Both deposit and down payment are the money one party pays to the other side before the other side performs the contract. So how can we distinguish them? These two words sound the same in Chinese and we are likely to be confused owing to the wrong typing or your carelessness. Even more, a great amount of people have used them casually.
Deposit is an amount of money or its alternative proportionally according to the contract that be given to the receiving party in accordance with the provisions of laws or bilateral agreement by the one party at the time of the contract or before it’s executed for the performance of a contract.
With respect to the down payment, we also name it as advance payment which doesn’t acquire the nature of guarantee. It’s not regulated definitely in Chinese law. As foreign traders, you must be pretty clear that our customers effect the down payment so as to show their sincerity or provide the receiving party with a certain of capital for their performances of a contract.
If a customer doesn’t pay us the down payment, it costs the company funds for the factory to purchase raw materials and manufacture products. On our part, we’re likely to bear all the losses by ourselves provided that the customer has the second thoughts.
And most of all, when the contract fails to be fulfilled or can’t be executed on time, deposit works as a tool that sanctions the side breaking the contract and makes up for the observant party. It possesses a nature of punition. It means that when the paying party violates the treaty, it has no right to withdraw the deposit and when the receiving party break a contract, it should double pay the paying party. Deposit can urge both the two parties to enter the substantive performance stage. With regards to the down payment, the same amount will be directly returned to the paying party and it possesses no nature of punition if the contract is proved invalid or one of or both the two parties break the contract.
Remember if the intention of paying is ambiguous or we can’t believe that the double return is appointed in the contract according to law, then it should be considered as an advance payment. A significant minority of people will make use of this and deliberately set a trap and turn the deposit into down payment so as to ease the burden and beat the rap when they break the contract. Therefore, we should pay attention to this when having negotiation with our customers.
As for the corresponding words, still, some people consider down payment as deposit as in British English, down payment is considered as deposit. To make sure it’s absolutely unambiguous, we’d better explicitly stipulate it in the contract.