Signing any agreement is often connected with the requirement of making up-front payment of certain amount of money. Then both parties should consider and provide in the agreement the purpose of the payment because mentioned payment, according to their intent, can cause different legal results. It is very important because many people do not distinguish between earnest and advance payment what can be used against them.
The earnest
The earnest is explicitly stipulated in the provisions of Polish Civil Code in contrast to the advance payment which generally was formed in the practise of trading and the results concerning giving it were determined in accordance with the opinions expressed in the civil jurisprudence and by the court judgements. Law provides a special rule in the article 394 § 1 of Civil Code which envisages that in the absence of a different contractual stipulation or custom, the money given upon the conclusion of an agreement is treated as the earnest.
In the case of the performance of the contract, the earnest shall be accounted for the price (or remuneration), but if the performance of the contract is impossible, the earnest shall be returned.
The special legal effect of the earnest is that in the case of the non-performance of the contract by one party, the other party may, without setting an additional time limit, withdraw from the contract and retain the earnest (if it is a party which gave the earnest, this party may demand the double amount of it). For example if at the conclusion of sale agreement a seller has received the earnest and the buyer does not pay the outstanding part of price despite the elapse of the time limit to pay the price, the seller may withdraw from the agreement and retain the earnest. But if the seller does not release to the buyer a product being the subject to the agreement, the buyer is authorised to withdraw from the agreement and demand the double amount of the earnest.
If the agreement is terminated with the consent of both parties, the earnest should be returned and the duty to pay the double amount of it is no more valid. The same applies to the case where non-performance of the agreement has been due to circumstances for which neither party is responsible or for which both parties are responsible.
There were many doubts involved in the moment of giving the earnest. The provision of law stipulates that it should be given ?upon the conclusion of an agreement? and part of opinions expressed in the civil jurisprudence said that the money given before or after the moment of conclusion of the agreement cannot be treated as the earnest. This issued was definitely solved by the Polish Supreme Court that in 2008 passed a judgement which indicates that the parties can freely set forth in the agreement that the earnest can be given before or after the moment of conclusion of the agreement.
The advance payment
The advance payment, similarly as the earnest, shall be accounted for the price (or remuneration) it in the case of performance of the contract. As well if the agreement is terminated with the consent of both parties, the advance payment should be returned to the party which gave it.
The advance payment does not grant any specific authorisation for unilateral termination of the agreement, if it is not correctly performed. However if the right for unilateral termination of the agreement arises from the content of the agreement or form the general provisions of law, the advance payment shall be returned.
In the case of the non-performance of the contract by one party, the other party which received the advance payment cannot retain it as the earnest but should return it because then the advance payment is treated as the undue benefit (the legal basis of this benefit does not exist because of the non-performance of the contract). If the agreement is not performed by one party, the party which gave the advance payment may demand the amount of it ? but not the double amount as in the case of the earnest.
As far as the advance payment is concerned, it does not have to be paid upon the conclusion of the agreement and alike the earnest it can be paid at any time.
It should be clearly noted that the certain amount of money given upon the conclusion of the agreement as the earnest is more advantageous because the role of it is to strengthen the meaning of the agreement and protect its performance. The advance payment is the amount which is paid towards the future price (it is a part of the price) and does not constitute a form of guarantee of performance of the agreement.
* I would like to emphasize that the abovementioned comments apply to those agreements for which the parties have chosen the Polish law, or to which Polish law applies under EU law, international conventions or the provisions of the Polish Act of 12 November 1965 Private International Law.

This entry was posted on Monday, 08-02-2010 at 10:14 by Tomasz Wachowski and is filed under How to invest in Poland. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.