Pima Savings & Loan Ass'n v. Rampello
812 P.2d 1115, 86 Ariz. Adv. Rep. 55, 168 Ariz. 297 (1991)
Rule of Law:
A liquidated damages provision is enforceable if, at the time the contract was made, the amount fixed was a reasonable forecast of just compensation for the harm caused by a breach, and the harm was incapable or very difficult of accurate estimation; additionally, contractual deadlines for exercising options must be strictly observed.
Facts:
- On April 15, 1988, the Rampellos contracted to purchase 65 condominium units from Pima Savings and Loan Association for $4.7 million.
- The contract required a $290,000 cash downpayment, with the remainder financed by Pima, and John Rampello gave a $165,000 check as part of this downpayment.
- The contract stipulated that if the closing did not occur due to the buyer's default, Pima would be paid $290,000 as liquidated damages, a sum the parties agreed was reasonable.
- The contract allowed the Rampellos until April 24, 1988, to review and inspect the real estate and its title, making the sale contingent upon their approval within that period, and failure to give written notice of disapproval by April 24 would constitute deemed approval.
- John Rampello conducted his inspection of the premises one or two days prior to April 24, 1988.
- On April 29, 1988, Rampello sent a $125,000 check for the balance of the down-payment.
- On May 20, 1988, Rampello sent a letter rescinding the contract, which Pima received on May 25, 1988.
- The checks Pima received from the Rampellos for the downpayment were returned due to insufficient funds.
Procedural Posture:
- Pima Savings and Loan Association sued the Rampellos in the trial court for breach of contract and for violation of A.R.S. § 12-671 (insufficient funds checks).
- Pima moved for partial summary judgment on its claim for liquidated damages.
- The trial court granted Pima's motion for partial summary judgment.
- The trial court entered judgment pursuant to Ariz.R.Civ.P. 54(b), allowing the Rampellos to appeal.
- The Rampellos appealed the partial summary judgment to the Arizona Court of Appeals.
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Issue:
1) Is a contractual provision for liquidated damages enforceable if, at the time of contract formation, the amount was a reasonable forecast of damages and actual damages were difficult to estimate, even if subsequent events suggest the actual loss might be less than the stipulated amount? 2) Does a contract provision allowing a buyer to terminate 'within' a specified period permit notice of disapproval after that period has passed?
Opinions:
Majority - Howard, Presiding Judge
Yes, the liquidated damages provision is enforceable because it met the criteria for a reasonable forecast of damages at the time of contract formation when actual damages were difficult to estimate, and no, the contractual option to terminate was not timely exercised. The court affirmed the partial summary judgment, holding that a liquidated damages provision is valid if two conditions are met at the time the contract is made: 1) the amount fixed is a reasonable forecast of just compensation for the harm caused by any breach, and 2) the harm caused by any breach is incapable or very difficult of accurate estimation. The court found that the $290,000 liquidated damages, representing slightly more than six percent of the total contract price, was reasonable on its face given the non-liquid nature of real property and the inherent difficulty in estimating future losses like the time to resell, market depreciation, and lost opportunities. The court emphasized that the reasonableness of the amount is determined at the time of contracting, not in hindsight, and therefore the fact that Pima subsequently managed to resell most of the units and reduce its actual losses did not render the clause an unenforceable penalty or 'shock the conscience.' The court also dismissed the relevance of a prior 'sweetheart deal' with lower liquidated damages, stating that the enforceability of the provision is a question of law for the court. Regarding the rescission, the court strictly interpreted the contract's language, which granted the Rampellos an option to terminate 'within' a specified period (through April 24, 1988). Their attempt to rescind the contract on May 20, 1988, was untimely, as such language requires the option to be exercised by the stated deadline, not at a 'reasonable time' thereafter.
Analysis:
This case significantly clarifies the application of liquidated damages clauses in Arizona, particularly for real estate contracts, by reaffirming that the enforceability is assessed at the time of contract formation based on the anticipated difficulty and reasonableness of damage estimation, not by actual losses post-breach. It demonstrates judicial deference to parties' contractual agreements, preventing hindsight from undermining a valid clause unless the initial estimate was truly unreasonable or unconscionable. The ruling also underscores the critical importance of strict compliance with precise contractual deadlines for exercising options, reinforcing the principle that specific language regarding time limits will be enforced as written.
