Legal Definitions - caution money

Caution money, also known as earnest money, is a sum of money paid by one party to another to demonstrate serious intent to enter into a contract or agreement. It acts as a good faith deposit, showing commitment and often securing a particular item, service, or opportunity. If the paying party fails to proceed with the agreement without a valid reason specified in the contract, the caution money may be forfeited to the recipient as compensation for their time, effort, and lost opportunities. If the agreement proceeds as planned, the caution money is typically applied towards the total purchase price or returned.

Here are some examples to illustrate the concept of caution money:

• Securing a Vehicle Purchase: A customer visits a car dealership and finds a rare, high-demand vintage car they wish to purchase. To ensure the dealership holds the car for them while they arrange financing, the customer pays a $1,000 caution money deposit. This deposit signifies their serious intent to buy the car. If the customer later decides not to purchase the car without a valid reason outlined in their preliminary agreement (e.g., failing to secure financing), the dealership might retain the $1,000 as compensation for taking the car off the market and potentially losing other interested buyers.

• Booking a Professional Service: A client wants to hire a renowned architect for a complex building project. The architect's firm requires a 10% caution money deposit before they begin detailed design work and commit their team's time to the project. This deposit demonstrates the client's commitment to the project and ensures the architect's firm is compensated for the initial allocation of resources and for turning down other potential clients for that period. If the client cancels the project after the initial design phase without a contractual escape clause, they would likely forfeit this deposit.

• Reserving a Limited-Enrollment Course: A student applies for a highly competitive, limited-enrollment workshop at a prestigious art institute. To secure their spot after being accepted, the institute requires a non-refundable caution money deposit of $500. This deposit confirms the student's commitment to attending the workshop and ensures the institute can finalize its class roster. If the student later decides not to attend, they forfeit the $500, which helps compensate the institute for the administrative costs and the lost opportunity to offer that spot to another applicant.