A Deposit Agreement is created when a person deposits an asset with another party. These agreements are usually used when an investor makes a deposit with a bank and the bank provides a guaranteed rate of return in exchange for keeping the deposit for a fixed period of time (usually several months to several years). This agreement lays down the terms and conditions as to how the deposited assets shall be handled by the party with whom it is deposited.
When Do You Need a Deposit Agreement
A deposit agreement is needed when an individual deposit an asset with another person. This is usually the case when an investor makes a deposit with a bank. Under the agreement, the bank guarantees that there is a return of the investor’s principal and pays a fixed rate of interest until the contract ends.
The purpose of the deposit agreement is to provide proof that a deposit has been made to the bank by the investor. The agreement lays down the terms and conditions under which the deposit has been made and this helps to avoid confusion and misunderstanding between the parties. This agreement seeks to protect the interests of both the parties to the agreement by formally laying down the grounds under which it is entered.
Inclusions in a Deposit Agreement
The agreement must clearly state the names of the parties between whom the agreement is entered into. This will include the names of the investor and the bank in which the deposit has been made. The date on which the agreement is entered into must also be mentioned along with the territory in which the agreement is enforceable.
The agreement must also mention the term of the investment and the rate of interest that will be payable by the bank. The agreement must also include all the important dates such as deposit date, collection date etc.
Apart from this, the agreement must clearly mention under which law it will be governed and how the agreement shall be terminated. The manner in which the agreement is to be modified should also be described to avoid any confusion in the future.
How to Draft a Deposit Agreement
The following are the steps to follow while drafting a deposit agreement:
- Decide the amount of deposit to be made by the investor to the bank
- Decide the rate of interest that will be applicable on such a transaction or on such a deposit
- Decide the term of such deposit in the bank
- Lay out what events shall constitute events of default and provide adequate remedies for them
- Decide the process for amendment or modification of the terms of the agreement and the circumstances when the agreement may be terminated by either of the parties to the agreement.
Benefits of a Deposit Agreement
- The agreement provides solid evidence that the deposit has been made by the investor to the bank.
- If the matter goes to court, the court can easily determine whether an event of default has occurred, if the deposit agreement is in place.
- The agreement helps put a dispute resolution mechanism in place to deal with any dispute that may arise under this agreement.
What Happens When You Violate a Deposit Agreement
- In the absence of a written deposit agreement there is no solid evidence that the deposit has been made by the investor to the bank.
- In case of a default by either party, there will be very limited remedies available to the other party in the absence of a written agreement.
- If there is no written agreement in place, there is no evidence as to the rate of interest that is applicable on the transaction and the term for which the deposit was intended to be kept with the bank.
Key Clauses in a Deposit Agreement
The following are the key terms of a deposit agreement:
- Deposit with the bank
- No deductions or set off
- Representations and warranties of the investor
- Representations and warranties of the bank
- Events of default
- Remedies for events of default
- Dividends and distributions
- Term of the agreement
- Limitation of liability
- Indemnification and damages
- Modification of the agreement
- Governing law and jurisdiction
- Termination of the agreement
What Happens When You Violate a Deposit Agreement
Generally, deposit agreements have a clause that talks about the actions to be taken when a party to the agreement breaches the clauses of the said agreement. An arbitration clause is present in most agreements and states that if a clause of the agreement is breached or if any dispute arises with respect to the terms of the agreement, the matter will be resolved by arbitration. The clause mentions where the arbitration proceedings will take place i.e. seat of arbitration, the language in which the proceedings shall be conducted and the manner in which the arbitrators shall be appointed.
Alternatively, any other form of dispute resolution such as mediation or negotiation may also be mentioned in the agreement.
The agreement can also mention that all disputes arising out of the agreement will be subject to the exclusive jurisdiction of a specified court.
Sample of a Deposit Agreement
If you require a sample of a deposit agreement, you can download a sample here.
Sample Deposit Agreement
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