"Unless it be demonstrated that provisions for liquidated damages are actually a penalty or are . . . otherwise unlawful, this court will sustain them."
Mahoney v. Tingley
Plaintiff agreed to sell his house to defendants for $20,250, and defendants deposited $200 as earnest money. The purchase agreement said that the earnest money would be forfeited as liquidated damages if defendants did not complete purchase unless plaintiff elected to enforce the agreement.
At defendants' request, plaintiff moved from the house, but defendants' attorney then wrote to plaintiff's that defendants wished to cancel the agreement. Plaintiff's attorney replied that the cancellation was not justified and demanded that defendants complete the transaction. Defendants did not reply and plaintiff sold the property to someone else for $19,000. Plaintiff then sued for $3,141.44 in alleged damages.
Trial judge ruled that plaintiff was only entitled to the stipulated $200 and granted defendants summary judgment.
Court of appeals reversed.
Can a seller avoid the consequences of an insufficient liquidated damages clause?
Page 710, Bottom
The agreement said that the earnest money "shall" be the liquidated damages. It is not a penalty as plaintiff is not the one that failed to fulfill part of the contract. It must be assumed that plaintiff intended the certainty of the enforcement of such a clause to the risk of seeking actual damages in the event of a breach. Defendants assumedly relied on this clause as well when signing. If plaintiff wanted more money guaranteed, he should have asked for more earnest money.
Plaintiff cannot avoid the consequences of the liquidated damages clause.