Southeastern Land Fund, Inc. v. Real Estate World, Inc.
227 S.E.2d 340, 237 Ga. 227, 1976 Ga. LEXIS 1206 (1976)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A contract provision that allows a seller to retain earnest money as "partial liquidated damages" while also reserving the right to sue for actual damages is an unenforceable penalty, not a valid liquidated damages clause.
Facts:
- A seller and a buyer entered into a real estate sales contract.
- As part of the agreement, the buyer paid $5,000 in cash as earnest money.
- The buyer also executed and delivered a promissory note for an additional $45,000 in earnest money to the seller.
- The contract stipulated that upon the buyer's default, the seller could retain all earnest money as "partial liquidated damages" and also "pursue any and all remedies available to him at law or equity."
- The buyer subsequently defaulted on the contract at closing.
Procedural Posture:
- The seller filed suit against the buyer in the trial court to collect on the $45,000 promissory note.
- The trial court granted the seller's motion for summary judgment and denied the buyer's motion for summary judgment.
- The buyer (appellant) appealed the decision to the Georgia Court of Appeals (intermediate appellate court).
- The Court of Appeals reversed the trial court's decision, holding the contract provision was an unenforceable penalty and ruling that the buyer's motion for summary judgment should have been granted.
- The seller (appellant) was granted certiorari by the Supreme Court of Georgia (highest court).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a real estate contract provision that allows a non-breaching seller to retain earnest money as "partial liquidated damages" while also reserving the right to pursue any and all other legal remedies constitute an unenforceable penalty?
Opinions:
Majority - Ingram, Justice
Yes. A contract provision that allows a non-breaching seller to retain earnest money as "partial liquidated damages" while reserving the right to pursue other remedies for damages is an unenforceable penalty. A true liquidated damages clause must represent the 'maximum as well as the minimum sum that can be collected' for the breach; it cannot serve as a baseline recovery that the non-breaching party can supplement by suing for actual damages. By labeling the earnest money as 'partial' liquidated damages and explicitly retaining the right to pursue all other remedies (which includes suing for actual damages), the parties did not agree to a fixed sum as the sole remedy for the breach. This ambiguity creates a situation where the seller could potentially recover more than their actual damages, which is the hallmark of a penalty. In cases of doubt, courts favor construing such clauses as penalties rather than liquidated damages.
Analysis:
This decision clarifies the exclusive nature of liquidated damages in Georgia contract law, establishing that parties cannot create a hybrid remedy. It prevents a non-breaching party from using a liquidated damages clause as both a guaranteed minimum recovery and a springboard to sue for greater actual damages. The ruling forces drafters of real estate contracts to make a clear choice: either specify a fixed amount as the sole remedy for monetary damages or leave the remedy as a claim for proven actual damages. This protects breaching parties from clauses that function as unenforceable penalties rather than a reasonable pre-estimate of loss.
