Definition of Earnest Money
Earnest money – is a sum of money that one party to a contract pays to the other, using funds allocated for the performance of the contract, in order to prove the existence of the agreement and to secure its execution.
In Lithuania, earnest money cannot be used to secure a preliminary agreement, nor a contract that, by law, requires notarization.
An earnest money agreement, regardless of the amount, must be made in writing. Failure to comply with the written form renders the agreement invalid.
If the party who gave the earnest money is responsible for the non-performance of the contract, the amount remains with the receiving party. If the party who received the earnest money is at fault, they must pay double the earnest money amount to the other party. Additionally, the party responsible for the breach must compensate the other for any losses, including the earnest money, unless the contract stipulates otherwise.
Under Lithuanian law, earnest money serves three main functions:
- Payment function – the amount is paid in advance and counts toward the total contractual payment, provided the agreement is fulfilled.
- Proof function – earnest money serves as proof that a contract was concluded. This is an accessory obligation: if the main obligation does not exist, neither does the earnest money agreement.
- Security function – it secures the performance of the contract. The parties understand that if the contract is breached by the giver, the money is forfeited; if the receiver breaches, they must pay double. This incentivizes both parties to comply strictly with the contract terms.
An agreement is considered to be about earnest money only if all three elements are present at the time of formation. Otherwise, the transferred sum cannot be considered earnest money.