Liquidated Damages – Not Always A Given

Liquid damages

A recent ruling by the Fairfax County Circuit Court on a damages provision in a real estate contract could foreshadow an evolution on the interpretation of the Default clause on real estate and other contracts in Virginia.

As reported in the July 24, 2014, edition of the Virginia Lawyers Weekly, Judge Charles Maxfield of the Fairfax County Circuit court sustained a demurrer to the complaint in Sagatov Builders, LLC v. Christian Hunt (CL2014-5735) ruling that an option clause in the damages provision in a real estate sales contract was unenforceable. A copy of the opinion can be found at our website.

The clause in question provided that in the event of a purchaser default, the seller could choose either to seek liquidated damages (i.e., keep the purchaser’s deposit of $50,000.00) or to pursue actual damages. The seller in this case claimed a purchaser default and filed a breach of contract case seeking liquidated damages. The purchaser demurred to the complaint on the grounds that the liquidated damages clause is an unenforceable penalty. In an apparent case of first impression, Judge Maxfield agreed with the purchaser and sustained the demurrer. Judge Maxfield held that the contract option to pursue either actual damages or liquidated damages undermines the purpose of liquidated damages, which is to provide agreed compensation for loss or injury when actual damages may be uncertain. The judge further held that the optional clause acted as a penalty as the seller could choose the liquidated damages where the deposit exceeded the actual damages, thereby punishing the purchaser. The seller was given leave to amend its complaint to seek actual damages, which it has since done. The defendant has filed an answer, and the case is otherwise proceeding.

Careful consideration should be given to the inclusion of such optional damages clauses.

The ruling in this case, that damages clauses that provide an option to pursue either liquidated or actual damages in the event of default are unenforceable, has the potential to affect the drafting and interpretation of the customary language of such contracts that has otherwise escaped serious scrutiny for decades. Such clauses are often found in commercial purchase and sale agreements, as well as in standard residential contracts such as those published by the Northern Virginia Association of Realtors. While the Virginia Supreme Court has not ruled on the issue and the ruling is not binding statewide, the ruling does set some precedent for Fairfax County and may be viewed as persuasive authority by judges in neighboring jurisdictions. Careful consideration should be given to the inclusion of such optional damages clauses. We’ll keep you advised on any developments.