Legal Question in Business Law in California

Re: Refunds

The issue with non-refundable deposits is usually whether the forfeiture of the deposit amounts to a penalty which only a court of law can properly exact, after trial, or whether it is reasonable as a measure of damages.

Without knowing the size of the deposit in relation to the total purchase price, or your lost profit from not being able to sell the machinery, or whether the purchaser has defenses to a claim that he breached his purchase contract, I cannot give you a very specific answer.

As a general guideline, ask yourself whether the forfeiture of the deposit would seem commensurate with your lost profit to a third party observer (such as a judge, juror or arbitrator) with some knowledge of the facts.

Most of these cases get decided on the basis of whether the amount forfeited is a realistic approximation of the non-defaulting party's damages. There is some reluctance to permit forfeitures if they seem somewhat out of proportion to the seller's net loss.

As a practical matter, whether to make a voluntary refund or stand firm would depend upon factors in addition to your likelihood of winning if sued, e.g., the probability of suit in the first place (which may depend upon the amount at stake and whether the contract has an attorney-fee provision), and whether your company is concerned about this customer's future business, good-will, etc.