A sale contract is a legally binding document that is generally irrevocable after its conclusion. In principle, contracts may not be revoked as a result of the will of one of the parties, hence; the legal terminology contract with the down payment has been established.
When a preliminary sale contract is entered into, both parties agree to a down payment which is a percentage of the full purchase price paid by the purchaser. On the one hand, a down payment may be considered as a means of guarantee to the parties, securing the seller's right by binding the purchaser to complete the contract, and securing the purchaser's right by preventing the seller from accepting other offers. On the other hand, the existence of a down-payment also entitles either party to revoke their offer, in exchange for forfeiting the down payment paid.
The concepts of "returning the down payment" and "the penalty clause" may be confused in the contract. A down payment is not refundable if the deal falls through because of the purchaser, however, in case the seller is the revoking party, the purchaser is entitled to double the down payment paid.
The return of the down payment is not considered as a means of compensation for the damage suffered by the other party as a result of the revocation, since the terms for it exist, even if no damage has occurred. A judge may, therefore, award additional compensation along with repayment of the down payment amount, in case the debtor acted in bad faith and against the provisions of his/her contractual liability.
In contrast, a penalty clause that is predetermined in the contract obligates the defaulting party to provide a form of compensation to the aggrieved party in the event of a breach of contract, and the judge may reduce this compensation if exaggerated.
Egyptian courts have dealt with issues wherein the will of the seller and/or buyer is unclear when paying the down payment since it is difficult to distinguish in many cases, especially when the contractors have not explicitly stated their will. With this in mind, the general rule is to assess, the intention of the contractors since this reveals the purpose of the down-payment, namely, whether it is paid to execute the contract and ensure its implementation, or as a means of permitting equitable contractual revocation.
We refer below to one of the cases initiated by our firm, in which the Cairo Court of Appeal ruled for the return of double the down-payment amount, in addition to a penalty of 4% of the total amount, to be paid annually, effective from the date of the judicial claim.
Given the importance of down-payments as a part of daily commercial transactions, it is necessary to ascertain the meaning of the "down-payment", as found in the law, and as established by the Egyptian courts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
