The explanation of down payment in business by China law

In China, the explanation of down payment is governed by the Civil Code of the People’s Republic of China (PRC) and related regulations. Chinese courts view a down payment as a form of earnest money or a deposit intended to secure the performance of a contract. Here’s how Chinese law addresses down payments and how courts typically decide related disputes:

1. Law Framework

The legal provisions concerning down payments are primarily found in the Civil Code of the PRC, specifically in the section on contracts.

Key Provisions Article 586: Definition of Earnest Money

Earnest money (定金) is a payment made by one party to demonstrate their commitment to a contract.

If the paying party breaches the contract, the earnest money is forfeited.

If the receiving party breaches the contract, they must return the earnest money plus an equal amount as a penalty.

Article 587: Limitations on Earnest Money

The amount of earnest money cannot exceed 20% of the total value of the contract. Any excess portion is invalid.

Article 585: Distinction from Advance Payment

If the parties agree on an advance payment (预付款), it is treated as a prepayment rather than earnest money. An advance payment is generally refundable unless otherwise stipulated in the contract.

2. Key Factors Considered by Courts

When deciding disputes over down payments, Chinese courts focus on the following:

Nature of the Down Payment: Courts determine whether the down payment is earnest money or an advance payment based on the language of the contract and the parties’ intent.

If the contract does not specify the purpose of the down payment, courts may interpret it as an advance payment rather than earnest money.