A buyer intending to pay some money to the seller of a horse should be able to answer the question ‘Why am I making this payment?’ Clarity around the purpose should avoid a potential dispute over entitlement to the money if no agreement is ever reached to sell the horse or if the buyer has to pull out of the sale due to personal or financial reasons. Resolution of a dispute depends on the correct legal characterisation of the payment which determines the rightful claim to the money.
A key factor in the law’s characterisation of the payment is whether or not it is made under an agreement to sell the horse and, if so, what the agreement says (if anything) about the nature of payments due.
Let’s firstly consider the situation where the buyer has not yet agreed to buy the horse but, driven by a fear of missing out, wants to be front of queue even before riding the horse or arranging a pre-purchase (veterinary) examination (‘PPE’). So the buyer rushes to make a payment to “hold” the horse, labelling it a ‘holding payment’ or ‘holding deposit’; whatever the precise description, the buyer’s aim is to demonstrate to the seller that he or she is serious about the horse and to engage exclusively with the seller until he or she makes a decision to buy or not! This kind of pre-sale payment is gratuitous, made and received without any legal obligation. It is not given and received as a gift. As such, should the buyer decide ultimately not to buy the horse, the seller must, as a general rule, return the payment. An exception to the rule might arise if the seller agreed to do something in return for the payment, such as taking the horse off the market, educating it, or facilitating the buyer’s inspection in some special way. In other words, the payment ‘purchased’ a benefit to the buyer. But any such agreement must be provable, so it should be documented by the seller by email or sms, identify the purpose of the payment, and state that the seller keeps the payment even if the buyer decides not to buy the horse. In my experience, however, it is better to dispense with any pre-sale payment altogether unless a high value horse is involved and the payment arrangement is properly documented, to avoid disagreement if a sale does not eventuate.
Where a buyer has agreed to buy the horse, conditionally (for instance, subject to a PPE) or unconditionally, a payment to the seller in any amount less than the full agreed purchase price, will be either a ’deposit’ or a ‘part payment’. The terms of the agreement will stipulate the nature of the payments and if any money paid is repayable to the buyer for any reason.
In most sales, a deposit of 10% of the price is payable. A deposit is a payment made under an agreement for the sale of the horse, unlike a payment to ‘hold’ the horse. Payment of a deposit is not essential to the binding nature of a sale agreement. Such a payment will, however, be an important factor to consider should there be a dispute over whether any sale at all was reached. The need to discern if an agreement to sell the horse was reached in fact is apparent when you consider the troublesome matter of a payment being labelled a ‘holding deposit’ which happens to be 10% of the asking price.
A deposit is usually 10% of the sale price and there is a good reason why. If the deposit is significantly greater, a buyer might claim that the deposit should not be forfeited on the ground that it is a ‘penalty’. The law around ‘penalties’ is complex and best avoided altogether by limiting a deposit to 10% and near to it. And even if called a deposit, a payment may in the eyes of the law be no more than a part-payment if it was not intended that the money would be forfeited. An intention might be discerned if the so-called deposit was 50% of the sale price.
There are 3 functions of a deposit: Firstly, it operates as a guarantee of the buyer’s performance of the sale agreement. Second, it confers on the seller an implied right to its forfeiture; a buyer is liable to lose the deposit if he or she decides not to complete the sale in the absence of a lawful reason. The seller can terminate the sale and resell the horse even for a price higher than the original one. A lawful reason includes the non-fulfilment of a condition precedent to the sale, commonly a satisfactory PPE. Regrettably, still to this day, too few buyers pay a deposit without adequately documenting (or documenting clearly enough) conditions precedent to the sale. Third, it is applied towards the price.
A ‘part-payment’ (also referred to as an ‘instalment’ or ‘payment on account’) is not, in contrast to a deposit, a guarantee of performance, nor is it forfeitable at law unless the seller and buyer have agreed otherwise. If the buyer intends a part-payment to be refundable for any reason, it remains important that he or she nonetheless obtains the seller’s documented agreement to refund it and in what circumstances rather than argue the law and exactly what was a agreed in point of fact.
Where the seller sells the horse in the course of a business of selling horses, it is worth bearing on mind that an agreement to pay the price in 3 or more instalments (including a deposit) can amount to a ‘lay-by’ sale. This is a scenario that a seller does not what to inadvertently fall into. A buyer is entitled to cancel a lay-by sale of a horse and claim all money paid to the seller (less certain valid deductions) at any time up until the buyer takes possession of the horse.
Selling and buying horses is normally time consuming and arduous. Disputes over the seller’s right to retain any payment towards a horse is entirely preventable by timely and appropriate words recording the parties agreement around the payment and receipt of money.
8 December 2021
© Michael Mackinnon, Solicitor & Independent Counsel