers. Particularly where there is a dealer and the deposit in question is large, the dealer may be reluctant to refund the buyer unless the vehicle has been sold elsewhere. However, this is only a valid condition if the seller ensures that the deposit is placed into an interest-bearing account until the transaction is completed and the funds are transferred.
Legal Considerations for a Car Deposit Contract
It is important to understand the legal ramifications involved in a car deposit contract. In order for a car deposit contract to be valid, it must qualify as a legally binding agreement. A legally binding agreement includes an offer, an acceptance of that offer, and an intention that the agreement has legal consequences.
In the context of a car deposit contract, if the buyer offers to purchase a vehicle from a seller, and the seller accepts the deposit made by the buyer and agrees to hold the vehicle until the deposit is paid and the purchase completed, this may be enough to create a legally binding agreement.
However, the key is whether both parties have the intention that their arrangement has legal consequences. It may be difficult to know who bears the fault when a deal falls through, as both buyers and sellers may have genuine reasons for wanting to back out of an agreement. Nonetheless, if a buyer makes a deposit without agreeing that it is binding, and the money is returned without incident, then it is likely that the agreement is not legally binding.
In addition to the potential consequences when the deal falls through, there may also be legal implications for the buyer while they are waiting to complete the purchase. For example, if the buyer is financing the vehicle and they become unable to make payments on the loan, the creditor will still often attempt to collect from the buyer, even if they do not yet own the car.
While it may be possible for the buyer to collect some compensation from the seller if the deal falls through, it is usually not recommended to agree to a car deposit arrangement without first involving a lawyer or being familiar with the relevant legal principles. A buyer should also avoid making a deposit contract for a car without reviewing the agreement with a lawyer or other experts in automotive law in your area.
How to Write a Safe Car Deposit Contract
When buying a car, one of the fastest and most effective ways of ensuring that you can lock in your purchase is by drafting a car deposit contract. Indeed, a well-written car deposit contract does not only serve as an agreement between you and the seller, but is also a legally binding contract that will be enforceable in the court of law. Following, is a basic guide on how you can draft your own secure car deposit contract.
1st Step: Determine provision dates. Clear provisions are one of the key steps to drafting any legal contract. In this case, you should specify the amount of the deposit, the date of the vehicles expected delivery, the location (i.e. dealership) and the closing date. Of course, feel free to add other provisions if needed.
2nd Step: List the terms & conditions. A car deposit contract is useless without a clear statement of the terms & conditions. As a long-term contract, it needs to specify the conditions under which it can be voided or considered canceled. For example, you cannot void your contract simply because you found a better deal on a different vehicle. A car deposit contract is a commitment; hence , you should specify the conditions under which the contract can be voided. For e.g. a bank financing scheme failing to consummate is a clear condition under which the contract can be considered void. Hence, in such instance, you can demand the refund of your car deposit. Naturally, feel free to list more examples.
3rd Step: Get an attorney to review your contract. As a legally binding document, you need to enlist the services of an attorney to review the contract before you both sign it. A lawyer will help you to identify any loopholes in the contract or their thinking that might make it fair (or unfair) for both parties. Once all parties are satisfied with the provisions and terms & conditions, you should email a copy of the signed contract to the seller, and keep a copy for your own records, too.
4th Step: Unilateral vs. bilateral contract. Ask yourself whether your contract should be unilateral or bilateral. In other words, is it intended to bind both parties or simply one party. If you are making it unilateral, then the following clause will suffice: If the car deposit offer is meant to be bilateral, then you should include the following provision: Enjoy your new vehicle.
Common Pitfalls to Avoid
Over the years we have seen a number of common mistakes that auto dealers and consumers make when it comes to car deposit contracts. We have listed some of the most common ones below:
Read the Fine Print. One of the biggest mistakes that both consumers and auto dealers make is not reading the fine print of a car deposit contract. It is essential that you make sure you are not agreeing to a term that will be harmful to you down the road. For example, some car deposit contracts permit the dealer to keep the deposit if the customer backs out of the deal. There are also terms that call for a restocking fee or other charges based on the condition of the vehicle when it returned. If you haven’t seen the fine print we advise you set it aside and use the deposit that day.
Know When to Pass. It is essential to understand when to pass on a car deposit contract. If the dealer is asking you for money before you’ve seen a contract that is a red flag. While it is not uncommon for dealers to ask for a deposit that is fully refundable when the customer isn’t happy with the car it is a mistake to pay anything greater than an application fee.
Don’t Rely on Your Memory. You see a car deposit agreement and it’s a simple five sentence paragraph so you sign it. You never thought twice about whether you were giving up any rights but take a look at what the fine print says. Once you sign you agree to all terms and it is not a valid excuse to say "I didn’t remember signing it." If you were handed a car deposit agreement be sure to understand the agreement and make up front requests in advance of signing. It is common for car brokers to have a deposit agreement that they require clients to execute. Don’t hand over your check until you’ve examined what you’re signing.
Ask Questions. Simply because a dealer asks you to sign a contract does not mean you have to. If you have any question about a provision in the agreement get clarification. You can also ask that the dealer offer you a different paper. For example, it is common for vendors to ask that you sign their nondisclosure agreement. Always ask to review it before it is placed in front of you to sign and ask questions.
Resolving Disagreements
Enforcement actions for car deposit contracts can be commenced in the Supreme Court of Western Australia. There may also be class action suits against new car dealers who have not paid deposits to their customers.
Negotiated settlements are the most common way of resolving disputes. Your lawyer will negotiate with the dealer on your behalf. If you’re successfully able to negotiate a favourable outcome, your lawyer will ensure there is a written settlement reached and signed by you and the new car dealer. If the dealer fails to meet their obligations in the settlement, you can file legal proceedings against them for breach of the settlement.
If negotiations to resolve the dispute have failed, your lawyer may suggest other avenues such as mediation or arbitration. Below is a brief explanation of these methods.
Mediation – a trained mediator meets with you and the dealer in a ‘without prejudice; context. Without prejudice communications are those made in the context of a negotiation with a view to settlement and which cannot be used in any later litigation. In other words , you can say what you like in relation to a possible settlement, without fear of the dealer using it in court. From the mediation, you either reach a settlement or you don’t – and if you reach a settlement that becomes binding on the parties.
Arbitration – arbitration is a compulsory means of dispute resolution under the Australian Consumer Law. However, it’s not definitely compulsory under WA law so don’t be worried if your dealer says the dispute must go to arbitration – this is not the case (it can still be used in a limited way in some cases, for example if the parties agree to it). Any costs associated with arbitration are also an expense that may not be recoverable and should be handled according to the terms of the contract.
If none of the methods has had the desired result and a dispute remains, the only way might be to commence court proceedings against the new car dealer.