Compiled from: Beijing No. 2 Intermediate People's Court
 
Case review
On March 7, 2022, Company B paid Company A 200,000 yuan as a deposit, with no agreement on the type of deposit. On March 10, Company A (lessor) and Company B (lessee) signed a formal "Store Lease Contract," stipulating that Company A would lease the property in question to Company B at an annual rent of over 770,000 yuan, with no mention of the previously paid 200,000 yuan deposit. Later, the property became unusable for reasons, and Company B filed a lawsuit, claiming that Company A's breach prevented the realization of the contract's purpose and demanded double the return of the deposit.

 
 

The court held that Company B paid Company A 200,000 yuan as a deposit on March 7, 2022, without specifying the type of deposit. However, considering the timing of the deposit payment and the contract signing, the deposit was intended to guarantee the conclusion of the contract. After both parties signed the "Store Lease Contract" on March 10, 2022, the guarantee function of the deposit was fulfilled. According to the law, the deposit should be applied as payment or returned, losing its nature as a deposit. Since the parties did not explicitly convert the deposit into a penalty deposit for breach of contract, the court found no legal basis for one party to apply the deposit penalty rule after the other party breached the "Store Lease Contract" and thus did not support the claim.
 
 
Civil Code of the People's Republic of China
Article 586
The parties may agree that one party pays a deposit to the other as a guarantee for the creditor's rights. The deposit contract is established upon the actual delivery of the deposit. The amount of the deposit is agreed upon by the parties, but it shall not exceed 20% of the principal contract's subject matter amount; any excess does not have the effect of a deposit. If the actual amount of the deposit delivered is more or less than the agreed amount, it is deemed a modification of the agreed deposit amount.
 
 
[1] The author's perspective
Clearly defining the type of deposit is crucial for accurately applying the deposit penalty rule, fully leveraging the role of deposits, and protecting legitimate rights and interests. When entering into a contract, parties should first understand the conceptual, nature, and functional differences between deposits and other payments to make reasonable choices and agreements. Deposits have a guarantee function and can be subject to the deposit penalty rule, while earnest money, security deposits, guarantee deposits, and advance payments generally do not apply to this rule. If the parties agree to use a deposit as a guarantee for debt, they should clarify the type of deposit as much as possible based on its purpose and effect. After the debtor performs the obligation, the parties should specify in the contract whether the deposit should be applied as payment, returned to the debtor, or continue to serve as a guarantee in the form of a deposit.