InquiringMind_cg

Nonrefundable deposit for construction/remodeling work

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I have a small handyman/construction/remodeling company.  In my contracts, I stipulate that any deposits made are nonrefundable.  I do this because of the need to purchase materials and such in the preparation for any particular job, and if the job falls through for whatever reason, I am not out of the money I have expended to date.  Recently, after bidding a sewer repair job for a client, the client signed the contract and offered to pay a substantial deposit because she had the money right then and there and didn't want to "spend it on something else" as she said.  I accepted her deposit and began ordering materials and planning for the job.  However, each time I contacted the client to begin the project at her home (it was both an internal and external job), she had a reason for delaying the start date.  This happened several times over the course of several weeks.  I kept in communications with her via phone, text and written letters expressing my concern that we really needed to begin the work and were just waiting on her ok to do so.  Now, the client wants to cancel the contract and get her deposit back.  Since I stand by my contract that clearly states no deposits are refunded, she has hired a lawyer to get her full deposit, along with attorney fees, back.

 

Since it is clearly written in the contract that any deposits made are non-refundable, and she signed said contract, what legal basis does she have to get all, or any of her deposit back?

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Your non-refundable deposit clause is, in legal doctrine, a liquidated damages clause.

 

Whether you get to keep the whole deposit depends on the exact wording of your contract and, more importantly, how your state appellate courts define and limit a liquidated damage clause.

 

Here's some general information:

 

At common law, a liquidated damages clause will not be enforced if its purpose is to punish the wrongdoer/party in breach rather than to compensate the injured party (in which case it is referred to as a penal or penalty clause).

 

In order for a liquidated damages clause to be upheld, two conditions must be met.

  • First, the amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term.

  • Second, the damages must be sufficiently uncertain at the time the contract is made that such a clause will likely save both parties the future difficulty of estimating damages.

Above is a brief and basic definition quoted from Wikipedia but the doctrine is relatively universal and is likely to apply in your state.

 

https://en.wikipedia.org/wiki/Liquidated_damages

 

For example: If the job was a $10,000 job and you collected a deposit of $5,000 and then spent $2,500 on materials and administrative expenses, no court in the country will allow you to keep the entire deposit.

 

Apply your own figures to that example and if your deposit is substantially larger than your expenses you would be wise to give her enough of a refund so that you can document what you do keep if you end up in court.

 

Another legal concept that you have to be aware of is that you cannot profit from another's breach. You can only be compensated for your actual damages.

 

Once you get beyond this case, make sure you rewrite your contract to specify liquidated damages of perhaps cost of materials plus a percentage for administrative expenses.

 

And never use the word deposit in your contracts. Call it first payment toward the total contract price. Too many people erroneously associate deposit with refund and that leads to a whole lot of argument and litigation.

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You may be interested in visiting the Small Business Law Center: Business Contracts and Forms and reading "Breach of Contract" and Lawsuits as a good resource to learn more about this subject matter. If you need further clarification on your specific situation, you may consider signing up for a LegalStreet plan. With the plan, you have unlimited access to a local lawyer to ask your questions and the plan also offers discounted legal representation should you need it.

Disclosure: LegalStreet and FindLaw.com are owned by the same company.
 

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