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Let's say a business provides some service/activity to a customer and charges them a $100 deposit on top of the service costs.

This deposit is to cover damages or other actions that negatively affect the business.

In the contract between the business and the customer, can the business set out that the deposit is paid back at their own discretion?

Or is the business required to set out specific criteria in the contract for paying back the deposit, which could be legally challenged?

Obviously withholding a deposit incorrectly could result in negative PR, but this question is purely about the legal aspect.

Answers for any jurisdiction would be interesting, but specifically trying to find out for Ireland / the EU.

Additional question: If damages exceed the deposit, can the business request more money from the customer?

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can the business set out that the deposit is paid back at their own discretion?

Generally speaking, the business is allowed to do so. What matters is that at the formation of the contract the customer be properly informed about that "entitlement to discretion". The duty to specify criteria for refund of the deposit and most of all provisions in contracts are premised on the parties' freedom of contract.

By contrast, in contexts of markets which are heavily regulated, legislation might constrain the concepts for which a customer may be billed and/or the corresponding amounts. Likewise, the term "deposit" might be statutorily defined in a way that it outweighs or strikes the business's discretion.

If damages exceed the deposit, can the business request more money from the customer?

It depends on the specific terms of the clause and whether it is altogether definite or conclusive in that regard. In turn, the specificity of the terms mostly depends on (1) how careful or skilled the draftsman is, and (2) the parties' bargaining power.

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