ECOVIS Miškinis, Kvainauskas ir partneriai advokat? kontora.
(continued from last issue)
At this point it is important to discuss similarities and differences between earnest money and advance payment. Earnest money is similar to advance payment, but is not identical. Advance payment as well as earnest money performs the function of payment - advance payment is included in the full settlement of the contract amount. Advance payment also performs an evidential function, but, unlike earnest money, advance payment never secures performance of the contract. It means that the party who paid the advance payment has a right to require the other party to repay the advance payment in all non-performance of contract cases, but the party who is liable for non-performance of the contract shall not be bound to pay the double amount of the advance payment.
The agreement for earnest money must be concluded in written form, irrespective of the amount of the earnest money. The agreement for earnest money which does not meet the requirement of the written form shall be null and void.
According to the provisions of the Civil Code, the earnest money cannot be used for securing a preliminary contract, likewise a contract that must be concluded in the obligatory notarial form. This regulation is based on the functions of the earnest money. A preliminary contract is an agreement of parties by which they obligate themselves to conclude another – principal – contract in the future under the conditions negotiated in the agreement. This contract does not create a financial obligation; as a result, earnest money shall not perform the function of payment. The preliminary contract can be secured with advance payment or with any other kind of security obligations. Earnest money shall secure the contracts for which notarial form is not obligatory: contract of independent work, contract of lease, etc.
To sum up, earnest money, if performing all three functions - the payment, evidential and a guarantee - can be used as one of the means to secure a contract.