Lind Building Corp. v. Pacific Bellevue Developments
55 Wash. App. 70, 776 P.2d 977 (1989)
Rule of Law:
A liquidated damages clause is unenforceable as a penalty if the stipulated amount is not a reasonable forecast of just compensation for the harm caused by the breach at the time of contracting, or if, at the time of breach, the non-breaching party suffered no actual loss or a minimal loss that bears no reasonable relation to the stipulated amount, especially when actual damages are not difficult to ascertain.
Facts:
- On September 8, 1983, Pacific Bellevue Developments (PBD) contracted to sell a tract of real property to Lind Building Corporation (Lind) for a purchase price of $4,144,085.
- Lind paid an initial $20,000 deposit, and the agreement included a clause allowing PBD to retain the deposit as liquidated damages if Lind defaulted.
- Lind subsequently made additional deposits and payments totaling $70,000, extending the closing date from January 15, 1984, to February 6, 1984.
- PBD agreed to further extend the closing until May 6, 1984, in exchange for more extension payments from Lind, bringing Lind's total deposits and payments to $250,000.
- Lind failed to close the transaction on May 6, 1984, and PBD refused Lind's request for further extensions, informing Lind that it had forfeited the $250,000.
- On June 5, 1984, PBD entered into a contract to sell the same property to a third party (Turner) for $5,150,000, which closed in September 1984.
- PBD's resale to Turner resulted in a minimal net profit on the resale, even after crediting the forfeited amounts from Lind.
- PBD's alleged losses, such as finance charges, office overhead, and real estate taxes, were readily ascertainable.
Procedural Posture:
- Lind Building Corporation filed a lawsuit in King County Superior Court against Pacific Bellevue Developments on May 30, 1984, seeking the return of $250,000 in deposits and payments.
- The trial court ruled that the liquidated damages clause in the Real Estate Purchase and Sale Agreement was an enforceable clause and did not constitute a penalty.
- The trial court awarded Pacific Bellevue Developments reasonable attorney's fees and costs.
- Lind Building Corporation appealed the trial court's judgment to the Washington Court of Appeals.
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Issue:
Does a liquidated damages clause in a real estate purchase agreement constitute an unenforceable penalty when the stipulated sum bears no reasonable relation to actual damages suffered by the seller, and the actual damages were not difficult to ascertain?
Opinions:
Majority - Scholfield, J.
Yes, the liquidated damages clause in this real estate purchase agreement constitutes an unenforceable penalty because the stipulated sum of $250,000 bore no reasonable relation to any actual damages suffered by PBD, and the actual damages were not difficult to ascertain, thereby violating the principle that contract damages should be compensatory, not punitive. The court applied a two-part test for the enforceability of liquidated damages clauses, requiring that (1) the amount fixed must be a reasonable forecast of just compensation for the harm caused by the breach at the time of contracting, and (2) the harm must be such that it is incapable or very difficult of ascertainment. Citing Restatement (Second) of Contracts § 356 (1981), the court emphasized that contract remedies are compensatory, not punitive, and a term fixing unreasonably large liquidated damages is unenforceable, especially if no loss or only a minimal loss has occurred. The court identified three reasons for invalidating the clause: 1. The $250,000 amount was not a reasonable forecast of anticipated damages at the time of contracting, as the initial agreement contemplated only a $20,000 deposit, and subsequent payments were primarily for extensions, not as estimates of damages. 2. PBD suffered no actual substantial damages. PBD resold the property for approximately $1 million more than Lind's contract price. Any actual loss was minimal and disproportionate to the $250,000, making its retention by PBD punitive rather than compensatory. 3. PBD's alleged losses, such as daily finance charges and real estate taxes, were readily ascertainable and provable, negating the requirement that damages be difficult to ascertain. Therefore, the court reversed the trial court's judgment, instructing it to enter judgment in favor of Lind for the $250,000 plus prejudgment interest and attorney's fees.
Analysis:
This case significantly clarifies the application of the two-part test for liquidated damages in Washington, emphasizing that enforceability is not solely determined at the time of contracting but also considers actual damages at the time of breach. It reinforces the compensatory nature of contract remedies, preventing non-breaching parties from receiving windfalls disproportionate to their actual losses. Future cases involving liquidated damages, especially in real estate transactions, will face stricter scrutiny, requiring a closer nexus between the stipulated amount and actual damages, making it more challenging for sellers to retain large deposits when they mitigate losses by quickly reselling property for an equivalent or higher price.
