Legal regulation of the earnest money in Lithuania

  • 2010-05-26
  • By Lina Kaucikaite, Associate Lawyer.

ECOVIS Miškinis, Kvainauskas ir partneriai advokat? kontora.

Earnest money is an effective and quite often used way to secure the performance of a contract. This article shall disclose the concept of earnest money, functions in which earnest performs, form of the agreement, similarities and differences between earnest money and advance payment and other important questions related to the agreement of use of earnest money.

Under the Civil Code of the Republic of Lithuania, earnest money shall be deemed to be a monetary amount issued by one contracting party from the payments due to be paid by him under a contract to the other party to prove the conclusion of the contract and secure its performance. If the party which issues earnest money is liable for non-performance of the contract, the earnest money shall remain with the other party. In the event where the party to whom the earnest money was handed over is liable for non-performance of the contract, he shall be bound to pay to the other party double the amount of the earnest money. In addition, the party who is liable for non-performance of the contract shall be obliged to compensate the other party for damages, including the earnest money, unless otherwise provided for by the contract.

Earnest money performs the following three functions:
1. Evidential – earnest money proves that the contract is already concluded;
2. Payment – earnest money is paid at the expense of future payments;
3. Guarantee – earnest money secures performance of the contract.
Agreement on earnest money is valid only then, when the monetary amount performs all these functions, and conversely, if the amount of money does not perform at least one of these functions, such sum of money will not be considered as earnest money.

(continued in next issue)