Earnest money is a financial benefit that one party provides to the other upon concluding a contract to secure their obligation. Earnest money can be a monetary amount or an agreed quantity of substitute goods. If the purpose of the given benefit is unclear, it is considered an advance payment. Earnest money must be explicitly agreed upon between the parties and is not presumed.
Example: A buys a car for €5,000.00 and gives €1,000.00 as earnest money. He still owes €4,000.00. If he pays €5,000.00, the seller must return €1,000.00.
The payment of earnest money serves as proof that the contract has been concluded. The given earnest money secures the obligation, ensuring the fulfilment of the commitment. Indirectly, earnest money also serves a performance function, as it must be returned or included in the fulfilment obligation when the contract is executed.145 It is essential that the parties have explicitly agreed that the given amount is earnest money; otherwise, the relationship is not subject to the rules governing earnest money. For example, if the contract states that “the contract is concluded upon payment of an advance of …”, such a contractual provision can be interpreted as an agreement on earnest money if the provision can be understood to mean that the payment is a condition for the valid conclusion of the contract, even if the term “advance” is used.146
Earnest money is an example of a real contract, meaning that the agreement on earnest money is only valid upon the actual transfer of money (or other substitute goods). Earnest money is a typical accessory obligation, as the agreement on earnest money is only valid if the primary obligation is also valid.147 The amount of earnest money is not legally regulated in a dispositive manner, meaning that the contracting parties have complete autonomy in determining it.
If the party providing the earnest money is responsible for the non-fulfilment of the contractual obligation, the recipient has three options: they may either demand fulfilment of the obligation if still possible, request compensation for damages while either returning the earnest money or including it in the compensation amount, or they may keep the earnest money.
If the recipient of the earnest money is responsible for the non-fulfilment, the provider has three options: they may demand fulfilment if still possible, request compensation for damages and the return of the earnest money, or request the return of double the earnest money. 148 When demanding fulfilment, it is also always possible to claim compensation for delays.
In the case of partial fulfilment, the creditor can either demand the remaining fulfilment of the obligation and compensation for damages, with the earnest money included in the damages, or claim damages due to incomplete fulfilment, again with the earnest money included in the damages. Alternatively, they can withdraw from the contract, return what they received as partial fulfilment, and choose between the remaining claims if the contract is not fulfilled due to the other party.149
Exercise:
1. George and Andrew agreed that George would purchase Andrew’s used couch for €150.00. George gave Andrew €50.00 as earnest money because he knew that Andrew’s neighbour was also interested in buying the couch.
- Was the contract concluded? Would the situation be different if George had not given Andrew the earnest money but had only promised to do so?
- What can George do if Andrew changes his mind and decides to give the couch to the neighbour?
- What claims does Andrew have if George does not pay the full purchase price?150
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