In the practice of concluding civil law contracts in Poland, the correct distinction between the concepts of “advance payment” and “earnest money” very often arises as an issue. Although they are frequently used interchangeably in everyday language, under Polish civil law they have entirely different meanings and produce distinct legal effects, particularly in the event of non-performance or termination of the contract. A proper understanding of the difference between an advance payment and earnest money is of essential practical importance, as it directly affects the question of whether the amounts paid can be refunded and, if so, to what extent.

An advance payment is not directly regulated by the Civil Code, but in practice it is regarded as a part of the payment made on account of the future performance of the contract, most often the price or remuneration. Its main characteristic is that it serves a settlement function rather than a security function. This means that an advance payment is, in principle, refundable if the contract is not performed, regardless of the reason, unless the parties have agreed otherwise in the contract. An advance payment does not have a sanctioning function and does not entail additional financial consequences for the defaulting party; its practical significance is therefore considerably weaker than that of earnest money.

Earnest money, on the other hand, has a different legal nature and is governed by Article 394 of the Civil Code. Earnest money constitutes a mechanism serving as security for the performance of the contract and is intended to encourage the parties to fulfil their obligations. Upon conclusion of the contract, one party gives the other a sum of money as earnest money, which produces different legal effects depending on whether the contract is performed or not. If the contract is properly performed, the earnest money is credited towards the price or remuneration. However, if non-performance is attributable to the party that paid the earnest money, the other party may retain it. Conversely, if non-performance is attributable to the party that received the earnest money, the other party may demand its return in double. In cases where non-performance is not attributable to either party, the general rules apply and the earnest money should, in principle, be returned.

The main difference between an advance payment and earnest money therefore lies in their function and their legal effects in the event of non-performance of the contract. An advance payment is purely a settlement mechanism and is, in most cases, refundable, whereas earnest money serves a security function and may result either in the retention of the amount paid or its return in double, depending on which party is responsible for the non-performance of the contract. In practice, it is also essential that courts do not rely solely on the label used in the contract, but examine the true intention of the parties as well as the function of the payment.

Accordingly, in order to avoid disputes and misunderstandings, it is extremely important to clearly specify in the contract whether the sum constitutes an advance payment or earnest money, as well as to define precisely the terms of any possible refund. The absence of such provisions may lead to significant financial consequences and legal disputes, particularly in commercial relationships and contracts involving high amounts.

The conscious use of these legal institutions allows for effective protection of the parties’ interests and reduces the risk of conflicts arising from non-performance of the contract.