The Legal Nature of Kapara and Its Similarities with a Contractual Penalty and an Advance Payment
The Law on Obligations (ZOO) defines kapara as a certain sum of money or an equivalent quantity of other fungible items which, at the time of concluding a contract, one party delivers to the other as a sign that the contract has been concluded, unless otherwise agreed. We shall demonstrate what kapara essentially is and how it differs from similar instruments by comparing it with a contractual penalty, an advance payment, and a withdrawal clause, with special reference to its effects in a preliminary agreement for a real estate purchase.
Kapara and the Contractual Penalty
Kapara shares certain common characteristics with the contractual penalty as well as with the advance payment, and in practice there may be instances of their inappropriate application. Unlike a contractual penalty, kapara is a real means of securing the fulfillment of contractual obligations, arising from the delivery of money (or other fungible items) prior to the performance of the contractual obligation, whereas a contractual penalty is a personal means of security. The latter is characterized by the debtor’s undertaking that, in the event of non-performance or delay in performance of the contractual obligation, he shall pay in advance an agreed sum of money (primarily as compensation for part of the damage suffered by the other party due to non-performance of the contract). A contractual penalty cannot be agreed upon for monetary obligations, whereas kapara can.
Kapara and the Advance Payment
The similarity with an advance payment lies in the monetary nature of the obligation. However, unlike kapara, an advance is merely a pre-paid portion of the agreed purchase price. The differences become apparent in the consequences of non-performance by the party that provided the kapara versus the party that provided the advance payment. Namely, if the contract is not performed due to the fault of the party that provided the kapara, the other party may retain it; whereas if the party that received the kapara fails to perform, that party is obliged to return it in double the amount. An advance payment, on the other hand, is returned in the event that the contract is not concluded, in accordance with the general principle of returning unjustly retained funds, regardless of liability for non-performance.
Kapara and the Withdrawal Clause
These two legal instruments are the most similar, yet a significant difference exists. A withdrawal clause is a benefit granted to a contracting party, allowing that party to change its mind about concluding the contract (within a specified period), provided that it pays its counterparty a sum of money (or delivers another item – for example, an artwork) as compensation for exercising that right. Kapara differs from a withdrawal clause in that it serves as a sign that the contract has been concluded and is intended to strengthen and secure the contract. Kapara must be delivered in advance, whereas a withdrawal clause is merely promised in advance and is paid by the party that withdraws from concluding the contract. The party that has provided the kapara to the other party cannot unilaterally withdraw from the contract by simply retaining the kapara, unless the parties have expressly agreed to authorize withdrawal from the contract. Only in that case is the kapara actually regarded as a withdrawal clause, having been delivered to the other contracting party at the time of the contract’s conclusion.
Kapara as an Accessory Contract
In addition to the above, kapara is an accessory contract. This characteristic means that it shares the legal fate of the main contract and cannot exist independently of it. In practice, this particularly creates uncertainties when the provision on kapara is included in the preliminary agreement (rather than in the main contract) and the main contract is never concluded. If the main contract does not exist or is void, then neither does the agreement on kapara—which is intended to secure that main contract—have any legal effect.
Preliminary Agreement and Kapara (in Real Estate Purchase Agreements)
A preliminary agreement for the conclusion of a real estate purchase contract is a widely used legal instrument through which the parties express their intention in advance to enter into a main contract. Although a preliminary agreement does not create legal consequences in the same manner as a main contract, it is most often concluded as a demonstration of a serious intent that, once the stipulated conditions are met or the agreed period expires, the main contract will be concluded, and it necessarily contains all the essential elements of that future contract.
A practical problem—and the subject of numerous court proceedings—arises in the treatment of kapara, which the parties frequently provide for in the preliminary agreement. Moreover, often such kapara, in the event that the main contract is concluded, is credited toward the purchase price of the property, so it is evident that the kapara takes on the role of an advance payment.
However, the question remains whether the right to retain the kapara provided at the time of signing the preliminary agreement persists, or whether there is an obligation to pay its double value if the main contract is not concluded.
Kapara in the Event of the Main Contract Not Being Concluded
Considering the legal nature of kapara—as a means of actual security for the future fulfillment of an obligation undertaken by contract—and given that the preliminary agreement is itself a contract, care must be taken in the formulation of the kapara provision in the preliminary agreement. If the preliminary agreement promises the future delivery of the kapara—so that it is not delivered at the time of the preliminary agreement’s conclusion—we consider the position taken by the Appellate Court in Belgrade in judgment Gž 6890/2021 of March 2, 2023, to be correct:
“In the opinion of the Appellate Court in Belgrade, pursuant to Article 79(1) of the Law on Obligations (ZOO), it is provided that if, at the time of the conclusion of the contract, one party has given the other a certain sum of money or a certain quantity of other fungible items as a sign that the contract has been concluded (kapara), the contract is deemed to be concluded when the kapara is delivered, unless otherwise agreed. This means that kapara is a real accessory agreement that serves to secure the main contract and represents a sign (evidence) that the contract has been concluded. The reality of the obligation—the simultaneous delivery of the kapara with the main contract—is the key characteristic; only then is the kapara a sign of the contract’s conclusion.
From the foregoing it follows that in the specific situation the disputed sum of money cannot be considered kapara, since it was not delivered simultaneously with the conclusion of the preliminary agreement and therefore does not constitute a sign or evidence that the preliminary agreement was concluded—especially in the case of a notarized preliminary agreement, which renders a real sign of conclusion superfluous. Furthermore, the disputed sum of money does not secure the performance of the preliminary agreement, which imposes an obligation to conclude the main contract rather than an obligation to pay a sum of money. Only if the kapara were agreed upon as a withdrawal clause would the rules regarding retention or return of a doubled kapara apply depending on the liability for non-performance; but, given the explicit intention of the parties not to agree on a withdrawal clause, it is the proper conclusion of the trial court that the sum of money given, although designated as kapara, does not produce the legal effects of kapara as prescribed by Article 80 of the ZOO in the event of non-performance of the contract, but rather constitutes an obligation to return it under the rules of unjust enrichment provided in Article 210 of the ZOO.” Judgment of the Appellate Court in Belgrade, Gž 6890/2021 of March 2, 2023. |
However, the reasoning of the Appellate Court in Belgrade in judgment Gž 6734/2021 of April 5, 2023, that the function of kapara exists only if it is delivered at the time of the conclusion of the main contract, is not entirely well-founded:
“The agreed purchase price was 58,000 euros, which the buyers were to pay to the sellers as follows: on the day of the conclusion of the preliminary agreement (July 4, 2016), the buyers paid an amount of 5,000 euros as kapara, constituting part of the purchase price – allocated according to the co-ownership shares, namely 2,500 euros for VV and 2,500 euros for GG. The remaining portion of the purchase price, amounting to 53,000 euros, was to be paid by VV and GG in the sum of 26,500 euros each on the day of the conclusion of the main purchase agreement. (…)After the conclusion of the preliminary agreement, the litigants engaged in negotiations, given that the plaintiffs did not have sufficient funds to pay the remaining purchase price. Negotiations lasted until November 30, 2016, when the defendants informed the plaintiffs that the property would be re-advertised for sale from December 1, 2016. The defendants subsequently concluded a purchase agreement for the property with a third party on February 20, 2017, but also retained each sum of 2,500 euros that the plaintiffs had paid on the day of the conclusion of the preliminary purchase agreement.
In view of the cited provisions of the law, it follows that kapara is given in the event of a concluded contract—as a sign that the contract has been concluded and as a means of security—and not in the case of a preliminary agreement. Accordingly, the defendants’ appeal arguments that the plaintiffs are responsible for the failure to conclude the main purchase contract have no effect, and the defendants are not obliged to return the amounts received from the plaintiffs. Namely, pursuant to the cited provisions of the Law on Obligations, the function of kapara exists only after the conclusion of the purchase contract. If the main purchase contract is not concluded, then what one party provided to the other at the time of concluding the preliminary agreement should be considered only a partial fulfillment of the contractual obligation—that is, a partial payment of the purchase price—and not a payment of kapara.” Judgment of the Appellate Court in Belgrade, Gž 6734/2021 of April 5, 2023. |
Conclusion
Kapara, as a legal instrument, plays a significant role in regulating the rights and obligations of the parties in a preliminary agreement for the conclusion of a real estate purchase contract. However, its effects in the event that the main contract is not concluded depends on the circumstances surrounding the non-fulfillment of the obligations and, perhaps more importantly, on the manner in which the kapara provision is legally formulated in the preliminary agreement.
The subject matter of the preliminary agreement is the undertaking to conclude a real estate purchase contract within a specified period. A preliminary agreement for the purchase of real estate is itself a contract and must be executed before a notary public in the form of a solemnized document, moreover, a preliminary registration of the future purchase of the property will appear in the legal information system. If, at the time of the conclusion of the preliminary agreement, a sum of money is delivered as kapara, we consider that the implicit non-conclusion of the main contract produces the effects provided by Law for kapara.
If, however, the contract text effectively treats the kapara as an advance payment, and the main contract is not concluded due to the fault of one of the parties, the recipient of the kapara will be deemed to have unjustly retained that sum and will be obliged to return it.
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Disclaimer: This text is written for informational purposes only as well as to give general information and understanding of the law, not to provide specific legal advice. For any additional information feel free to contact us.

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